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Dr Lal Pathlabs’ strategic move to strengthen western region

Dr Lal Pathlabs’ (Dr Lal) Q2FY22 result was below our estimates as the non-COVID revenues fell short of our expectations. Revenue from COVID-19 and allied tests sharply declined by 76.8% QoQ with drop in cases. Base business revenues had a two year CAGR of 10.6% to Rs4.5bn (I-Sec: Rs4.8bn). EBITDA margin declined 110bps YoY to 28.4%. Adj. PAT grew 11.4% to Rs950mn. Dr Lal announced 100% acquisition of Suburban Diagnostics (India) (Suburban) for a cash consideration of Rs9.25bn (additional Rs2.25bn is contingent). We remain positive on Dr Lal given volume growth consistency, ability to execute well and strong return ratios. However, we believe that the current valuations capture the near term growth, so we recommend HOLD.

  • Business review: Amid sharp decline in COVID-19 cases, COVID-19 and allied tests contribution declined to 10.2% of sales (36.3%/22.1% in Q2FY21/Q1FY22). Base business witnessed a two year CAGR of 10.6%. The volumes (patients) witnessed 27.8% growth and is expected to continue in FY22E on a lower base. Average realisation stood at Rs722 (down 9.7% YoY) on account of lower COVID-19 revenue. EBITDA margin at 28.4% dropped 280bps QoQ with falling realisations. We expect EBITDA margin to be range bound at 28-29% over FY21-FY23E as it integrates Suburban into the business.
  • Suburban acquisition: Dr Lal announced 100% acquisition of Suburban for a cash consideration of Rs9.25bn (additional Rs2.25bn is contingent) by valuing at 18.5xFY22 EV/EBITDA. The deal will be funded via internal accruals and it is expected to consummate within a month. Suburban’s FY21 revenues were Rs2.95bn (Rs1.27 was non-COVID) with 19.6% margins. Suburban has ~200 centres across >10 cities in western India which is a crucial growth area for Dr Lal. Post the deal, Dr Lal will immediately see revenue contribution from western region jump to 24% from 10%, the acquisition is strategically important in long term to become a meaningful player in western India.
  • Key Concall Highlights: 1) Cash and equivalent stood at Rs11.4bn as of Q2FY22. 2) Non-COVID revenues expected to be normalise in next couple of quarters 3) Further investment in Suburban to – i) strengthen consumer business, ii) expand in white space and iii) enhance lab capacity 4) Post deal, Greater Mumbai cluster would be a second highest revenue contributor at 14% after Delhi-NCR. Suburban will lead consumer business and Dr Lal will focus more on B2B segment 5) the company is continuously evaluating inorganic opportunity in Western and South region.
  • Outlook: We expect Dr Lal to outperform industry growth and register revenue/ EBITDA/PAT CAGRs of 23.6%/25.2%/25.2% over FY21-FY23E. RoE and RoCE would remain strong at 25.6% and 27.0%, respectively, in FY23E.
  • Valuation: We raise FY22E-FY23E revenue and EBITDA estimates by 2-10% and 1-6% respectively to factor in lower COVID-19 sales and Suburban acquisition. Retain HOLD with a revised DCF-based target price of Rs3,601/share (earlier: Rs3,405/share). Key downside risks: Higher-than-expected competition and regulatory hurdles. Key upside risk: continued upside from COVID-19 related tests

Please find attached report here.
MB Bureau