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Diagnostics: Increasing sanity provides some respite

Our latest analysis across seven cities suggests diagnostics pricing trends slightly improved further in 3QFY24. Notably, Netmeds, the most aggressive player in the past six months, has hiked prices. Yet, incumbents are still priced ~2-2.5X the cheapest organized alternative thereby still witnessing a volume brunt. We roll forward FVs for DLPL and METROHL with a tad higher long-term estimates. Despite the 500-1,100 bps underperformance of these stocks versus BSE500 in the past six months, valuation comfort is missing even as we bake in higher volumes. Retain SELL on DLPL and REDUCE on METROHL with raised FVs of Rs2,000 and Rs1,525, respectively.

METROHL continues to experiment in Delhi NCR; Thyrocare hikes prices by 5%

Likely indicating its intent to strengthen its presence in Delhi NCR and thereby escalating the threat for DLPL, METROHL has once again reduced its prices in the region by ~18% qoq on KIE’s sample test bouquet. We highlight, over the past six months, METROHL has dropped prices twice and hiked prices once in Delhi NCR. Its pricing has remained largely unchanged in other cities. Thyrocare has raised prices across cities by 5% qoq. Pricing for other incumbents like DLPL, Agilus and Vijaya was largely steady qoq. We highlight over the past one year, most of the larger incumbents, except Agilus, have raised prices up to 8%.

Netmeds bites the bullet; incumbents’ pricing gap stays at ~2-2.5X

APHS took a pause after a fairly hectic past few quarters (2X jump in 2QFY24, 5% hike in 1QFY24 and 50% cut in 3QFY23) with flat qoq pricing in 3QFY24. Among other hospital and offline players, Lupin hiked its overall prices by 5-7% qoq, while Aster DM and Medplus raised their prices in Hyderabad by 5-25% qoq across our sample test bouquet. After six months of aggressive pricing, Netmeds has significantly raised its prices by 27% qoq, reverting to its pricing in FY2023. Among the other online platforms, while Tata 1mg, PharmEasy and Redcliffe have lowered prices in 3QFY24 by 2-9% qoq, Healthians, mFine and Orange Health have raised prices qoq. Tata 1mg is now again the most aggressive online player on pricing, in all seven cities except Delhi, where Netmeds stays the most aggressive player.

Turning less bearish on incumbents than earlier; though not the right time yet

As highlighted in our earlier reports, the latest quarterly trends indicate the worst of the pricing-led competition in diagnostics is behind us. However, pricing of incumbents stays ~2-2.5X higher than the cheapest organized alternative across cities, even for specialized and semi-specialized tests. Given the high pricing differential and the sheer number of newer entrants, we remain guarded on any further meaningful volume advantage to listed incumbents even if competitive intensity ebbs further. We bake in 12-14% sales CAGRs over FY2023-26E, for DLPL and METROHL, hinging on higher volumes. We roll forward and now value DLPL and METROHL at Rs2,000 (Rs1,850 earlier) and Rs1,525 (Rs1,465 earlier), respectively. We retain SELL on DLPL and REDUCE on METROHL.

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