Dr Lal PathLabs is one of the largest companies in the Indian diagnostic industry,
having a market share of 12.0% amongst diagnostic chains. It’s one of the fastest
growing companies in the space with strong profitability.
Dominant player in the industry: The company, according to our estimates, is the
second largest player with an estimated ~12% market share in the organised
diagnostic chains. It has grown at a CAGR of 20.7% over FY2013-15, primarily
driven by volumes which grew 16.7% during the period, while the rest was on
back of pricing power. Thus, given the company’s dominance in its industry and
its cash flows (~Rs148cr cash on the books of the company as of FY2015), we
believe that the company can easily leverage growth in the diagnostic healthcare
services industry in India, which will grow by a CAGR of 16-17% till FY2018.
Strong financials: The company has strong business fundamentals, which are
reflected in its financials. It has exhibited a strong 20.7% CAGR on the sales front
over FY2013-15, predominately led by volumes and partially on the back of
pricing power. On the profitability front, the company has maintained healthy and
steady margins in the range of 22-25%. The same has been driven by
improvement in operating efficiency, including prudent management of costs and
expenses and lower capital expenditure due to use of a “reagent rental” model.
Outlook and Valuation: The company is valued at a P/E multiple of 43.5x-44.3x
its FY2016E EPS at the lower and upper end of the price band respectively,
assuming industry led growth. On P/BV basis, the company trades at 10.3x-10.5x
FY2016E, which factors in a higher-than-industry growth and continuance of the
current profitability of the business, which the company has been maintaining
over the past few years. However, though we believe that the company can
sustain the profitability trend and is fundamentally strong, we believe that the
valuations demanded through the IPO factor in the company’s business
fundamentals as well as the scarcity premium with it being the only
listed company in the space. Hence, we recommend an “Avoid” on the issue.
Investors could consider waiting for a possible correction in the stock price post the
listing of the IPO.
