HomeFinanceAnalyst Corner: ‘Hold’ on Dr Lal Pathlabs with DCF-based target cost of...

Analyst Corner: ‘Hold’ on Dr Lal Pathlabs with DCF-based target cost of Rs 3,405


Dr Lal Pathlabs’ (Dr Lal) Q1FY22 efficiency was above estimate due to larger income from Covid-19-associated tests. Covid-19 and allied tests’ contribution improved to 36.3% of sales (13.2% in Q4FY21). Base enterprise revenues grew 84.1% YoY, two year CAGR of 7.4% to Rs 3.8bn vs estimated Rs 4.1bn. Overall, income grew 128%, EBITDA margin was up 1300bps YoY to 31.2% and adj. PAT was up 362% to Rs 1.3bn on a low base. The base enterprise was also impacted by 2nd wave of Covid, but has began recovering Jun’21 onwards. We stay positive on Dr Lal provided volume development consistency, capacity to execute nicely and powerful return ratios. However, thinking about current rally in the stock cost which has made valuations fair, we downgrade it to HOLD from Add.

Strong income development led by Covid-associated tests: Dr Lal witnessed yet another quarter of powerful development with 128/41% YoY/QoQ development. Revenue from RT-PCR and anti-body tests contributed 17.3% and other Covid-allied tests contributed added 19.% of total income. Base enterprise has witnessed a two year CAGR of 7.4%. The volumes (patients) witnessed 103% development and we estimate powerful development in FY22E on a decrease base. Average realisation stood at Rs 860 (up 13.2% YoY) on account of larger Covid tests income. We think the firm would witness double-digit volume development more than longer period provided leadership position and shift from unorganised to organised players.



Operating leverage drove margin expansion: Dr Lal reported an EBITDA margin of 31.2% (+290bps QoQ) vs estimated 28.6%. Higher income was the crucial cause for the exact same as operating leverage advantage kicked in. However, Covid tests income would drop from Q2FY22 as circumstances have dropped drastically and therefore, EBITDA margin would normalise. We anticipate EBITDA margin to boost 190bps more than FY21-FY23E with choose-up in patient volumes, sustaining advantages of price manage and operating leverage.



Outlook: We anticipate Dr Lal to outperform sector development and register income, EBITDA and PAT development at CAGRs of 17.8%, 21.8% and 27.1%, respectively, more than FY21-FY23E. RoE and RoCE would stay powerful at 27.7% and 26.2%, respectively, in FY23E whereas RoIC would move to ~145%. We are positive on the extended-term outlook thinking about the company’s powerful brand franchise with sustainable development, expansion prospective, healthful FCFF generation and powerful return ratios.

Valuation: We raise FY21-FY23 EBITDA estimates by 3-9% to aspect in larger income from Covid tests and development recovery in base enterprise. Considering current rally in stock cost which has made valuations fair, we downgrade Dr Lal to HOLD from Add with a revised DCF-based target cost of Rs 3,405/share (earlier: Rs 3,000/share) implying 60.2xFY23E EPS and 41.1xFY23E EV/EBITDA. Key downside dangers: Higher-than-anticipated competitors and regulatory hurdles. Key upside danger: continued upside from Covid-associated tests.



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