Analyst Corner| Dr Lal Pathlabs: Downgrade to ‘hold’ with TP of Rs 3,405

Dr Lal witnessed another quarter of strong growth with 128/41% YoY/QoQ growth.

Dr Lal Pathlabs’ (Dr Lal) Q1FY22 performance was above estimate due to higher revenue from Covid-19 related tests. Covid-19 and allied tests contribution increased to 36.3% of sales (13.2% in Q4FY21). Base business revenues grew 84.1% YoY, two year CAGR of 7.4% to Rs 3.8billion vs estimated Rs 4.1billion. Overall, revenue grew 128%, EBITDA margin was up 1300bps YoY to 31.2% and adj. PAT was up 362% to Rs 1.3billion on a low base. The base business was also impacted by second wave of Covid but has started recovering Jun’21 onwards. We remain positive on Dr Lal given volume growth consistency, ability to execute well and strong return ratios. Considering recent rally in the stock price, which has made valuations fair, we downgrade it to ‘hold’ from ‘add’.

Strong revenue growth led by Covid-related tests: Dr Lal witnessed another quarter of strong growth with 128/41% YoY/QoQ growth. Revenue from RT-PCR and anti-body tests contributed 17.3% and other Covid allied tests contributed additional 19.0% of total revenue. Base business has witnessed a two-year CAGR of 7.4%. The volumes (patients) witnessed 103% growth and we estimate strong growth in FY22E on a lower base. Average realisation stood at Rs 860 (up 13.2% YoY) on account of higher Covid tests revenue. We believe the company would witness double-digit volume growth over longer period, given leadership position and shift from unorganised to organised players.

Operating leverage drove margin expansion: Dr Lal reported an EBITDA margin of 31.2% (+290bps QoQ) vs estimated 28.6%. Higher revenue was the key reason for the same as operating leverage benefit kicked in. Covid tests revenue would drop from Q2FY22 as cases have dropped significantly and hence, EBITDA margin would normalise. We expect EBITDA margin to improve 190bps over FY21-FY23E with pick-up in patient volumes, sustaining benefits of cost control and operating leverage. Valuation: We raise FY21-FY23 EBITDA estimates by 3-9% to factor in higher revenue from Covid tests and growth recovery in base business. Considering recent rally in stock price, we downgrade Dr Lal to ‘hold’ from ‘add’ with a revised DCF-based TP of Rs 3,405/share.