As Covid wanes diagnostic companies stare at a large de-growth in revenues

Revenue of diagnostics players this fiscal may record a 5-7 per cent de-growth with growing preference for self-test kits and a sharp fall in Covid-19 and allied tests with the pandemic waning away, global analytical company CRISIL said in a report released on Wednesday.

This is contrary to a stellar 30 per cent growth last fiscal driven by a severe second Covid wave and pent-up demand for regular tests, the report said.

Decline in revenue along with higher operating expenses, largely marketing and advertisement related, will lead to moderation in operating margins to pre-pandemic levels of 24-25 per cent, which is still healthy. Last fiscal, higher realisation from Covid allied tests and better operating leverage resulted in operating profitability reaching a decadal high of around 28 per cent.

“However, good cash generation, prudent capital spends (mainly on diagnostic equipment) and low debt levels will keep balance sheets at healthy levels, resulting in ‘stable’ credit profiles for diagnostic players,” said CRISIL.

A study of 11 diagnostics players (including five pan-India players) that had aggregate revenue of over Rs 6,500 crore last fiscal indicates as much.

“From 18-20 per cent last fiscal, the revenue share of Covid-19 tests has fallen to low-to-mid single-digit in the first half of this fiscal. Increasing preference for at-home tests will limit revenue growth from Covid-19 lab tests in the remainder of this fiscal. This shortfall will be partly compensated by 12-14 per cent increase in revenue contribution from regular tests in both existing geographies and from expansion into tier-2 and 3 cities,” Anuj Sethi, Senior Director, CRISIL Ratings said.

CRISIL Ratings noted a trend that there is increasing competition from online pharmacy players offering tests mainly in the wellness segment of regular tests; these tests typically do not involve doctor prescription/ referrals.

The online pharmacy players, without investing in physical infrastructure of their own, have tied up with regional labs for conducting such tests. To counter this competition, established diagnostic players, who generate 10-12 per cent of revenues from wellness tests, have stepped up investments in digital infrastructure and home-collection services. Additionally, they have increased marketing and advertisement spend to reinforce brand recall and awareness on quality.

“Higher marketing and advertisement spends along with drop in the share of revenue from Covid-19 and allied tests, is estimated to have impacted operating profitability by 300-400 basis points in the first half of this fiscal. However, various cost optimisation measures undertaken and a moderate increase in realisation from regular tests will ensure operating margin still remains healthy at 24-25% for fiscal 2023,” Shounak Chakravarty, Associate Director, CRISIL Ratings said.

Yet, good cash generation along with strong liquidity will be sufficient to meet capital expenditure requirements of diagnostic players, the report said. The need for capex as such is not high, as investment will majorly be towards laboratory equipment. Hence, debt levels are expected to remain low, ensuring continuation of healthy balance sheets and ‘stable’ credit profiles, for CRISIL Ratings rated diagnostic players. That said, any further intense waves of the pandemic, increase in competition from online players, and the ability of incumbents to continuously expand their market share would bear watching, said the report. Business Today