Dr Lal Pathlabs Q1FY23 beats estimates, ICICI Securities

Dr Lal Pathlabs (Dr Lal) Q1FY23 performance beat our estimates driven by better than expected improvement in the base business. Revenue from Covid and allied tests (ex-Suburban) plunged 92.2% YoY. Base business revenues (ex-Suburban) grew 15.4% YoY (3-year CAGR of 10.0%) to Rs 4.5bn vs our estimate of Rs 3.9bn. Overall revenue fell 17.1% YoY, mainly on the high base of Covid-led revenues. EBITDA margin contracted 780bps YoY to 23.4%. Adjusted PAT was down 56.0% YoY to Rs577mn. While intensified competition is likely to weigh on realisations in the near term, we believe changing revenue mix in favour of specialised tests will provide support. We remain positive on Dr Lal given its strong brand equity, focus on geographical expansion, mix shift towards specialty tests and strong return ratios with healthy FCF. Maintain BUY with a revised target price of Rs 2,919/share (earlier: Rs 2,981/share).

Business review: Revenue declined 17.1% YoY (ex-Suburban, decline was 23.6% YoY) mainly due to 92.2% fall in Covid revenues. Covid-related tests’ contribution reduced sharply to 4.2% of sales from 36.2% and 13.6% in Q1FY22 and Q4FY22 respectively. Base business (excluding Suburban revenues of Rs 355mn) witnessed a 3-year CAGR of 10.0%. Non-Covid volumes (patients) witnessed 13.9% YoY growth in Q1FY23, and this is expected to remain strong in full-year FY23 with improving base business. Average realisation on non-Covid tests remained flat QoQ, while that for patients improved marginally with revenue mix favouring the specialised and semi-specialised tests, as well as higher contribution from Swasthfit. EBITDA margin declined 780/160bps YoY/QoQ to 23.4% amid consolidation of the low-margin Suburban business and sharp fall in Covid revenues coupled with higher spends towards marketing and digitisation. We expect EBITDA margin to be limited at ~25% over FY23E-FY24E, due to lower margins of Suburban and higher costs.

Concall highlights: 1) Guided for 13-15% annual revenue growth; Delhi and NCR expected to grow in single digits. 2) Suburban margins stood at ~12% in Q1FY23; the company’s focus is to double volumes in next 2-3 years and get margin of 20%. 3) Home collection accounted for ~10% of total revenue against 5-6% pre-Covid. 4) Swasthfit contributes 21%, total routine test is ~30% of sales. 5) Company is looking to acquire assets in south India.

Outlook: We expect Dr Lal to outperform industry growth with revenue, EBITDA and PAT CAGRs of 9.1%, 5.2% and 5.2% respectively, over FY22-FY24E, driven largely by volume growth. RoE and RoCE are expected to be at 20.2% and 16.8% respectively in FY24E. We are positive on the long-term outlook considering the company’s strong brand franchise with sustainable growth, expansion potential, healthy FCFF generation and strong return ratios.

Valuation: We reduce our FY23E-FY24E EBITDA estimates by ~2% to factor-in higher spend towards digitisation and marketing. Maintain BUY with a revised DCF-based target price of Rs 2,919/share (earlier: Rs 2,981/share), implying 63.8x FY24E EPS and 37.5x FY24E EV/EBITDA. Key downside risks: Higher than expected competition and regulatory hurdles.

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