Buy Dr Lal Pathlabs Ltd For Target Rs1,740 By Emkay Global Financial Services Ltd
DLPL delivered a strong Q4FY26 print, with revenue growing 17% YoY majorly on the back of volume growth (sample/patient: 13%/8%). The company's strategy of expanding network infrastructure, reinvigorating channel partners, and improving test menu continue to yield results, as the core geography (Delhi NCR) continued to deliver double-digit growth. Sustained strong performance of Swasthfit (27% of FY26 revenue, growing at 2x company rate) and improving trajectory of the Suburban business lends comfort to the management's guidance of achieving early-to-mid-teens revenue growth in FY27, in our view. We increase our FY27/28 revenue estimates by 3% each, factoring in a stable pricing environment and demonstrated execution capabilities benefiting DLPL's leadership position as consumer awareness/preference for organized diagnostics players improves. Strong net-cash balance sheet, industry-leading margin, and stable return ratios provide comfort on valuations. We maintain BUY on DLPL with unchanged Mar-27E TP of Rs1,740 (based on DCF method), implying FY28 PER of 43x (7% discount to LTA).
Strong print on the back of improving volume
For Q4FY26, DLPL reported revenue growth of 17% YoY (+5% vs consensus) primarily on account of increase in sample volumes (+12.9% YoY) and realizations (+3.3% YoY, due to geography and test mix). Gross margin expanded moderately (+31bps) to 80.8%, while EBITDA margin narrowed by 146bps YoY to 26.6% due to increase in infra costs and A&P spends. Contribution from the Swasthfit portfolio increased to 28% in Q4FY26 (Q4FY25: 26%), implying 26% YoY growth in Swasthfit revenue. D&A expenses grew 23% YoY, while interest expenses grew 22% YoY. Adj PAT grew 15% YoY to Rs1.3bn (excluding the one-time impact of costs owing to the Suburban acquisition in Q4FY25). DLPL has announced a final dividend of Rs4/share (FY26: Rs20.5/share)
Outlook and risks
The management plans to continue investing in network expansion and digital initiatives as well as provide innovation-led offerings to differentiate among organized players. The management's confidence in achieving the FY27 guidance is supported by the cumulative maturation of ~32 labs and ~2,000 collection centers added over the past two years, sustained double-digit momentum in the Delhi NCR stronghold, and recovery in the Suburban business. EBITDA margins are expected to remain in the 27–28% range as incremental revenues are reinvested into lab expansion (12–15 in FY27), precision diagnostics, and a few radiology centers. A stable pricing environment should further aid DLPL's growth trajectory as consumers gravitate toward quality-focused, branded organized operators, in our view. A strong balance sheet (net cash position of Rs1.5bn, providing ample headroom for both organic investment and inorganic opportunities), industry-leading margin, and stable return ratios provide comfort on valuations. Key risks: Irrational pricing environment, inflationary pressures owing to the ME crisis, and disruption in the raw-material supply chain.
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