 "Deepening presence in Tier-III may be Dr Lal PathLabs' growth pill")
India’s largest diagnostic chain, Dr Lal PathLabs, which has managed to reduce its dependence on the Delhi-National Capital Region (NCR) for revenues by focusing on new geographies, is now aiming to penetrate further into its strong markets by expanding its presence in Tier-III and beyond towns.
Besides, the Delhi-headquartered diagnostic chain is seeking merger and acquisition opportunities to strengthen its presence in Southern markets, which currently contribute only 6 per cent of its consolidated revenues.
Speaking to Business Standard, Om Manchanda, managing director of Dr Lal PathLabs, said, “This year, we don’t want to implement any price increases. We aim to grow in volumes instead. Our next phase of growth will come from Tier-III and Tier-IV cities, where maintaining affordability is crucial. We want to sustain margins at 26-27 per cent (earnings before interest, tax, depreciation, and amortisation margins).”
Dr Lal PathLabs’ strategy to expand beyond Delhi-NCR began about a decade ago. In 2005, Delhi accounted for nearly 82 per cent of its revenues, with the rest of India contributing only 18 per cent of its turnover. Since then, there has been considerable change — by the end of 2023-24, Delhi-NCR contributed 31 per cent of its revenues, while the rest of North (comprising markets like Punjab, Haryana, Jammu & Kashmir, Himachal, Uttar Pradesh, Rajasthan, Uttarakhand, etc.) contributed another 31 per cent. East India and West India each contribute around 15 per cent of revenues, while the South has a smaller share at 6 per cent.
Typically, diagnostic chains focus on one or two top regions. This is due to the brand stickiness consumers have and the infrequency of visits to diagnostic laboratories (labs).
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Manchanda highlights that the ‘white spaces’ for them lie in further penetrating strong markets.
“Organic growth is challenging in non-core markets like South and West. It is easier for us to expand deeper where brand awareness is established.” He adds that the rest of North is performing well, and they have established hub labs (smaller than reference labs) in several districts in the North to serve surrounding areas.
“For example, Varanasi, Lucknow, and Meerut serve as hubs in Uttar Pradesh, catering to areas like Saharanpur and Roorkee,” Manchanda adds.
Dr Lal PathLabs operates four large reference labs for the four zones in India, in addition to the hub labs. Currently, it has 35 hub labs across India.
Manchanda believes that smaller cities have high potential, especially those with populations of 2-3 million. However, the frequency of testing and the test profile differ from larger cities. Most of the demand in smaller cities is for communicable diseases, with relatively lower-priced tests and lower price realisation.
Dr Lal PathLabs has mostly seen organic growth over the years. “Only around 10 per cent of our Rs 2,227 crore turnover comes from acquired assets,” he informs.
For the South, Manchanda envisions a combination of organic and inorganic growth. Bengaluru, for instance, represents an organic growth market with a diverse population, including a reasonable number from North India, where Dr Lal PathLabs benefits from brand recall.
In the West, Dr Lal PathLabs has focused on inorganic growth in recent years, which has fuelled its expansion. Taking a cluster approach with these acquisitions — in Nagpur, Indore, Yavatmal, and Mumbai — has proven successful.
“We have a company called Pathlabs Unifiers, which serves as the holding company for these smaller acquisitions,” Manchanda said.
Therefore, they plan to replicate this strategy for the South. Manchanda notes they are open to making acquisitions that facilitate market entry, even if it entails a city-based approach.
While not disclosing a tentative size for the deals Dr Lal PathLabs is considering, Manchanda emphasises the importance of factors such as governance and business profile in evaluating potential assets.
“Often, there are brands built on a doctor’s reputation, and once that individual is no longer involved, this aspect diminishes,” he explains.