Q1 results: Dr Lal PathLabs' health improves

Better margins and focus on cost rationalisation to drive earnings

Dr Lal PathLabs’ improved performance for the June quarter (Q1) comes as a respite, especially after a weak second half in FY17, which was impacted by demonetisation, increased competition and higher expansion-led costs. Thus, a 12 per cent increase in revenue in Q1, fuelled by about a nine per cent growth in volumes and margins, was impressive. 

But, will the trend continue? Analysts are optimistic but with some caution.With its focus on expanding the business and competition remaining high, the company is working on optimising costs and increasing productivity from the current in-house network. This is crucial, given the headwinds in certain areas.

Analysts say the past six-nine months have witnessed a sharp increase in the competitive intensity of hospital-sourced businesses of all large players. The hospital lab management business contributed Rs 30-35 crore to Dr Lal’s revenues in Q1. Despite being a relatively low-margin business, the company is expanding it, given the volume push the business provides. So, this could weigh on overall margins.

The company’s earnings before interest, tax, depreciation and amortisation (Ebitda) were up 8.5 per cent year-on-year (y-o-y) and 31 per cent sequentially, in Q1. Ebitda margin at 26.3 per cent grew significantly compared to the preceding quarter’s 22.7 per cent and came closer to 27.1 per cent in the year-ago period. Profit growth of 10.5 per cent was also helped by an increase in other income.

It is expected that the growth in volumes should be good in the September quarter, as the period remains seasonally strong, but a high base of last year may be a constraint. A different business model, such as having secondary labs to support its central laboratory, also reflects on profitability. 

According to analysts, while it helps to serve patients better and faster, thereby supporting growth, it also adds to operating costs, putting pressure on the margins. Most peers have only one central lab and hence, have not seen much stress on their financial and stock performances.

Dr Lal’s new testing laboratory in Kolkata will be commissioned by November. Om Manchanda, whole-time director and chief executive officer, said Dr Lal aimed to achieve 20-25 per cent growth in the east from 13-14 per cent, which in turn would drive its all-India growth. Operating expenses, too, would increase initially, but Manchanda said with cost optimisation efforts, margins would remain in the range of 25-27 per cent.

The near-term challenges such as high base of last year, commissioning of new capacity and higher competition, however, seem to have priced in. Dr Lal’s share price has fallen significantly from a high of Rs 1,278.55 in November to Rs 821 now. Hence, analysts say it remains attractive for medium- to long-term investors. 

Surajit Pal at Prabhudas Lilladher Securities, said with strong free-cash flow, guidance of better-than-industry growth of 15-16 per cent and 25 per cent Ebitda margin, valuations (30 times of its FY19 estimated earnings) will remain at a premium.