Even as the healthcare space continues to recover from tough times, here is one segment within the sector that has delivered stellar gains – the diagnostics stocks.
They are riding on increased spend on preventive healthcare in the wake of higher consumer awareness.
India’s $9 billion diagnostic-testing industry is fast emerging as one of the bright spots in the country’s healthcare landscape over the past five years, as consumers have turned to pathology centres for blood testing on everything from liver function to cholesterol, Goldman Sachs had said in a May 21 report.
However, recent concerns over potential price caps on essential tests have cast doubt on whether mid-teens revenue growth rates for large diagnostic chains can continue.
In a September 20 report, Edelweiss pointed out that annual reports of three companies – Dr Lal Pathlabs, Metropolis Healthcare and Tyrocare Technologies – for financial year 2019 threw up some common trends, such as mid-teens volume growth, margins stability, 30 per cent-plus return on capital employed (RoCE) and positive free cash flow.
Shares of Dr Lal Pathlabs have posted an impressive 52.45 per cent gain since the start of 2019, as they rode high on a wave of brand power and strong deliveries in the B2C segment. Close on its heels was Metropolis Healthcare, which was listed in April and is up 45.90 per cent from its issue price. Thyrocare, meanwhile, has shed 7.27 per cent for the year to date.
“Dr Lal Pathlabs is better placed among them mainly because of higher brand presence. It is highly dependent on the B2C segment. Our rating is ‘accumulate’, but the stock is getting expensive relative to peers,” said Surajit Pal, research analyst at brokerage firm Prabhudas Lilladher.
“There is a wide valuation gap between the three companies – Dr Lal Pathlabs and Metropolis are valued at double the value of Thyrocare,” he said.
Stocks of Dr Lal Pathlabs and Metropolis are valued at 54.96 times and 50.42 times one-year trailing earnings, while Thyrocare is valued at 29.88 times, data from Thomson Reuters showed.
“Thyrocare is their poor cousin,” said Pal from Prabhudas Lilladher. He said given the valuations, he would opt for Thyrocare instead of the other two stocks,
Currently, Dr Lal Pathlabs has five ‘strong buy’, 8 ‘buy’, 1 ‘hold’, 2 ‘sell’ and 1 ‘strong sell’ ratings, data from Reuters showed. Metropolis has 1 ‘strong buy’, 2 ‘buy’, 1 ‘hold’, 1 ‘sell’ and 1 ‘strong sell’ ratings. Thyrocase, meanwhile, has 2 ‘strong buy’, 3 ‘buy’ and 1 ‘hold’ ratings.
In a May note, Pal said with guidance for better cash flow and customer growth from bundled offers, Dr Lal Pathlabs expects to maintain its current growth in FY20E.
He had pointed out that Dr Lal Pathlabs management expects competitive intensity to remain strong with price war, regulatory interference an expected price ceiling from the government.
“DLPL (Dr Lal Pathlabs) remains confident of its brand power, service quality, high-end test capability, network of collection centres and KRL which will drive volume growth and profitability in FY20-21E,” Pal said in the note.
In an August 30 note, Ambit Capital – which has a ‘buy’ rating on Metropolis – said the company was building a Dr Lal Pathlabs-like moat in west India by milking its reputation and test range through deepening customer reach (up six times over FY16-19; now best in the west).
With weakening competition and scope for market share gains in west (around 11 per cent versus Dr Lal Pathlabs’ 25 per cent in NCR), 16 per cent revenue CAGR is doable over FY19-22 despite smaller addressable market and higher PE inflow, the report said.
An improving B2C mix – from 43 per cent to 48 per cent for Metropolis –will drive operating leverage-led profit growth at a compound annual growth rate (CAGR) of 21 per cent, the report said.