Dr Lal’s growth prospects may be priced in the stock
PremiumThe company has adequately diversified its revenue stream, expanding into areas beyond the Delhi-NCR region
Dr Lal PathLabs Ltd continues its northward journey on the bourses, having gained almost 68% year-to-date. Its June quarter performance beat analysts’ estimates, with revenues more than doubling on a year-on-year (y-o-y) basis. Also note, revenues grew 40.7% sequentially. Core Ebitda almost tripled over Q1FY20, and was up 55% sequentially. Analysts at Nomura Global Equity Research said revenue and Ebitda came in at 24% and 27%, ahead of their estimates, respectively. The beat was on account of significantly higher-than-expected covid-19 and allied testing volumes, they added.
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With the earnings beat, the forward earnings estimate for FY22 was upgraded by analysts, which will support the stock. However, covid-related extraordinary gains may normalize, going forward. The benefits from the shift of market share from the unorganized to organized sector, network expansions and its foray into new regions are expected to drive growth. The firm has adequately diversified its revenue stream, expanding into other regions and reducing the share of contribution from Delhi-NCR. In Q1, Dr Lal commenced pilot operations at its Bengaluru reference lab and it may soon start its Mumbai reference lab, after licensing requirements for the same are met. It also started operations at six satellite labs. All this will help drive growth momentum, said analysts.
Analysts at Prabhudas Lilladher Research said they remain positive on the entire diagnostic chain, as organized firms gain market share and have elasticity to adjust volume and realizations. Among the challenges, however, is the changing consumer behaviour. Patients are seeking home collection and there is a high focus on hygiene. Also, the growing online usage for test bookings means rising investments on online modes. As overall expenditure and operating costs are rising, analysts cautioned on the margin front.
Dr Lal Pathlabs’ valuations are also much above its historical average. The firm’s stock trades at 67 times FY23 estimated earnings and at EV/sales (FY22) of 14 times. Its valuation is expensive, reflecting event-based short-term opportunities in the pandemic, said analysts at Prabhudas Lilladher. Historically the stock has traded at 35-45 times earnings, said analysts. Nomura said at 69.1x their one-year-forward earnings estimate, the stock is at a significant premium over domestic and global peers.
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