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Last Updated : Jul 15, 2020 06:36 PM IST | Source: Moneycontrol.com

Dr Lal PathLabs shares extend gains into 3rd day; analysts positive on firm's long term story

Despite the turmoil caused by COVID-19, the stock has been gaining significantly in the calendar year 2020 so far. The stock has gained 27 percent as of July 14 close on BSE against a 13 percent fall in benchmark Sensex.

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Todays L/H

After hitting a fresh all-time high of Rs 1,935 in intraday trade, shares of Dr Lal PathLabs ended 0.76 percent up at Rs 1,912.40 on BSE on July 15.

With this, the stock extended its winning run into the third consecutive session.

Despite the turmoil caused by COVID-19, the stock has been gaining significantly in the calendar year 2020 so far. The stock has gained 27 percent as of July 14 close on BSE against a 13 percent fall in benchmark Sensex.


The company, in its Annual Report for 2019-20, stated that instances and situations like the COVID-19 outbreak further boost the importance of diagnostics as an integral part of the healthcare system.

The company highlighted that the outlook for the diagnostics industry in India is favourable with rapid technological advancements in the healthcare industry, and doctors increasingly relying on evidence-based treatment.

Long term story positive

Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities is of the view that the company's long-term structural trends are favourable and aid the business of large players.

However, Oza sees some bumps in the road ahead for the company.

"Dr Lal Pathlabs had reported a 31 percent decline in Q4FY20 net profit, primarily led by pandemic-related disruptions in March along with some underlying weakness in the Delhi-NCR region. We expect a challenging FY21 with gradual recovery and volumes normalizing by H2FY21," said Oza.

Oza expects revenues to decline by 27 percent year-on-year (YoY) in Q1FY21 with non-COVID revenues declining 39 percent YoY.

"We expect COVID testing to drive growth in realisations per patient in Q1FY21. We expect EBITDA margins to collapse to 14.5 percent led by negative operating leverage. Net profit may decline by 72 percent in Q1FY21," Oza said.

As per Oza, the stock's valuation at 50 times FY22E is very rich, so his DCF-based target price for the stock is at Rs 1,180.

Vinod Nair, Head of Research at Geojit Financial Services, believes in Dr Lal's long-term story.

"The debt-free balance sheet and solid operating performance are key factors that will propel the company’s growth in the long-term and hence we recommend a buy," said Nair.

Nair highlighted that Dr Lal's strong business model led to revenue growth of 15 percent CAGR over FY15-20, supported by a rise in sample collection -backed by a large network of patient services centres and pick-up points - along with a growing number of patients served.

"The company’s Hub and Spoke model (centralized diagnostic testing) offers economies of scale and future expansion opportunities, along with a large network, which enhances the company’s purchasing power with suppliers," said Nair.

He believes the company is all set to gain from the current COVID-19 situation, as its Delhi lab received approval for COVID-19 testing.

Additionally, Dr Lal continues to focus on improving the ratio between collection centers and labs, by focussing on building franchise infrastructure. The company continues to grow inorganically with the recent acquisition of two labs in Maharashtra, Nair pointed out.

For Nirali Shah, Senior Research Analyst at Samco Securities, Dr Lal is a 'hold' call for the long-term.

Shah underscored the company maintains a strong balance sheet with a cash balance of Rs 569 crore, which seems enough to navigate through the COVID-19 storm.

"The company has been able to manage its working capital well with quick cash conversion cycles. Even though the current situation is challenging as the business saw a significant impact on their revenues during the lockdown period, but there is the gradual recovery now," Shah said.

The analyst expects margins to remain suppressed in the near term as 60-65 percent of total costs are fixed in nature and the walk-ins have reduced drastically.

But the point of relief is that the management has indicated that the rise in awareness about testing in the country will serve as a tailwind over the long-term.

"The stock currently trades at P/E multiple of 69 times, valuing the stock at a premium. Since the company faces some headwinds in the near-term, investors should wait for lower prices before making fresh investments," Shah said.

Siddharth Sedani, Vice President, Equity Advisory, Anand Rathi Shares and Stock Brokers has a 'buy' call on the stock with a target price of Rs 1,999, citing that the company is the number one brand in diagnostics across different matrices like revenue, profitability, number of tests offered, etc.

Sedani highlighted that Dr Lal is a well-established consumer healthcare brand having a pan-India coverage with nearly 200 clinical labs.

"The company has very strong and continuously improving financials with its revenue, EBITDA and PAT growth at a CAGR of 16 percent, 18 percent and 20 percent, respectively, over the last 5 years," Sedani said.

The success of its business depends on network expansion. Even though the company is showing remarkable growth in other parts of India, but 72 percent of the company's revenue is still dependent on the northern part of India, Sedani pointed out.

Keshav Lahoti, Associate Equity Analyst at Angel Broking is positive on the long-term prospects of the company, given the expected long-term revenue growth rates of nearly 15 percent CAGR, high margins profile, cash-generating business and moderating competitive intensity.

The analyst believes that most labs of Dr Lal are now operating at 75-80 percent of pre-COVID levels, inclusive of COVID testing revenues.

Recently started Rapid Antibody testing is expected to further boost revenue for the company.

Over the next few years, the company is targeting to penetrate North (excluding NCR) & East India where competition intensity is low compared to West and South of India and will help the company to reduce its dependence on the NCR region, Lahoti said.

"Increasing scale of operations will help reduce cost structure for national path-lab chains like Dr Lal PathLabs thus forcing out marginal players from the market in the long run. COVID-19 will lead to further consolidation in the industry. An increase in B2C business will lead to an improvement in margins," Lahoti said.

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First Published on Jul 15, 2020 02:02 pm