Confident of beating sector growth of 16-17%: Dr Lal PathLabs

Dr Lal PathLab reported a steady first quarter growth with a 17.7 percent rise in revenue to Rs 222.84 crore while its operating profit came in at 27.1 percent year-on-year. The quarter growth has been in-line with expectations, says Om Manchanda, CEO of Dr Lal PathLabs, adding that some operational expenses will be seen in the next nine months.“We continue to see healthcare doing very well,” he says. The sector is growing at 16-17 percent rate, which the management is confident of surpassing. However, a drop of 1-2 percent in margins is expected as new labs will start in next fiscal, he says. Margins will be maintained in 25-26 percent range. The company’s dependence on Delhi-NCR is reducing as the rest of India business now contributes 55 percent to overall business. With increasing competition, Manchnada says focus is on pricing and driving up volumes.Below is the transcript of Om Manchanda’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Latha: This is definitely a good performance on all parameters, but can you still do better? What would you guide in terms of full year for revenues and for margins?A: Our quarter growth has been in line with our expectations. We expected around 18 percent growth. That is what we have delivered. Our margins have been slightly better than what we expected. We do expect certain operational expense (opex) items coming up in the next nine months.As far as next quarter is concerned or how we look at the future, we continue to see healthcare doing very well and as we mentioned earlier, growth rate in healthcare market is about 16-17 percent and we expect to beat this growth in future as well.Sonia: The other positive is that your over-dependency on the Delhi National Capital Region (NCR) market is reducing, so you are growing fast in other regions as well. Can you take us through the geographic distribution? Which are the markets in which you are growing and which could be the triggers for you going ahead?A: We started our business in Delhi, our dependence in the past was very high. Over a period of time, it has reduced and we continue to see that dependence on Delhi NCR moving down. Now, rest of India business contributes about 55 percent of the business and that is growing faster than NCR. We hope that with our future strategy of building east and central region by opening central laboratories, we will further see a better growth rate in rest of India in the times to come.Anuj: But the competition is picking up in this is space which is quite anecdotal and it is visible as well. Do you think you will be able to sustain margins in the high 20’s, 26-27 percent?A: This industry has always been competitive because we do not compete against large players. Our competition is with a lot of smaller labs. The real story in our business is to build preference for brand and shift from unorganised sector to organised.Probably you are right, because with this couple of listings happening in the recent past, the sector has suddenly become visible but according to us, the competition was always there. As far as the profitability is concerned, in other parts of the country, we have to stay competitive on pricing and probably drive volume growth and build preference for our brand and build as much as wider collection infrastructure as possible, especially through franchisee network.Latha: That is the point is it not? You will be taking over terrain from unbranded, unlisted players perhaps and that is where the pressure on margins comes. So, will you be able to maintain 27, will you improve or slip a little?A: In the past also, we have said that at least there will be a drop of about 1-2 percent margin as we go along, especially when our new labs come up in the next financial year, not in this financial year but there are many ways to build the portfolio. Pressure normally happens from smaller players on routine tests like sugar etc. but there are a lot of high end tests which are growing fast and capabilities of many of these smaller labs is not there as of now. So, mix is also going to drive our realisation on the higher side. So, on balance we should be able to at least manage margins between 25 and 26 percent range.Sonia: Just one more comment on the east India market, because that seems to be untapped for now, by pan-India diagnostic chains and you guys are setting up a reference lab in Kolkata as well. When will that lab come on stream and what kind of market share do you think you can grab in the east Indian market?A: Current timeline for that lab is of September, 2017. The work has already commenced and as you rightly picked up, competitive intensity in east India is slightly on the lower side compared to what we see in other cities. We have first mover advantage because we started expanding our network about 12-13 years back. The entire north east business falls into Kolkata region and once that lab comes up, we hope to see an uptick on volumes as well as value going forward.As far as the market shares are concerned, as we have maintained earlier, the market is highly fragmented, unorganised. Organised players -- all of us put together -- is hardly about 10-15 percent of the total market. So, market shares are fairly low right now, but going forward we see that once our lab comes up, we should be able to grow faster there.