Q2FY23 Review: Dr Lal PathLabs: Margins surprise, Growth still below pre-Covid

3 Nov 2023 , 01:17 PM

DLPL’s Q2 Ebitda margin of 30% surprised positively vs mgmt’s guidance of 25% margins and was aided by operating leverage benefits from seasonal business/test mix contribution in Q2 as well as higher GMs led by recent price hikes. While mgmt expects sustainable Ebitda margins to be 26% given margins in H2 tend to be lower than H1, analysts of IIFL Capital Services also note that DLPL’s 4-yr organic volume/value Cagr at 6.8/10.6% in Q2 is still significantly below pre-Covid trajectory of 13/15% despite moderating competitive intensity and recent round of price increases. DLPL is focussing on deepening its presence in tier-3+ towns in order to accelerate its growth, given the saturation and growth slowdown in metro markets. Although analysts of IIFL Capital Services upgrade FY24-26 Ebitda by 7-9% to factor in ~100bps higher margins, they believe DLPL’s valuations are expensive at 55x 1YF PER, particularly considering valuations are still 35% higher than pre-Covid levels while the growth trajectory continues to trend below pre-Covid levels. Maintain ADD. 

4-yr Cagr organic growth is still below pre-Covid levels: 

DLPL’s nonCovid revenue grew 14.7% YoY in Q2, driven by volume/realization growth of 4.2/10.1% YoY. While YoY growth looks reasonable given the recent price-led realization growth, 4-yr organic volume/value Cagr at 6.8/10.6% is still underwhelming. Mgmt attributed growth slowdown to saturation in metro markets and relatively higher competition from online players, and hence DLPL is now focussing on deepening its presence in tier-3+ towns. 

Deepening presence in tier-3+ markets: 

DLPL’s revenue from tier-3+ towns, accounting for 34% of company’s overall revenue, grew at 18% Cagr over FY20-23 driven by addition of 10 new labs in these markets. DLPL intends to add another 20+ labs in tier-3+ towns over the next few years. While mgmt expects margins in tier-3+ towns to be similar to its metro business margins, analysts of IIFL Capital Services believe expansion in these smaller markets could drive a pressure on DLPL’s overall realizations and margin profile. 

Sustainable Ebitda margins are expected to be at 26% vs 30% margins delivered in Q2, as margins this quarter benefitted from higher contribution of routine tests, seasonal business and impact of price hikes. Margins in H2 will be lower than H1 owing to seasonality impact. While DLPL is targeting to drive growth for Suburban by ramping-up its B2C business in Mumbai, Pune & Goa, DLPL has also run aggressive marketing campaigns to ramp-up its base D2C business and the ‘Swasthfit’ bundled tests.