Margin pressures to cap upside for Dr Lal Pathlabs as Covid dents volumes

Valuations too do not leave much scope for gains

The June quarter performance of Dr Lal Pathlabs was severely impacted by the pandemic denting volumes and revenues. After a 62 per cent fall in volumes in April, patient testing increased gradually with the fall restricted to 25 per cent in May. The company posted an increase in June of 3 per cent. 

The gains towards the end of the quarter were led by opening up of more centres across its network, market share gains from the unorganised segment and a favourable base. The company highlighted that non-Covid tests in July were at 90 per cent of normal levels though complete recovery is expected to happen in the December quarter. 

The 29 per cent fall in volumes in the quarter was responsible for revenues declining 21 per cent y-o-y. Aided by higher Covid volumes, realisations however improved by 11 per cent. Excluding Covid test, revenue fall was higher at 37 per cent.

The hit to the revenues led to significant impact on operational performance with reported operating profit falling 49 per cent over the year ago quarter. Margins contracted by 10 percentage points to 18.2 per cent. Margins have been on a declining trend since the September quarter last year when they had hit 30 per cent. 

Analysts however are positive on the prospects of the company given its focus away from the NCR region which now account for 39 per cent of revenues. The derisking strategy should gain momentum if there is an inorganic expansion especially in the South and West regions. Analysts at Edelweiss Securities believe the shift from unorganised to organised diagnostics will be a structural tailwind, though move away from NCR could dent margins in the near term.

While the results were above estimates, the stock is down six per cent from weekly highs as valuations have factored in the price. Nomura’s analysts believes that the company’s track record of operational excellence, balance sheet and consolidation gains in the diagnostic market are adequately reflected in the stock price. The stock which is up 47 per cent from its March lows is trading at 50 times its FY22 earnings estimates.