Stocks of diagnostic chains factoring in near-term positives: Analysts

They say it will be a good strategy to exit these stocks at least for now. Over the long-run, however, Dr Lal Pathlabs, Metropolis Healthcare and Thyrocare Tech still offer room for growth

Despite rising Covid cases across the country and the focus on getting tested for the virus, analysts say it will be a good strategy to exit stocks of diagnostic chains as they are pricing in most positives – at least for now. Over the long-run, however, Dr Lal Pathlabs, Metropolis Healthcare and Thyrocare Technologies still offer room for growth.

“The focus has now shifted to vaccination amid the recent spike in cases. Though stocks of diagnostic chains offer long-term value given the potential, most counters are factoring in the near-term positives. Valuation-wise, too, they are fairly priced at the current levels. It makes sense to exit them now when they are rising,” says A K Prabhakar, head of research at IDBI Securities.

At the bourses, most stocks from the sector have given a modest year-to-date (YTD) return, despite the 3 - 8 per cent jump on Monday. Dr Lal Pathlabs, Metropolis Healthcare and Thyrocare Technologies have gained in the range of 3 per cent to 18 per cent in 2021 so far. The S&P Midcap and S&P BSE Smallcap indices, on the other hand, have gained 14 per cent and 16 per cent, respectively during this period, ACE Equity data show.

G Chokkalingam, founder and chief investment officer at Equinomics Research, also echoes a similar view and says the stocks are factoring in near-term positives.

“The earlier panic of Covid is behind us and the focus is now on vaccination. Over the next six months to a year, most citizens will get vaccinated and develop some immunity to the disease. Though the strains are a concern, they should be handled with more vaccines being developed,” says Chokkalingam. The focus for these firms will then shift to preventive health packages and routine business. Yet, it is better to exit the stocks now as they are factoring in most near-term benefits, he adds.

From a long-term perspective though, analysts at HDFC Securities remain bullish on the sector and say ageing population, increasing disposable income and the need for preventive health checkups / diagnostic tests and the overall push from the government on healthcare puts these diagnostic chains on a firm footing. Besides, there is huge potential for organised players to take market share from the unorganised sector.

The diagnostic industry, according to their estimates, is currently estimated at $9.5 billion and is expected to grow at a compounded annual growth rate (CAGR) of around 11 per cent over the next five years, largely driven by increase in healthcare spends. The current disruption led by Covid will help the industry leaders in absorbing the small and mid-sized labs, which are facing operational challenges.

“The four major players – Dr Lal PathLabs, Metropolis Healthcare, SRL Diagnostics and Thyrocare Technologies – aggregate around 6 per cent of market share. So, there is a huge opportunity for organic expansion and consolidation of national players,” said Hemanshu Parmar, an analyst tracking the sector at HDFC Securities. Organised players with national presence would grow at 15 – 17 per cent CAGR over the next five years and continue to garner market share, led by asset light models and strong cash flows, adds Parmar.

That said, growth of diagnostic chains over the medium-to-long term, analysts believe, would be majorly volume-driven. While hospital-based laboratories are restricted to the walk-ins and in-patients, diagnostic chains have an advantage of expansive test menus and affordable costs, touch points to service patients locally, value added offerings for patients and the ability to sustainably grow in new markets. Companies have already started to implement initiatives such as retailer partnering, home testing, and enhancing engagement with patients through digital presence, in addition to maintaining their basic testing services as a safety net.

“Attracted by historically high growth rates (20-25 per cent), lucrative returns, and low entry barriers, most players compete on pricing to garner volumes quickly and move up the cost curve, supported by private equity (PE) investors. A faster shift of unorganised business to organised players, potential consolidation, likely increase in preventive check-ups and sizeable scale would benefit large organised players with strong balance sheets,” Parmar adds.