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Improving growth and attractive valuations; Upgrade to BUY

Dr.Lal’s (DLPL) stock price has declined ~20% from its recent highs. Our downgrade after 1Q results was primarily due to weak visibility on volumes and expensive valuations. Post the recent correction, however DLPL trades near -1 SD along with sample volume growth returning to double digits during the quarter. Overall, DLPL's results were largely in-line with our estimates. The company reported 11% revenue growth, alongside 10%/19% growth in EBITDA/PAT, with margins contracting 30bps YoY, due to higher growth in staff cost. The 11% YoY revenue growth was driven completely by sample volume growth. As the company plans to add 15-20 labs, we anticipate growth could accelerate starting FY26. We project 12- 13% top-line growth in FY26/27, with margins expected to remain above 27%, aided by an improving Swasthfit mix (currently at 24%). Attractive valuations, steady growth and margins warrant an upgrade to BUY. We largely maintain our earnings estimates as well as target multiple and roll forward to Dec’26 TP of INR 3,600 (25% upside).

* Double digit test volume growth: Test volume grew ~11% to 20.6mn and patient volume grew 3%YoY to 6.9mn. The company achieved this through deeper penetration in core markets as well as concerted efforts to grow in the West and South region. The highmargin ‘Swasthfit’ portfolio contributed ~23% to revenue (vs. 20% in 3QFY24) for the quarter (24% for 9MFY25) and is expected to further improve. Realisation per patient increased 7.5% YoY at INR 865 - driven by mix and not price. Future growth in this metric will maintain this trend going forward. At an industry level test pricing is stabilising with predatory pricing/deep-discounting now receding

* Gross margins to stabilise at 80%: The management guided for gross margins to stabilise going ahead as the company will face some headwinds in terms of rising reagent costs due to rupee depreciation. However, increasing sample and patient volume are driving operating leverage; this enables the company to maintain competitive pricing and their EBITDA margins. The management are averse to pricing led growth, and will not take any price increases over the next 6-9 months. We have built in 10.7%YoY for FY25 and 12- 13% for FY26/27 which will be driven by volume ramp-up, higher Swasthfit contribution and network expansion. DLPL plans to roll out Swasthfit to Tier 3/4 cities and also widen its scope.

* Network expansion on track: The company is on track to open 15-20 labs this year. DLPL is expanding their reach into Tier 3 and Tier 4 markets while strengthening presence in the core regions. They are making investments in new infrastructure in Metro / Tier 1 cities as well. The majority of capex outlay is back-ended. Some of the expansion initiatives are visible in higher employee costs as the company builds out its front end presence. The company indicated that so far they have spent INR 300mn in lab expansion efforts.

* West – the fastest growing: West region was a key driver for the company and was the fastest growing region for the quarter and YTD. During the quarter/9M suburban grew 9.2%/9.8% YoY with margins for trending at 15-16% for the year so far, with 3Qwitnessing a dip in margins as it is a seasonally weak quarter. DLPL’s boad has given an in-principle approval for expeditious consolidation of Suburban’s business. This should lead to some savings in administrative and legal costs.

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SEBI Registration Number is INM000010361