Company Name – Dr Lal Pathlabs Limited (DRLAL) Current Share Price – INR 2,143 (June 02, 2022) Market Cap – INR 17,866 cr |
1. What is interesting about the stock?
The requirement of an RT-PCR or a Rapid Antigen Test (RAT) for stepping into a mall even, has become a part of our lives in 2021. And with that, pathology labs came into the consciousness of everybody. Each city had its share of preferred labs but SRL, Dr. Lal’s, and Metropolis were amongst the handful commonly available across many cities.
Late Dr. Major S.K. Lal (father of current Chairman), commenced the business of providing pathology services and maintaining a blood bank in the year 1949 through sole proprietorship of M/s Central Clinical Laboratory and M/s Blood Bank Transfusion Centre. The business of diagnostic and related healthcare tests and services now continues to be provided by the Company.
Dr Lal Pathlabs Limited provides diagnostic and related healthcare tests and services in India and internationally. Tests provided by the Company are:
The Company has 277 laboratories including 31 NABL accredited laboratories, a National Reference Lab at Delhi accredited by CAP, Regional Reference Lab at Kolkata and Bengaluru, and 4,731 patient service centers and 10,599 pick-up points offering more than 5,000 tests. The Company uses a hub and spoke model:
The Company has also invested in a robust IT and digital platform for complete integration of its operations with the customer-facing app that helps the Company to offer a seamless experience. This allows it to compete with the health apps that are popular with the younger population and cater to the fast-growing home collections business (12% of business vs 5-6% pre-Covid for DRLAL). The Company also uses this IT backbone to manage its franchisee network efficiently, which has helped the Company remain asset-light (asset turnover of ~10.6x).
The diagnostics segment in India is highly untapped and fragmented, presenting growth opportunities. It represents about 5% of total healthcare costs and is likely to grow to cross INR 1 trillion in 2025, according to details in the draft prospectus of API Holdings (PharmEasy). Diagnostics industry is expected to grow by ~15% in the next few years driven by:
Demand for lifestyle diseases-related services to grow
Increase in evidence-based treatments
Focus on preventive diseases and wellness
Diagnostic Services industry continues to remain highly fragmented and unorganized:
Standalone centers – 46%
Hospital-based labs – 37%
Diagnostic chains – 17%
Pan – India chains: ~35%
Regional chains: ~65%
Low entry barriers and good returns prospects in this segment have attracted many online and offline companies, making it difficult for existing players like Dr. Lal to maintain leadership.
Management Background
Dr. Arvind Lal is a pathologist, medical administrator, and chairman of the Company.
Dr. Om Manchanda, Managing Director, joined Dr. Lal Pathlabs in 2005. He is an MBA from IIM Ahmedabad and had worked at Hindustan Unilever for about 10 years before joining the Company.
Bharath Uppiliappan, the CEO, has an experience of over 20 years of across various industries. Bharath is a PGDM from SP Jain Institute of Management (SPJIMR), Mumbai.
Ved Prakash Goel, CFO, joined the company in 2006. He has over 20 years of experience in the field of finance. He is a Chartered Accountant and B.Com from Delhi University.
Why invest in Dr Lal Pathlabs?
The key investment arguments summarized would be:
Largest diagnostic chain in the country with a nationwide footprint serving nearly ~27 million patients annually; future growth expected from the Western and Southern regions through both organic and inorganic routes
Well-established and trusted brand in the space, will continue to be the preferred choice for doctors who are the primary decision-makers for specialized tests which form 60-70% of their revenues
Experienced management team
2. Key Historical Financials
In FY22, the Company integrated Suburban Diagnostics, a chain it acquired to strengthen its presence in the Western Indian market. This led to a jump in revenues by 32%, which is not directly comparable with the previous year. The normalized* EBITDA margin was 29% and the normalized PAT margin was 18%, which are likely to moderate in the next few quarters. In Q4FY22, the EBITDA margin has already moderated to 25% from 28% same quarter last year. DrLal, like all other diagnostic chains, has negative working capital. This leads to healthy cash convertibility (CFO/EBITDA ratio).
*Normalized EBITDA margins adjust for RSU, and CSR expenses and normalized PAT margins adjust for notional depreciation on consolidation of Suburban Diagnostics
3. What is my view on company valuation?
The Company’s share price has almost halved from the pandemic-fueled highs and is likely to continue to face downward pressure due to increased competition affecting margins for a few more quarters and lower growth prospects. The P/E multiples on a TTM basis have rationalized from 110x to ~50x over the last year, almost at its lifetime median P/E levels.
However, I believe that the established players will be better placed to grow at the specialized end of the diagnostic tests as they have built deep relationships with doctors who prescribe such tests. Given its wide reach across the nation, I believe that the Company is worth keeping an eye out for, and investors should evaluate investing for the long term at half of the current TTM P/E levels.
4. What are the risks to the investment analysis?
Risks to the analysis are:
With the tailwind of Covid-19 cases ebbing and non-Covid tests not increasing as significantly as expected, the extra revenues and margins that the existing players managed to earn are no longer sustainable
The entry of new players like Tata 1mg, VC/PE funded players like PharmEasy (through the acquisition of Thyrocare Technologies), Adani group, funded health-tech apps like Healthians, etc. have increased the competitive intensity in the space and will bring down margins in the industry
The increase of home-based testing which gained prominence during the epidemic is resulting in lower footfalls in many test centers, making them unviable and drag for older players with large networks. It might also reduce the attractiveness of business for the franchisee, thereby impacting growth through that route for the Company
About the Author
I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.