Saurabh Mukherjea’s team bullish on healthcare stock that fell 50% this year

Even though Dr. Lal Pathlabs – one of the topmost diagnostic and laboratory chains in the country – has eroded about 50 percent of shareholders’ wealth in the current calendar year, some of the investors remain convinced that it will come out of the trough.

The stock is part of Rising Giants portfolio of Marcellus Investment Managers, a PMS firm founded by celebrity fund manager Saurabh Mukherjea, and has contributed to the portfolio’s underperformance. However, the money managers believe concerns around the stock are “overdone”.

“Evolution of the firm on various aspects over the last 2-3 years has been encouraging and we remain convinced on the fundamentals despite the recent share price correction,” Mukherjea’s team said.

In a newsletter, Marcellus displayed its conviction and confidence in the company. It also shrugged off two of the biggest concerns about the company – a decline in profits in the last two quarters and stiff competition from new entrants.

As the pandemic subsided, things have become a little difficult for the company as far as growth is concerned. After recording 27 per cent YoY PBT growth in FY21 and 100 per cent YoY in H2FY22, Dr. Lal Pathlabs witnessed a significant decline in PBT (down 31 per cent YoY) in H2FY22. PAT fell about 33 per cent in the same period.

“The fall in PBT is primarily on account of tapering down of Covid-19 testing related revenues in H2FY22 (decline of 50 per cent YoY) as Covid-19 cases dropped significantly in India. Covid-19 related revenues were never expected to be sustainable and hence tapering down was expected by us,” Marcellus said.

It pointed out that the more sustainable non-Covid revenues have grown by 35 per cent YoY in FY22. Though, in the March quarter, the growth numbers moderated, which Marcellus attributed to low testing of non communicable and chronic diseases and the short spike in the Omicron variant of Covid during Jan/ Feb, which affected non-Covid testing.

The moderation in business has led to massive selling in the stock. The stock is down about 53 per cent from its 52-week highs and has fallen 48 per cent in the current calendar year. It is one of the biggest losers from the sector following Metropolis Healthcare and lesser-known Soni Medicare and Gian Life Care.

Another reason that is attributed to the fall in shares is increasing competition from the likes of Tata 1Mg. These new entrants have announced aggressive prices in certain metro cities, which has the potential to hurt Dr Lal Pathlabs business. But Marcellus feels the fears are overdone.

What gives Marcellus additional confidence about Dr Lal’s ability is to deal with the competition are:
(i) Swasthfit’s – which provides bundled tests/ health packages-- contribution to Dr Lal’s revenues has increased. This is a good sign because this is where price competition is the hardest from competitors, the money manager said.
(ii) Home sample collection share in revenues for Dr Lal has increased from 5 per cent to 12 per cent of sales.
(iii) Aggressive expansion of physical collection centers by 23 per cent YoY during FY22.

“Neither do we expect meaningful market share loss, nor do we expect any weakness in margins in core non-Covid business,” it adds.

Beyond Marcellus, analysts are not very enthusiastic about the stock. The consensus rating seems to be neutral with analyst opinion being divided.