Why are Stocks in the Diagnostics Industry Falling?

Last Updated: 4 May 2024

The Indian diagnostic sector is thought to grow at 10% to 12%. According to a report, it is going steady with a little deceleration in contrast to the pre-pandemic surge trend of 12 to 14%. The majority of the diagnostic stocks on the exchanges were down because of many reasons.

Back on May 16th of the year 2022, the exchanges were down, led by Thyrocare. It was down by 6% and was right after Metropolis, which was down by 4%. After that, there was the Dr Lal PathLabs, down by 2.4%.

Since January of that year, these enterprises in the world of diagnostics space were collectively down by 36% on average. So, what is this trend, and why is it so? Here, we have tried to collate all the pointers that will help you get an idea of this fall.

What the Analysts Believed Back Then?

The analysts stated that these moves were merely a knee-jerk reaction to the big news and were sentimental by nature. It has been indicated that stock moves were driven by news. All connected sectors are to be volatile in the short to medium term. If restrictions come from the multiplex, the shares will go down.

However, the analysts believe those measures will not significantly impact the connected sectors in the long run. 

The Reason Behind the Occurrence Back Then

The most vital factor behind these changes is the disruptive pricing going up in this industry. In accordance with the media reports, Tata 1 MG has provided an advertisement where the famous tests were offered at Rs 100. The same tests would cost anywhere in the range of 500 to 1200 with other companies. For example, a thyroid examination, as per the report, costs 525 with Metropolis. 

According to many analysts, the rising competition in the diagnostic industry may put pressure on the margins. Though the chance of growth is high, the competition seems to be intense moving forward. 

Factors like decreasing ease restrictions of COVID-19 requirements of tests and the range of rapid tests may have an impact on the stocks. While all these may be contributing factors, many experts in the industry believe that the diagnostics industry stocks are massively valued and could be in correction mode.

Overview of the Diagnostics Industry in India

The growth in the sector is massively driven by volume and fragmentation. A few large players and different small and regional players dominate it. The analysts point out that 80-85% of the sector is unorganized or dominated by the regional players.

So far, there are few things that can contribute to the rise of organizations in the diagnostic industry. It can be anything from better life expectancy and changes in lifestyle to improvements in testing services. 

The outbreak of COVID-19 has helped enhance the realizations and volumes for organizations, including Dr Lal Pathlabs, Metropolis, and Vijaya Diagnostics. It is something that has also helped to increase the penetration of testing services across the country. The government has also promised to enhance healthcare expenses, which will be beneficial for all the organizations operating in the industry.

The Suggestion of the Recent Report

The report stated that the attractiveness of the sector, marked by margins that are favourable and low entry barriers, has spurred aggressive competition, with new players getting introduced in the market. This kind of rapid expansion has resulted in a massive collision for market share. This is particularly true in the North and West Indian markets. It is where the highest intensity is observed. 

Dr Lal Pathlabs and Metropolis Healthcare are also not safe from these challenges. Irrespective of implementing price hikes that were selective, patient volume growth in their key market keeps on being below history averages. 

Both organizations are massively investing in lab expansions in the key regions. However, analysts have emphasized that a new lab generally takes close to three years to gain earnings before depreciation, interest, and taxes.

The analysts carried out a cautious outlook on Dr. Lal Pathlabs and Metropolis Healthcare in light of the dynamics. It reiterates a sell rating with price targets of 1,784 and 1,296, respectively. They have emphasized that aggressive expansions coupled with competitive pressure might limit the upside potential for the stocks now.

Wrapping Up

The changes in diagnostic lab stocks can be foreseen only by a handful of people. Past events and the new reports regarding the trend steer us to an interesting wait. So, it’s time to wait, watch and see how it pans out.

Frequently Asked Questions

How big is Dr. Lal Pathlabs?

The organization is known for being one of the largest players in the diagnostic industry. It has a majority presence in the northern region of India.

What has the recent expansion of the diagnostic industry led to?

The aggressive expansion has taken things to a significant tussle for market share. This is especially true in the North and West Indian markets. It is where the highest intensity is noticed.

What were the factors that led to the changes in the diagnostic industry back in 2022?

Factors like decreasing ease restrictions of COVID-19, requirements of tests, and the range of rapid tests may have an impact on the stocks. While all these may be contributing factors, there are many experts in the industry who believe that the stocks in the diagnostics industry are massively valued and could be in correction mode.