Indian diagnostic sector set for double-digit growth in medium term: CareEdge Ratings

Diagnostics consist of pathology testing and imaging services, with pathology tests accounting for 60 percent of the market share. The radiology market is growing rapidly due to surging demand for imaging services, while pathology testing is expanding as more people undergo preventive health checks.

Shift to prevention

The market includes unorganised/local standalone labs, hospital-based labs, and corporate entities. Doctors play a pivotal role, often conducting diagnostic tests before prescribing medication, leading to the growth of these services.

After Covid-19, India's approach to healthcare has shifted towards prevention, with increasing incomes encouraging this transition. Diagnostics companies are expected to benefit from this shift, projecting revenue growth of 12-14 percent in the medium to long term.

Lifestyle-related diseases such obesity, diabetes, and hypertension are on the rise, contributing to increased demand for diagnostics. The prevalence of non-communicable diseases is expected to grow from 19 percent in 2008 to 28 percent in 2030, supporting diagnostic sector growth. Additionally, with an aging population, there is a greater need for diagnostic services.

Overseas patients, attracted by India as a cost-effective destination for medical treatment and its advanced healthcare facilities, have contributed to the growth of the diagnostic sector.

Priti Agarwal, senior director at CareEdge Ratings, noted that India's affordability and quality of medical treatment are drawing patients from around the world. Government initiatives to promote India as a medical tourism destination are expected to drive demand for Indian diagnostic services in the coming years.

Pan-India diagnostic chains hold a 35 percent market share, while regional chains account for about 65 percent. The four largest entities – Dr Lal PathLabs, Metropolis Healthcare, SRL Diagnostics, and Thyrocare Technologies –  collectively have only 6 percent of the market share.

Growth plans

Local players have 46 percent, followed by hospital-based labs at about 37 percent. The highly fragmented nature of the sector is the result of low entry barriers, minimal capital requirements, and limited regulatory constraints.

Organic and inorganic growth strategies are being employed due to industry fragmentation. Companies are setting up centres in untapped regions, primarily through franchise models, for organic growth. The major listed companies with strong balance sheets and ample cash profits are expected to continue inorganic growth in the medium term.

The total operating income of diagnostic companies increased significantly in FY21 and FY22 due to Covid-19 testing revenue. In FY23, non-Covid-19 revenue is increasing because of the growing interest in preventive healthcare and sales of wellness packages, as well as the inorganic growth of large, organised players.

The PBILDT (profit before interest, lease rentals, depreciation and taxation) margin is expected to be in the range of 23-25 percent for major organised players in pathological diagnostics, while operating margins are projected to be above 40 percent for entities involved in imaging services.

Companies are focusing on home visits to provide convenience for patients. They are digitising the home visit segment through artificial intelligence and machine learning techniques. This has spurred the entry of startups specialising in home visit diagnostic services.

Additionally, companies are expanding their networks by targeting tier-2 and tier-3 cities.