Recommendation from Pharmaceuticals Sector
This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.
DR LAL PATHLABS
PASSING ALL ‘TESTS’
HERE IS WHY
Debt-free status
Leading market position
Good growth prospects.
Dr Lal PathLabs operates its own pathology labs, while collection centres are primarily run on a franchisee model. Its operations are spread across the country. The company is debt-free. The franchisee model will help keep the company asset light and it can expand without taking on debt. The company’s leading market position helps it build on to its existing brand loyalty and expand faster.
The Indian diagnostic industry is highly fragmented and dominated by unorganised players. Standalone labs constitute 48 per cent of the market and hospital-based labs make up for 37 per cent.Diagnostic chains cover close to 15 per cent of the overall diagnostic market, of which, pan-India chains cover 35-40 per cent, with the balance 60-65 per cent are managed by regional chains. This low regional penetration in the Indian market provides ample scope for growth for large organised players such as Dr. Lal PathLabs. Moreover, unorganised players struggle to keep their prices in check whereas organised players can keep prices in control mostly due to economies of scale.
According to the research report ‘Indian Diagnostic Services Market Outlook 2020’, the diagnostic services market is expected to continue growing in the coming year.This growth is likely to be driven by improving healthcare facilities, medical diagnostic and pathological labs, private-public projects and the health insurance sector. Moreover, with the rise in health consciousness in society and the rising burden of chronic diseases, this market will swell to approximately Rs86,000 crore in revenue by 2020.
Though a major portion of the diagnostic business is being managed by the so-called unorganised sector, the diagnostic service market is expected to become much more organised and consolidated with a lot of small and independent laboratory players becoming franchisees for the larger players.
Following key tends are expected to drive sector growth in the coming years: The population above 65 years old is growing at 4-4.5 per cent per annum in India It is estimated that close to 3-3.5 per cent of private healthcare revenue growth will come from the rural population moving up to the USD 1,500-2,000 income bracket every year. Rising awareness and the government’s recent steps to incentivise preventive testing via tax breaks will prove to be a tailwind for volume growth. The market for diagnostics services is expected to grow at a healthy 10 per cent CAGR until FY23.
On a consolidated basis, the gross sales has increased 12.10 per cent to Rs327.90 crore in Q3FY20 from Rs292.50 crore in Q3FY19. EBITDA showed an increase of 25.46 per cent to Rs82.30 crore in Q3FY20 from Rs65.60 crore in the same quarter last year. PAT for Q3FY20 stood at Rs54.90 crore as against Rs46.10 crore in the same quarter last year, showing an increase of 19.09 per cent. The company has shown good financial performance in the past. Its debt-free status helps keep a healthy balance-sheet. With its established market position and brand loyalty, the company is well-poised to perform good in the near future. By virtue of these factors, we recommend our reader-investors to BUY this stock.
