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Swasthfit drives the beat

DLPL posted a robust quarter, with revenue growing 11% YoY on the back of sample volume increasing 9% YoY and Swasthfit contributing 24% to the topline. DLPL’s focus and execution prowess on expanding its presence in Tier 3+ cities (bulk of expansion) is likely to support its high single-digit revenue growth in core markets (Delhi NCR). With pricing pressures abating, DLPL remains well positioned to capture the structural tailwinds enjoyed by the Indian healthcare industry, in line with our thesis (link). Suburban’s improving margin trajectory (Q4: 17%) is likely to offset network & brand investments, keeping margin flat over FY24-26E. Strong balance sheet (net cash of Rs8.7bn), and improving return ratios provide comfort on valuations. We retain BUY with Mar-25E TP of Rs2,800/share (basis DCF), implying FY26E PER of 48x

Improved efficiencies drive the beat on profitability

For Q4FY24, Dr Lal Path Labs reported a revenue increase of 11% YoY at the consolidated level, on account of improved product mix and network expansion generating incremental growth. During the same period, patient and sample volumes grew 2.4% and 9% YoY, on account of the higher penetration in Tier 3+ cities. Higher share of bundled tests (Swasthfit – a high-margin product) in the business resulted in DLPL’s realizations per patient and sample increasing up to 10% and 2%, respectively, YoY for the fiscal. Gross margin expanded by 160bps YoY, owing to superior cost control measures undertaken by the company. EBITDA margin increased by 300bps YoY to 26.5%, predominantly due to other expenses increasing a mere 5% due to increase in share of bundled testing, which requires less overhead expenses per patient. Depreciation decreased 3% YoY, with other income increasing 30% YoY and leading to a 500bps YoY rise in PAT margin. Company announced a final dividend of Rs6/share, leading to total annual dividend of Rs24/share. Net cash on books stood at Rs8.7bn, with FY24 capex reported at Rs512mn.

Outlook and risks

Management has set a 5-6% patient volume growth target for FY25, as it expects muted competitive intensity on an incremental basis. Success seen in the wellness and bundling portfolio is refreshing, and may drive volume growth as consumer behavior evolves postpandemic. With Company focus on deepening its presence in Tier 3+ cities, Suburban showing signs of ramping up (double-digit growth), and the core market growing at a mid-single-digit, we expect DLPL to clock 12% revenue CAGR over FY24-26E. We anticipate the cost rationalization initiatives, higher bundling, and improving Suburban margins to offset the investments in expansion and branding, thereby leaving margins flat during FY24-26E. Strong balance sheet (net cash of Rs8.7bn), improving return ratios (ROE at 20%), and robust cash generation (OCF as a % of EBITDA at 88%) lend comfort on valuations. We retain our BUY rating on DLPL. Key risks: Increased competition in the organized market, shortage of manpower and skilled labor, adverse regulatory ruling around pricing cap for healthcare services

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