Diagnostic cos revenues to decline 7% in FY23 as Covid tests fall: Crisil

A fall in Covid-19 tests will lead to an up to 7 per cent dent in diagnostic companies' toplines in FY23, rating agency Crisil said on Wednesday.

The fall in revenues in FY23 will come after a handsome 30 per cent growth in FY22 on higher testing, the agency said, attributing the fall in Covid testing in the ongoing fiscal to the waning intensity of the pandemic and also a preference for self-test kits.

The operating profit margins, which had hit a decadal high of 28 per cent in FY22, will moderate to 24-25 per cent in FY23 on the decline in revenue and the higher operating expenses, driven by advertising and marketing costs, it said.

Good cash generation, prudent capital spends (mainly on diagnostic equipment) and low debt levels will keep balance sheets at healthy levels, resulting in 'stable' credit profiles for diagnostic players, the rating agency said.

The agency said it has analysed 11 players in the industry having an aggregate revenue of over Rs 6,500 crore to arrive at the estimates.

Its senior director Anuj Sethi said the revenue share of Covid-19 tests has fallen to low-to-mid single-digit in the first half of this fiscal, down from occupying a fifth of the revenues in FY22.

"This shortfall will be partly compensated by a 12-14 per cent increase in revenue contribution from regular tests in both existing geographies and from expansion into tier-2 and 3 cities," he added.

Another trend being observed in the industry is the increasing competition from online pharmacy players offering tests mainly in the wellness segment of regular tests, the agency said, adding that such tests typically do not involve doctor prescriptions or referrals.

Such online pharmacy players, without investing in the physical infrastructure of their own, have tied up with regional labs for conducting such tests. This play has forced established diagnostic players, who generate 10-12 per cent of revenues from wellness tests, to step up investments in digital infrastructure and home-collection services.

Higher marketing and advertising spends, along with a drop in the share of the revenue from Covid-19 and allied tests, is estimated to have impacted operating profitability by 3-4 per cent in the first half of this fiscal, its associate director Shounak Chakravarty said.

"Various cost-optimisation measures undertaken and a moderate increase in realisation from regular tests will ensure operating margin still remains healthy at 24-25 per cent for fiscal 2023," he added.

Intense waves of the pandemic in the future, increase in competition from online players, and the ability of incumbents to continuously expand their market share will be the factors to watch out for, the agency said.