We entered an otherwise hard market with Suburban deal: Dr Lal Pathlabs MD

In a Q&A, Om Manchanda says the firm is now growing organically in the Southern market, but is open to inorganic opportunities there

Dr Lal Pathlabs, which recently announced the acquisition of Mumbai-based Suburban Diagnostics in a deal that gives them scale in one of the key markets in India, plans to retain the Suburban brand. Speaking to Sohini Das, Om Manchanda, Managing Director of Dr Lal Pathlabs says that they are now growing organically in the Southern market, but is open to inorganic opportunities there. Edited excerpts:

Will you retain the Suburban brand or rename it?

We will keep the Suburban brand. We are the owners of the brand and we will have a multi-brand strategy. We will keep it as it is. We are in the process of developing a reference laboratory in Mumbai. Dr Lal Pathlabs will continue to function in Mumbai, and the Mumbai reference lab will cater to the entire western region. With this asset coming in, we have to sit and see how to optimise and rationalise it. Dr Lal Pathlabs will have its own separate operations continuing in the Mumbai region.

What factors drove the decision to acquire Suburban Diagnostics?

The Suburban acquisition actually gives us entry into a market which would have otherwise been tough for us in terms of building scale. Building scale takes time, and the kind of scale Suburban has in just the city of Mumbai, it would have taken us many years to reach that kind of scale had we done it organically. It is giving us entry into a very large market. It is a market that one cannot be absent – Mumbai and entire Maharashtra.

Secondly, Suburban brand enjoys a very good consumer franchise. Many businesses in pathology which are mostly business-to-business focused, picking up samples from other laboratories. Suburban has built a direct to consumer franchise. During Covid19 period, they have done a lot of home sample collection, airport testing. The top of the mind share of this brand has gone up significantly in the recent past.

Thirdly, this is a good quality asset, backed by Sequoia. PE firms bring in certain processes, governance focus, which may be missing in an asset which is only driven by owners. This really helps us. And lastly, having Dr Sanjay Arora (founder of Suburban) who has built this brand keeping quality in mind is another plus. We will keep the old team. We look at it as another platform and build it just like we built Dr Lal Pathlabs.

What are your plans for the rest of India markets, especially South?

We are building clusters across India – we developed a Pune cluster, and a Bangalore cluster. We have recently launched a Bengaluru reference laboratory. So, for the time being our organic efforts will continue in the South. We basically want to focus on Suburban for the western region as of now.

Will you take on some debt to fund this acquisition, are you open to acquiring assets down South?

We are a zero-debt company. This deal will be funded through internal accruals. We won't pick up any debt. There are two parts to this deal–part one is the floor price, part two is linked to performance, which would come in only sometime next year.

What we have done in West (inorganic growth) also holds true for the South, which is another market where we need to build our foothold.

Covid-19 revenues are down. Is this the right time for an acquisition?

The Covid-19 trajectory will keep fluctuating. While the value of Covid-19 tests is down, the volume isn't. Last year the realisation was high as the prices were higher. Now the rates have dropped, but our RT-PCR test numbers still exceed last year's same quarter. Covid-19 is not going to be a stable line of business; it will have its fluctuations.

Do you see more consolidation in the diagnostics sector?

For a big player to become bigger organically at this stage is going to be very time-consuming. The market will become like a pyramid–lots of smaller laboratories at the bottom that have scale at city-level, but they won't have professionally management teams. Aggregation and consolidation would come in.

We are No. 1 in India in diagnostics. About 80 per cent of the diagnostics market is still fragmented and unorganised. More consolidation would continue.

What are the challenges ahead for diagnostics players in India?

There are two challenges ahead for the sector – I see pricing pressure continuing to build in this business. There are large players with economies of scale, and that player will put pricing pressure. Some players also operate on a cash-burn model, which will also put pricing pressure. The second challenge is entry into non-core markets. Organic entry will remain challenging, and one would have to keep scouting for assets and they are not going to come cheap.

Are omni-channel players and aggregators are threat to conventional players like you?

Omni-channel and online aggregators are not really pathology companies. They are e-commerce players who are strong on the tech side. We can also list our tests on such platforms.

We have to see what our core strengths are. In times of illness, we want to go to a lab which gives the most accurate diagnosis. Online aggregators would continue to get volume of screening tests like diabetes etc.