Dr Lal PathLabs: Street worried over rising pressures

Growth rate and margin could see downward trend in near term

The stock of Dr Lal PathLabs fell 6.4 per cent after brokerages cut their margins and earnings estimates for the company due to rising pressure on pricing and volumes.

Morgan Stanley, which has cut its target price to Rs 700 from Rs 888, said the company would face substantial pressure, given competitive intensity. Some pressure was visible in the company’s March quarter performance, when its operating profit margin declined 298 basis points year-on-year to 23.6 per cent.
 

The pressure mounted on account of competition in the business-to-business (B2B) segment, promotional and employee expenses as well as costs associated with setting up new laboratories. The B2B segment, which includes revenues from nursing homes and hospitals, accounts for 40 per cent of the company’s top line.
 

Analysts at Nomura said the company’s operating profit margins could contract 100-200 basis points, given the scheduled expansions in the eastern and central region over the next two years.

Those at JM Financial say increasing incidence of private equity-funded regional players in the lucrative and highly-fragmented diagnostics space has increased the pricing pressure on incumbents and limited growth prospects as both compete to capture market share in larger cities. A drop in demand because of the recent demonetisation had aggravated the pressure over the last quarter.

The management, however, is looking at optimising the cost structure at existing centres by increasing volumes rather than expanding to new markets.
 

Over the past three years, the company has lagged its listed peer Thyrocare Technologies, with its volume growth coming in at 15.5 per cent. Thyrocare has reported a growth of 26 per cent. 

However, the commencement of the regional reference laboratories is likely to push volumes. The company is set to commission its Kolkata Regional Reference Laboratory by September 2017, which will help it to capture a greater share of high-end tests in the eastern region. Besides, commissioning of another reference laboratory in Lucknow will help to double its addressable market size.

How soon the company can translate these into profitability is yet to be seen.

The company did not respond to queries by Business Standard.

In the near term, heightened competition and pressure on margins would be an overhang. At the current price, the stock is trading at rich valuations of 31 times its FY19 earnings estimates.