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Staging a comeback

DLPL’s management commentary struck a bullish tone, anticipating double digit growth in FY25 (likely ~12% in our view) driven by improved volumes and a favourable case mix. The key positive readout here is – DLPL will not take price hikes to achieve this! The company delivered a strong performance (5% PAT beat on cons.) as well. A large part of the current 11% growth was driven by Tier 3+ growth, higher Swasthfit and price hikes. Volume growth was admittedly soft but the management had called out a few reasons for this even last time around (higher bundled tests, covid rub-off, competition from hospitals, etc.). While there is hardly any room for gross margin expansion, operating leverage-led margin expansion will be reinvested for network expansion. DLPL plans to open 20 hubs predominantly in Tier 3+ towns. With a cash balance of INR 9.6bn and private market valuations cooling down, there is sufficient room for inorganic expansion (upside risk). DLPL is trading 1SD below average PE making the risk-reward extremely favourable. We prefer DLPL as our ‘top pick’ in the sector and maintain BUY with a Mar’25 TP of INR 2,735.

* Signalling bullish trends: The management guided for higher growth in FY25 driven by better volume growth and case mix. The key positive readout here is – DLPL will not take price hikes to achieve this! The management believes that competitive intensity has reduced, predatory pricing is over and covid impact is now all in the base. The price hike benefit built into FY24 growth is 3.5%. We expect stable growth in Delhi NCR (7-8% as no expansion planned) and higher growth in Rest of North and Suburban. We factor in 8- 9% volume growth and 3-3.5% price growth over the next 2 years. The company plans to open 20 hubs next year mainly in Tier 3+ towns and expects current 24% Swasthfit contribution to further rise. There is no room for gross margin improvement (likely as no price hikes this year) and will remain around 78-80%. As DLPL is now refocusing on investing in labs, the margins will stabilise around current levels, in our view.

* Suburban: There are some visible green shoots – Suburban while delivering nearly double digit growth this quarter, reported strong 17% EBITDAM (vs. 12-13% earlier). DLPL is trying to gain traction and acquire customers via promotion activities. The company has completed management transition and will now focus on integration whilst following a dual brand strategy in the region.

* Price hike boosts growth by 3.5%: Realisation per patient was higher at INR 833 (+7.5%) due to better test mix, higher Swasthfit contribution and price hikes. Patient volume grew +2.5%YoY to 6.5mn (below JMFe) – this trend is reversing. The high-margin ‘Swasthfit’ portfolio contributed c.24% to revenue and is expected to further improve.

* Key financials: - Revenue/EBITDA/PAT for the quarter were INR 5.5bn/1.45bn/845mn grew +11%/25%/49%YoY and were -1%/-1%/-2% vs JMFe and in line/+3%/+5% vs consensus estimates; - Gross Margins come in at 80% (vs JMFe 79.8%, 78.4% YoY). EBITDA margins were

26.5% (vs. JMFe 26.4%, 23.5% YoY); - Cash at the end of the quarter stood at INR 9.6bn, providing sufficient headroom for inorganic growth. South India remains top priority markets for inorganic growth. Capex outlay for the year is INR 600mn.

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