Volume growth key to Dr Lal Pathlab's health; stock rises over 4%

Firm banking on acquisitions, and rationalisation of prices

The Dr Lal Pathlab stock rose over 4 per cent on Wednesday, spurred by a robust June quarter (Q1) performance, along with expectations of higher volume growth and profitability in the current financial year.

Revenue growth of 15 per cent for the diagnostics major in the quarter was driven by a 16 per cent jump in patient volumes. In addition to volumes, the growth in sales was also on account of an increase in the number of tests per patient.

Even as the mature Delhi-NCR market saw volume growth of 8-9 per cent, it was the non-NCR markets that led growth on this count, with an increase of 19 per cent.

Analysts at Kotak Institutional Equities said the ability to achieve 20 per cent growth in non-NCR markets on a sustainable basis is key for the company to hit an overall mid-teen revenue growth rate, amid high competition.

Growth is expected to be driven by the franchisee model that accounts for over a third of overall revenues. In addition to rationalisation of prices in bulk tests, the firm has also increased channel margins. It has indicated that 50-60 per cent of the incremental growth will be led by channels.

Besides organic growth, the company could consider acquisitions to enhance its presence in newer cities. In line with this strategy, it has acquired 70 per cent stake in Central Labs, Indore.

In addition to its healthier top line, the company was able to increase its margins. This came on the back of a better case mix as well as lower costs. Brokerages have increased their operating and net profit estimates for the current financial year by 2-3 per cent each.

Despite the positives on the growth and margin fronts, analysts believe the stock — which has gained over 22 per cent over the past year — is richly valued at over 38 times its FY20 earnings estimates.

Any regulatory intervention including pricing caps and intense competition are major obstacles that could impact its growth story.