Preventive testing, Ayushman Bharat to drive diagnostic firms' revenues

Diagnostic services companies led by Dr Lal Pathlabs, Metropolis Healthcare have outperformed the market and this trend is expected to sustain

While the Street is cautious on the outlook for segments within the health care space such as pharmaceuticals, one segment which is expected to buck the trend on growth and revenue outlook is diagnostics services. Diagnostic services companies led by Dr Lal Pathlabs and the recently listed Metropolis Healthcare have outperformed the market and this trend is expected to sustain.

The sector, which had been pegged by concerns related to pricing cap on essential tests and competition from unorganised and small local players, is expected to see better days. Analysts at Goldman Sachs are bullish on the sector given the potential for increased inclusion of diagnostic testing in health insurance and ample runway for higher market penetration. This is on the back of an improvement in standards of living and rising awareness about preventive health care. They believe the same will reflect on the three listed diagnostic services stocks — Dr Lal Pathlabs, Metropolis Healthcare and Thyrocare Technologies. 

Ayushman Bharat, the national health insurance scheme rolled out by the central government to raise public spending on health care from the current 1 per cent to 2.5 per cent of GDP by 2025, is also seen as a growth trigger. Diagnostic firms will observe a trickle-down effect in time to come, say analysts at Karvy Stock Broking who are positive on the prospects of Thyrocare and Dr Lal Pathlabs.

Preventive testing that accounts for less than 10 per cent of the overall market is growing 20 annually, according to analysts. As the government increases incentives (including tax breaks) towards preventative testing, Goldman Sachs believes this segment can grow at the rate of 27 per cent annually over FY19-23. Increasing insurance coverage for diagnostics services, including outpatients, is also seen driving growth for the sector.

Among the key picks for stocks is Dr Lal Pathlabs. The company, which was earlier focussed on the Delhi-NCR region, is gradually transforming its product, channel and geography mix. Not only this de-risks from Delhi-NCR but expansions in east India and growing presence in south and west India is also expected to drive its growth. The company’s east India expansion is led by Kolkata Reference Laboratory, which now supports a variety of tests and is the main centre for diagnostics in that region, say analysts. Besides, while it has grown organically in the south and the west (Bengaluru and Pune), analysts feel that the company is in a strong position to opt for inorganic growth in the regions given the strong cash position. The company’s contributions from other regions compared to Delhi-NCR are seen rising to 57 per cent. Given that it is well-positioned to outperform competition underpinned by a strong brand, quality-focused testing, steady margin and expansion to new geographies, analysts at Edelweiss Research see more upside for the stock.

Though Thyrocare Techno-logies is growing well, it had to take price cuts to drive volume growth. This, however, led to pressure on margins. Nevertheless, analysts at Equirus say that price cuts of 25 per cent in Aarogyam profiles has driven volumes, up 49 year-on-year in the March quarter.

The company has also taken hikes in select tests. Overall realisations were intact year-on-year during the March quarter (down 5 per cent sequentially). Higher growth in high-value Aarogyam would boost the company’s overall realizations, they add. Analysts at Karvy Stock Broking, too, say that the company will be able to maintain margins and gain a dominant share in both business-to-business and business-to-consumer segments. Revenues are expected to grow at 15.4 per cent annually over FY17-21 and operating profit could grow at 14.5 per cent annually.  

Metropolis remains a focused player, concentrating on the business-to-consumer segment with higher retail customer orientation and specific geographies. While the company has grown 17 per cent annually over FY16-FY19, focus cities (Mumbai, Bengaluru, Chennai, Surat and Pune) had grown at higher rates. Analysts at JM Financial expect Metropolis to continue to deliver industry-leading growth (22 per cent annual profit growth over FY19-21).