Sales recovery, expansion in new markets key to Dr Lal Pathlabs' growth

Higher competition, expansion may be a challenge for margin

The Dr Lal Pathlabs stock has gained 13 per cent on expectations that de-risking of the revenue profile, lower Covid-related contribution, and volume gains will improve its sales and margins.

Sales of the company which had been impacted during the first half of FY21 have started recovering. Non-Covid test and walk-in volumes, which were down 38 per cent YoY in the June quarter, came back on the growth track in the December quarter and report­ed an 8 per cent YoY increase. Though walk-in volumes are lower than the pre-pandemic period, they have recovered from the lows of last year.

While near- and medium-term growth should be led by north and east markets, the company is looking at south and west markets to de-risk dependence on Delhi-NCR, which accounts for 35 per cent of sales.

In addition to inorganic growth, the company is planning to put up reference labs in Mumbai and Bengaluru to serve these markets. Alankar Garude of Macquarie Capital believes it will take Dr Lal Pathlabs 4-5 years to stabilise its operations in the two regions. While this will help de-risk its geographical presence and is positive in the long term, it can impact profitability in the near term.

Analysts at Edelweiss Research believe that penetration in the region (west and south) will take longer given stiff competition, which coupled with rising investments and sales from franchisee centres, are likely to impact near-term margins.

What may offset some concerns on the margin front is the declining trend in Covid-19 tests. Contribution from Covid tests are down 60 per cent from peak levels and this is expected to continue.

Growth from an increase in preventive tests, market share gains from the unorganised segment, and expansion in new areas will help ensure growth in mid-teens over the next five years. However, the increase in competitive intensity in the diagnostic space by hospital chains, such as Apollo Hospitals, e-commerce, and pharma companies may pose a pricing pressure.

Though growth prospects are strong, valuation at 54x its FY23 earnings estimates captures most of the upside. Investors can take exposure to the diagnostics leader on dips.