Dr Lal Pathlabs: Test it out - Buy

The six-decade-old New Delhi-based diagnostic and healthcare testing major Dr Lal Pathlabs (DLPL) seems well-positioned for growth in the next two to three years.

First, the company’s suite of test offerings continues to grow with the addition of around 70 new tests in the last fiscal. It now has a catalogue of 1,100 test panels, 1,934 pathology tests and 1,561 radiology and cardiology tests. Further, the firm has introduced higher margin tests such as enhanced liver fibrosis and chromosome interface profiling.

Next, the company is commissioning two new regional reference labs (RRL) in Kolkata and Lucknow, both of which are owned properties. The Kolkata lab is likely to begin operations from October 2017. The RRL at Lucknow for which construction is yet to begin, is expected to be commissioned in early 2019. Capex is estimated at around ₹40-50 crore for each of these facilities, to be funded through internal accruals. The company has indicated a break-even time of two to three years.

In addition, the expansion in the number of patient service centres from 1,340 in 2014-15 to 1,559 in 2015-16 is expected to increase its reach and sample volumes. The company has increased its lab management services for hospitals from 14 to 18 in the last fiscal. Having grown via acquisitions in the past, the company has indicated that it is not averse to pursuing such opportunities for its growth plans.

DLPL listed around Christmas last year with 30 per cent gains from its IPO offer price of ₹550.

The stock now trades at an all-time high. It trades at 72 times its trailing 12-month earnings, at 15 per cent premium to its listed peer Thyrocare Technologies. But this high multiple does not seem inappropriate, given the expansion plans, healthy margins and a likely shift to diagnostic chains from unorganised players.

Investors with a three- to five-year horizon can consider taking exposure to this mid-cap stock as it is expected to maintain its growth momentum in the coming years.

Dr Lal Pathlabs provides laboratory services for bio-chemistry, haematology, microbiology and a few other pathological and radiological services to individual patients, hospitals, healthcare providers and hospitals.

The company sources a sizeable portion of its laboratory equipment under the rental reagent model (RRM).

This asset light model entails DLPL to purchase monthly a fixed number or quantity of reagents, diagnostic kits and automated analysers in lieu of owned equipment that is rented and not owned. In a few cases, the company purchases diagnostic equipment either when the equipment is unavailable or if it is cost-effective when owned.

DLPL, which operates on a hub-and-spoke model, has a National Reference Lab at New Delhi, supported by regional clinical laboratories.

The number of clinical labs, which rose to 172 in 2015-16 from 131 in 2012-13, enabled the company to service a larger number of patient samples. The number of patients from whom such samples were collected grew to 1.2 crore in 2015-16 from 77 lakh in 2012-13.

As a patient can have multiple tests, this 56 per cent rise in number of patients translated into a faster 64 per cent growth in the number of samples processed from 1.6 crore to 2.63 crore.

An increase in patient service centres to 1,559 in the last fiscal from 834 in 2012-13 and a growth in pick-up-points to 4,967 from 2,879 in the same time frame too, helped.

Around 72 per cent of DLPL’s revenue is from North India, with 13 per cent share from the East. It is yet to gain significant traction in South and West India with the geographies contributing around 7 per cent each. The company derives a minor 1 per cent share from patients residing outside India.

In 2015-16, the company posted revenue of ₹791 crore, up 20 per cent year-on-year, mainly driven by volume growth of 21 per cent. Operating margin was flat Y-o-Y and came in at around 27 per cent. For the quarter ending June 2017, revenues improved by 18 per cent Y-o-Y to ₹223 crore on the back of 15 per cent volume growth. Profit after tax rose 30 per cent to ₹40.2 crore.

Since 2012-13, revenue and net profit have annually grown 19 per cent and 23 per cent, respectively. The company is debt-free and held cash of ₹295 crore in March 2016.

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