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Margins surprise on the back of Suburban and Swasthfit

DLPL’s Q2FY25 margins expanded by 110bps YoY on the back of improving contribution from Swasthfit and better margin performance at Suburban (~600bps QoQ). Sample volume growth (+8.6% YoY), however, remained soft owing to lower incidence of monsoon-related illnesses (except West region) and a higher base. With the management’s target of adding 15-20 labs in FY25, signs of Suburban turning around, and predatory pricing receding, we anticipate 13% revenue CAGR over FY24-27E. Ramp up from hospital-backed chains remain a key risk for the well-diversified revenue base of DLPL, in our view. A strong balance sheet, industry leading margins, and improving return ratios provide comfort on valuations. We retain BUY with a revised Sep-25E TP of Rs3,400 (based on DCF), implying FY26E PER of 55x (in line with LTA).

Q2FY25 results on expected lines

For Q2FY25, DLPL reported a revenue increase of 10% YoY, on the back of volumes increasing 8.5% YoY and realizations by 1% YoY. Patient volumes grew 3.6% YoY, while higher share of bundled tests (Swasthfit) and superior cost-control measures resulted in gross margins expanding by 107bps YoY. This has also resulted in EBITDA margins expanding by 110bps YoY to 30.7%. Strong operating performance and depreciation falling 2% YoY, along with other income increasing 21% YoY and finance cost reducing 23%, led to PAT expanding 18% YoY. The company has announced an interim dividend of Rs6/share for the quarter. Capex for the quarter was Rs106mn and net cash on books stood at ~Rs11bn. Swasthfit revenues grew 25% YoY, contributing to 24% of the topline. Management plans on adding 15-20 labs, majority of which will be commissioned in Tier 3+ cities in its core geographies.

Outlook and risks

With Suburban delivering 12% YoY growth and plans of network expansion in Tier 3+ cities in North & East regions, we believe the current growth trajectory to continue for DLPL. Margin performance on the back of higher contribution from Swasthfit as well as ramp up in margins at Suburban in the current quarter (+600bps QoQ expansion) should offset the back-ended network expansion planned by DLPL, in our view. Factoring in Q2FY25 results, we marginally increase EBITDAM by 20-30bps over FY26/27E, respectively. However, baking in softer volume growth over the medium term, we marginally cut our sales estimates by 1% over FY25-27. Strong balance sheet (net cash of Rs11bn), improving return ratios (ROE/ROCE at 23%/27%, respectively, in FY27), and robust cash generation (OCF as a % of EBITDA at 88% in FY24) lend comfort on valuations. We retain our BUY rating on DLPL, with revised Sep-25E TP to Rs3,400 (DCF), implying FY26E PER of 55x. Key risks: Increased competition in the organized market from growing hospital chains, predatory pricing from any market participants, and adverse regulatory ruling around pricing cap for healthcare services.

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