DrLalPathlabs - WordPress.com · 2019-07-10 · Metropolis DrLalpathlabs Thyrocare SamplesCollected...

Jainam Share Consultant Pvt Ltd Sector : Healthcare

22-05-2019 1

Riva Patel- Assistant Research Analyst ([email protected]); 0261-6725518

Investors are advised to refer through important disclosures made at the last page of theResearch Report.Jainam Share Consultant research is available on www.jainam.in

Dr Lal Pathlabs22nd May 2019

Initiating Coverage|Healthcare

mailto:([email protected]);

http://www.motilaloswal.com/Institutional-Equities


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Dr Lal Pathlabs Date:22-05-19

About the Company:

Exchange: BSE BSE Code:539524 Current Market Price:1042.80 Date: 22-05-19

Latest Date 22-05-19Latest Price (Rs) 1042.80

52 Week High (Rs) 1150.00

52 Week Low (Rs) 817.00

Face Value(Rs) 10.00

Industry PE 44.71

TTM PE 43.63

TTM Period 201903

Price/BV(x) 9.19

EV/TTM EBIDTA(x) 24.67

EV/TTM Sales(x) 6.96

Dividend Yield% 0.43

MCap/TTM Sales(x) 7.22

Market Cap (Rs in Cr. ) 8690.86

EV (Rs) 8377.36

Latest no. of shares (in Cr.) 8.33

Dr Lal Pathlabs is the provider of diagnostic andrelated healthcare test and services in India.Company provides range of pathology, radiologyand Cardiology tests. Company has started itservice in 1949 so it has close to 7 decades ofexperience and trust of over 1.5Crs customers.Individual patients, hospitals and otherhealthcare providers and corporates are thecustomers of the company. It comprise ofNational Reference Laboratory in New Delhi,Kolkata Reference Laboratory in Kolkata and 193other clinical laboratories, 2153 patient servicecentres, 4316 strong manpower and 5624 pickuppoints as of 31st March’18. Company provides2425 pathology tests, 1772 radiology andcardiology tests and 478 test panels (profiles) asof Q3FY19. Company has accredited from CAP,NABL and ISO. Company has hub and spokemodel, where specimens are collected from alllocations within the area or region and then sentto clinical laboratory for centralised diagnostictesting, this kind of distribution network provideeconomies of scale.


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Investment Rationale

1. Robust Financials

Dr Lalpathlabs has strong Return ratios:

2018 2017 2016 2015 2014ROCE(%) 33% 39% 38% 38% 51%ROE 22% 26% 26% 28% 35%ROA 19% 23% 21% 20% 24%ROIC 50% 60% 51% 54% 66%

Company somewhere do have low growth and margins compared to Thyrocare, but company hasstrong return ratios indicating higher efficiency in utilisation of capital and giving steady returns.Returns have slow down in last five years due to rise in average net worth. Company with lowerrequirement of capital employed and working capital it is able to generate higher returns, higherefficiency compared to peers.

2. Strong Balance Sheet

If we have a look at Dr Lalpathlabs balance sheet it is almost liquid balance sheet, 34% of balancesheet size is in cash & bank balances another 16% of balance sheet size invested in investments.High liquid position of Dr Lal Pathlabs makes it easier for company to expand and do capexwithout raising debt. Company is also generating positive free Cash Flow consistently. Stronger thebalance sheet higher chances of sustainability in industry.

3. Strong Brand name & Higher Market Share

Dr Lal Pathlabs has approx 70 years of experience in diagnostic industry. It has diversified itspresence across different regions in India. It has 35-40% market share in large diagnostic chains. Ithas 2 Reference Laboratory (Kolkata & Delhi), 191 other Clinical Laboratories, 2153 patient servicecentres, 4316 strong manpower 5624 pickup points. Company has base of 1.5 customers.Company has made its presence by creating strong brand image and gaining the trust for manycustomers.

4. Opportunity from Industry

In Diagnostic industry, 48% share is of unorganized players. For a company to grow, expand anddiversify its services it has to do it through inorganic growth that is acquisition of this small playersacross different regions because organic growth will require lots of fund and it will also takeenough time to get profits in the book.


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Risk & Concerns

1. Ayushman Bharat

2. Decline in price leading to lower margins due to rise in competition

Dr Lal Pathlabs has to face high competition in industry, because it has to compete with regionallabs which has higher market share in their region as well as other large diagnostic chains likeThyrocare or Metropolis which are equally efficient and present across India. Thyrocare is one ofthe company providing service at lowest costs so its puts pressure on other companies to reduceprice. In pathology segment there are low entry barriers and does not require heavy assets to startbusiness so it becomes it easier for an individual to start a lab and provide pathology test. Hence,higher competition and Ayushman Bharat might lead to lower prices for diagnostic tests.

3. Risk from local labs or regional labs (unorganised) & Vendors

Company do have risk from local labs famous in specified regions. In specified region, doctors cancombine its operation set up necessary equipments and start diagnostic services. This doctors cancreate a group and provide services which might not be provided by other companies. To createpresence in such regions require better quality services at affordable cost.Companies do have risk from vendors as well. Vendors supply reagent and equipment to run thetest and give results so if vendors start providing diagnostic services it will be a huge threat andthey will even get advantage of cost on equipment as well.

4. Difficulty in Expansion

Companies operating as large diagnostic chains has to either acquire small diagnostic companies inregions where it wants to increase its share or else set up its own labs which company requiresenough fund to implement the same. For acquisition, small companies are aware that companiesare quoting high valuations so it has raised expectation of this companies making acquisition moreexpensive. Dr Lal won’t face that much problem in doing capex or acquisition because it hasenough funds to do the same without raising debt.

Under Ayushman Bharat government is going to provide coverage of upto Rs500000 per familyper annum to 10.74Crs poor and vulnerable families. This expense will be borne by state andcentral government. Ayushman Bharat provides healthcare services at affordable or lowestpossible cost so this will create pricing pressure in Diagnostic industry.The insurance cover isRs 500000 per year which will be borne by central government (60%) and stategovernment(40%). Ayushman Bharat is risk for this companies, companies have to providehealthcare services at lower cost so price erosion will lead to margin hit.Government also provides free diagnostic services like in Telangana in 2018, in Assam it wasextended to nearly 1000 government hospitals in 2018, it was announced in Delhi in 2017 etcthis step by government poses a threat for companies because it will be volume but low priceand low margin business.


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5. Concern of Margins

Company have lower margins compared to Thyrocare, due to higher expenses on selling &advertisement cost as well as employee cost. Thyrocare hires 100% freshers in its company whichgives them advantage of lower employee cost because lower expectations of salary compared toexperienced personnel. Dr Lal has 16-17% of Sales as fees paid to channel partners, so thisadditional cost (employee, selling and fees to channel partners) lowers margins of company.


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Industry

India’s diagnostic Industry:

Diagnostic Industry can be classified into pathology and radiology/imaging testing services.Pathology testing involves collection of blood, urine and stool samples for treatment of patient’sdiseases. Pathology testing segment includes biochemistry, immunology, hematology, urineanalysis, molecular diagnosis and microbiology. Pathology tests can also be classified as Routinetests which includes Hemogram, General test, Stool test etc; then Semi-Specialised Tests whichincludes thyroid test, Vitamin tests etc; then Specialised Tests Pancreatic Cancer Marker CA 19.9HLA DNA Typing etc.Radiology involves x-rays and ultrasounds, which help mark anatomical or physiological changesinside a patient’s body, in order to assist doctors to diagnose a patient’s disease. It also includesmore complex tests, such as computed tomography (CT) scans and magnetic resonance imaging(MRIs) and highly specialized tests, such as positron emission tomography (PET)-CT scans.

Diagnostic industry is expected to grow at CAGR of 16% to reach Rs 802Bn in FY20. Within thediagnostics market, the pathology segment contributes approximately 58% of total market byrevenue while the remaining 42% is contributed by the radiology segment. Within pathology teststhere are two types one is “PATHOLOGY” in which when someone is not well and doctor prescribesome tests and second is “PREVENTIVE” in this, tests may be similar to pathology but the aspect oftest is different so in pre-emptive test it is to check whether your body is functioning well.Pathology contributes 92% and preventive tests contributes 8% in terms of revenue in Indiawhereas in developed countries 40% revenue comes from preventive tests as it part of insuranceplan so it covers there cost as well, in India it is out of pocket expenditure.

Urban population contributes 65% of total revenue of diagnostic industry and rural contributes35%. Higher contribution from urban population due to higher disposable income, higher literacyrates and better infrastructure in Urban areas.

Under diagnostic market we can categorize into Standalone centers, Hospital based centers anddiagnostic Chains. Standalone centers are unorganised players which offer basic testing which hashighest contribution in market of 48%, hospital based centres where some of work may getoutsourced to third-party laboratories which contribute 37% and lastly diagnostic chains which hasall India network and offer range of services which contribute 15% as of FY18; so unorganisedplayers dominates the market.


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Global Healthmarket:

India’s healthcare expenditure as % of GDP is just 3.9 lowest compared to USA at 16.8%, Germanyat 11.2%, Brazil at 8.9% etc. Per capital healthcare expenditure is also lowest at just US$63whereas USA at US$ 9536, Singapore at US$2280 etc. We can say that India’s healthcare market isstill under penetrated. Companies in this industry still has lot of room to expand and grow. Othercountries like USA, Germany have reached to maturity in healthcare industry, in developedcountries health insurance do cover its diagnostic test as well where as in India this expense is outof pocket of individual.

Country EBITDAMargins

Fixed AssetsTurnover

ROCE ROE NetDebt/Equity

Quest Diagnostic USA 19.7% 1.0 10.4% 13.8% 0.7Laboratory

Corporation ofAmerica

USA 19.7% 0.8 7.7% 14.0% 1.0

Alere USA 18.9% 0.5 6.5% 14.5% 1.3Sonic healthcare Australia 17.6% 0.9 8.7% 13.0% 0.6

Thyrocare India 38.8% 1.5 23.8% 15.3% (0.3)Dr Lal India 26.5% 6.8 43.5% 31.2% (0.6)

*Net Debt=Debt-Cash

If we compare companies in India and other developed countries, companies in India with no debthas higher margins and return ratios. The main difference lie is in industry, USA & Australiaeconomies are developed where diagnostic industry is penetrated, health insurance is alsopenetrated whereas in India diagnostic expense is out pf pocket expenditure for an individual.


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Hub and Spoke Model

In the hub and spoke model, the central location(hub) which is the main laboratory around whichsmall collection points (spokes) are located. At the end of the day, all samples are collected andsent to the main laboratory where the actual testing is done. This reference laboratory has highlyequipped to conduct routine as well as specialised pathology and radiology tests whereas satellitelabs offer limited range of services, mainly acting as feeders for reference laboratories. Mostcollection centers do not have testing facilities.

Ways companies can Expand

Customer Volume PricingPower

Margin Cost ofAcquisition

Direct Walk-in(B2C)

Low High High High

Small Labs/Doctors Moderate Moderate Moderate ModerateHospitals High Low Low Low

Franchise Partners(B2B)

Moderate Moderate Moderate Low

1. Direct Walk-in (B2C)

Volume is low because of less contribution from preventive tests in pathology so no individualunless prescribed by doctor will walk-in want to get tested. In India, this expenses are also notcovered by insurance so makes it expensive for an individual to get tested unless required.

Pricing power and margins are higher because company offers packages (like combine of 20 or40 tests) so this makes individual to know everything about there health through this tests.Margins are higher for company if patient chooses panels instead of single tests.

National ReferenceLab

Local Labsor CC

Regional Labs orSatellite Labs

Regional Labs orSatellite Labs

Local Labsor CC

Local Labsor CC

Local Labsor CC


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Cost of acquisition is higher because company has to do promotion, advertisement andbranding to increase its awareness.

2. Small Labs/Doctors

This small labs/doctors get commission from companies if they send samples to get testedbecause this small labs are not well equipped to perform this tests. Its moderate inmargins,volume, pricing power and cost of acquisition depending on commission they receiveand reliability of tests.

3. Hospitals

All hospitals may not perform all diagnostic tests so they send it to this diagnostic chains andget a commission. It is volume business hence lower pricing power and margins. Low cost ofacquisition once company proves its reliability and faster results of tests.

4. Franchise Partners(B2B)

They earn a commission; volume, pricing power and margins are moderate. Cost ofacquisition is low because its local partner who is going to grow business of the company.


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Growth Drivers

Increase spending on Preventive & Wellness Segment

Preventive & Wellness segment consists of early diagnostic test of an individual for early detectionof any disease and know human health conditions at very early stage. Rise in literacy rate, peopleare more aware about importance of diagnostic test to take preventive care and aware aboutthere health. Preventive & Wellness market contributes 7-9% in total diagnostic industry and it isexpected to grow at 20% CAGR in next three financial years.

Increase in Health Insurance penetration

In India, health insurance does not cover diagnostic test, so this expenses is out of pocket of anindividual. Out of pocket health expenditure as % of total health expenditure is 67% in Indiahighest compared Brazil 28%, China 32% & Russia 36%. In India, every individual has to spend outof its pocket for diagnostic test, if health insurance policies start giving cover for this expenditurethis might lead to rise in diagnostic industry.

Public Private Partnership

Public private partnership is tie-up of private diagnostic companies with government like ingovernment hospitals to provide variety of pathology and diagnostic tests. This partnership givesprivate companies volume business but with lower margins. This also increases penetration inrural and semi-urban market. Public-Private partnership will increase overall expenditure inhealthcare industry, easy access and quality diagnostic services at affordable cost. This will bevolume business but at lower prices.

Rise in Population, Income and Awareness

India’s 1.32Bn population which is still rising which will boost consumption of healthcare anddiagnostic services. With rise in disposable income which is expected to grow from US$6538 inFY17 to US$8495 in FY22 will create more spending on preventive and healthcare segment.Increase in literacy rate people will become more aware of health issues or diseases and requiredtests to prevent or to be aware about there health conditions through this tests.


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Business

AboutDr Lal Pathlabs is the provider of diagnostic and related healthcare test and services in India.Company provides range of pathology, radiology and Cardiology tests. Company has started itservice in 1949 so it has close to 7 decades of experience and trust of over 1.5Crs customers.Individual patients, hospitals and other healthcare providers and corporates are the customers ofthe company.

Company provide catalogue of 478 test panels, 2425 pathology tests and 1722 cardiology andradiology tests and can be categorize into (i) “routine” clinical laboratory tests — such as bloodchemistry analyses and blood cell counts; (ii) “specialized” testing services — such ashistopathology analyses, genetic marker-based tests, viral and bacterial cultures and infectiousdisease tests; and (iii) preventive testing services — such as screenings for hypertension, heartdisease and diabetes.

Network: “Hub and Spoke Model”

In Hub and Spoke model, samples are collected across multiple locations within a region fordelivery to predesignate clinical laboratory for centralised diagnostic testing, provides greatereconomies of scale and offers scalable platform for the continued growth of the business.Network includes National Reference Laboratory in Delhi and Regional Reference Lab at Kolkata,2153 patient service centres and 5624 pickup points.

How process works from Patient to their final test results?


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Firstly, if patient is not well he will go and see a doctor which will prescribe some tests. Eitherdoctor will suggest some labs where tests need to be conducted (if doctor has tie-up withdiagnostic companies) or mostly it is the choice of patients where to get tested. Patients hasmultiple options like visit hospital, collection center of any diagnostic company or some local labwhere samples will be collected and now days samples are also collected from home. Then thissamples are taken to regional labs or national reference labs (for complex tests) which is wellequipped and tests are conducted. After conducting tests they generate test result and sent eitherdirectly to patient or to the doctor.

How company operates?

Diagnostic companies require equipments and reagent to conduct various pathology and radiologytests. Companies buy this equipments, reagent from various vendors like Abbott, Waters, Roche,Bruker and Agilent etc.

Company get this equipments at very low cost from vendors. Companies also buy chemicalcomponent called reagent to execute tests from the same vendor. Vendors also provide service ofthis equipment for a fee over a period of time and maintenance of that equipment when thatperiod is expired. Cost of equipment is lower so when company buys cost of reagent which is veryexpensive vendors includes cost of equipment in cost of reagent which makes it more expensive,hence cost of equipment is cheaper. Diagnostic companies will use that equipment for itsdepreciable life so diagnostic companies has to compensate the cost of equipment by buyingreagent. Diagnostic companies have to give minimum volume of reagent that it will buy (over theuseful life of equipment), if company exceed minimum volume then vendors may give themdiscount as well. In short, diagnostic companies have to promise the volume (of reagent) it willconsume, which includes cost of equipment as well.

VENDORS DIAGNOSTICCOMPANIES

Equipments & Reagent


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Peer Analysis

Metropolis Dr Lalpathlabs ThyrocareSegments Pathology

RadiologyPathologyRadiologyCardiology

PathologyRadiology

Total Test 3840524 (profiles)

4197478(profiles)

24686(profiles)

SamplesCollected(in Crs)

1.6 2.93 1.633

No of PatientsVisits (in Crs)

0.77 1.52 Not Available

Accreditation NABL, ISO, CAP, CDC,ILAC, APLAC

NABL, ISO, CAP,CDC

NABL, ISO, CAP

Employees 4585 4316 985Key Focus Cities to

expandMumbai, Bengaluru,Chennai, Surat &

Pune

South & WestStates

(Bengaluru,Pune)

Not Available

Total no of cities inwhich they operate

173 Not Available 551

Revenueconcentration

62.75%(from top 8 cities)

72.5%(business from

north)

Not Available

Geography SplitRevenue:

NorthEast WestSouthOthers

73%54%

28% 8%-

72%13% 7%8%-

24%17%31%26%2%

Metropolis Dr Lalpathlabs ThyrocareNationalReferenceLaboratory

1 1 1

RegionalReferenceLaboratory

12 1 8

Clinical Labs 106 193 Not AvailablePatient Service

Centers1130 2153 1122*

Pickup Points 8500 5624 -*as of Nov’15


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Growth* (%) Metropolis Dr Lalpathlabs ThyrocareRevenue 10.82% 15.57% 21.60%EBITDA 7.62% 13.42% 29.33%EBIT 9.22% 14.14% 34.12%PAT 15.74% 13.55% 34.31%

*Last 2 years CAGR

Metropolis Dr Lalpathlabs ThyrocareSamples Collected

(in Crs)1.6 2.93 1.633

No of Patients Visits(in Crs)

0.77 1.52 Not Available

Revenue per patient visit 835.80 695.34 Not Available

Revenue per sample 402.23 360.72 462.75

PAT per patient visit 65.64 113.016 Not Available

PAT per sample 68.59 58.63 57.22

Margin (%) Metropolis Dr Lalpathlabs ThyrocareEBITDA 28.41% 27.93% 47.22%EBIT 25.46% 24.80% 40.96%PAT 17.05% 16.25% 26.22%

Clearly, Thyrocare has highest growth and margins compared to other companies. It hashigher margins due to lower employee cost, 17% as % of Sales for Dr Lal and 9% for thyrocare,22% of Metropolis and Dr Lal is having high cost of fees paid to channel partners.

Metropolis and Dr Lal pathlabs almost goes parallel in terms of margins, so clearly Thyrocare isleader in terms of growth and higher margins. Metropolis has lowest growth compared toother two companies.

Thyrocare has advantage in higher growth due to its strategy of providing quality services ataffordable cost so it provides at lower cost; focuses more on volume business. Thyrocare 51%revenue comes from preventive care profiles. Profiles are higher margin business wherebusiness can take advantage of economies of scale by conducting more tests.

Metropolis Dr Lalpathlabs ThyrocareCOGS as % of

Sales22.67% 21.38% 26.55%

Other Incomeas % of PAT

7.28% 18.17% 24.88%


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Growth (%) Metropolis Dr Lalpathlabs ThyrocareRevenue 10.82% 15.57% 21.6%Inventory 9.66% 37.22% 26.11%Receivables 14.24% 6.47% 14.47%Fixed Assets 18.52% 12.82% 7.38%

*Last 2 years CAGR

(Rs in Crs) Metropolis Dr Lalpathlabs ThyrocarePAT 109.75 171.79 93.44CFO 103.93 197.07 107.03Capex 19.90 66.30 43.65FCF 84.03 124.6 63.38

CF0 as % of PAT 94.69% 114.71% 114.54%Investments 100.42 144.80 100.98

Cash 60.14 313.51 11.86Liquid Balance

Sheet(Cash +Investment

as % of totalBalance Sheet)

30.58% 50.81% 23.63%

For Thyrocare Cost of materials consumed (reagent and other consumables to conductvarious tests) is higher compared to Metropolis and Dr Lal because it might not have thatmuch volume of tests it conducts but it do have patient growth.

Except metropolis, other two companies have higher inventory growth in Dr Lal sales growthis 16% and inventory growth is 37% whereas in Thyrocare sales growth is 22% inventorygrowth is 26% last 2 years CAGR. If we see as Inventory % of Sales, Dr lal stays in range of 2-3%whereas Thyrocare stays in range of 4-5%.

All companies generate Free Cash Flow but Dr Lal has liquid balance sheet because it has 50%of size of balance sheet as investments and cash. All companies has to expand across differentregions to increase market share and do capex so it will be much easier for Dr Lal to do thesame without raising debt.


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Ratios

Metropolis Dr Lalpathlabs ThyrocareRoE 29.81% 22% 22.16%RoCE 36.73% 33% 32.18%RoA 21.17% 19% 20.59%RoIC 39.31% 50% 26.90%

Cash ConversionCycle (in days)

23.29 -12.25 21.65

WC as % of Sales(excluding cash)

149..8123.28%

193.5518.31%

110.2530.94%

Capital Employedas % of Sales

(excluding cash)

374.2958.16%

472.4944.70%

441.61123.%

Dr Lalpathlab has highest RoIC, which shows with lower invested capital it isgenerating higher returns that is higher efficiency. Dr Lalpathlabs has fastest recoveryof cash from its business, lowest cash conversion cycle.

If we look at WC as % sales, Dr Lalpathlab has lowest ratio which means withlowest WC it is able to generate higher revenue comparing to metropolis andthyrocare. Capital employed as % of sales, Thyrocare is weakest where it requiresmuch capital in its business compared to other to generate enough revenue.


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Financials

Profit & Loss A/C

FY15 FY16 FY17 FY18

Revenue from Operations 659.59 791.32 912.38 1056.92

Other Income 12.35 19.77 27.54 31.22

Total Income 671.94 811.09 939.92 1088.14

Cost of Materials Consumed 139.16 172.92 197.08 226.03

Employee Benefit Expense 134.39 136.83 152.01 180.75

Finance Cost 0.4 0.5 0.7 0.84

Depreciation & AmortizationCost

28.19 28.28 27.54 33.06

Fees to collectionCentres/Channel Partners

- - 100.1 127.55

Other Expenses 230.09 271.84 225.67 258.6

Total Expenses 532.23 610.37 703.1 826.83

Profit before Tax 139.71 200.72 236.82 261.31

Tax 43.28 67.49 81.23 89.53

Profit After Tax 96.43 133.23 155.59 171.78


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Balance Sheet

FY15 FY16 FY17 FY18Non-Current Assets 193.64 185.96 223.53 295.86

Current Assets 281.67 365.15 466.56 623.02Total Assets 475.31 551.11 690.09 918.88

EQUITY & LIABILITY

EquityEquity Share Capital 81.26 82.68 83.07 83.33

Other Equity 259.82 383.88 512.45 707.85Non-Controlling Interest 2.3 2.94 2.44 3.79

Total Equity 343.38 469.5 597.96 794.97

LiabilityNon-Current Liabilities 20.17 5.27 7.29 7.95

Current Liabilities 111.76 76.33 84.84 115.96Total Liabilities 131.93 81.6 92.13 123.91

Total Equity & Liability 475.31 551.1 690.09 918.88


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Cash Flow Statement

FY15 FY16 FY17 FY18Net Cash Generated fromOperating Activities

121.77 158.54 171.30 197.01

Net Cash generated fromInvesting Activities

(113.45) (163.49) (137.11) (172.27)

Net Cash Generated fromFinancing Activities

(0.79) 0.36 (32.26) 12.50

Net Increase/Decrease inCash & Cash Equivalents

7.53 (4.59) 1.93 37.24


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Valuation

1. Discounted Cash Flow

ParticularsFCF (Last 3 years average)

(Rs in Crs) 113.05

Growth Rates 15% 14%

Terminal Growth Rate 2%

Discount Rate 12%Shares Outstanding 8.33

Yrs 2018 2017 2016 2015 2014 2013 CAGR Average(Last 3 years)

FCF 122.28 102.88 113.99 86.47 65.2 68.08 12% 113.05

FCF Growth Rate PV1 130.01 15% 116.08

2 149.51 15% 119.19

3 171.93 15% 122.38

4 197.73 15% 125.66

5 227.38 15% 129.02

6 259.22 14% 131.33

7 295.51 14% 133.67

8 336.88 14% 136.06

9 384.04 14% 138.49

10 437.81 14% 140.96

SUM 1292.84

Terminal Year CF 1318.70Terminal Value 13186.96

PV of Terminal FCF 4245.85PV of FCF between 1-10 years 1292.84

Total FCF 5538.68Investment 144.80New FCF 5393.89

Intrinsic Value per share 647.52CMP 1042.80


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Companies in Diagnostic chain business is cash generating business, Dr Lalpathlabs has 12% ofCAGR growth in FCF in last 5 years. Average of FCF comes up to 113.05Crs.

Expansion in this industry will highly come from inorganic growth that is through acquisitionof companies with similar business which has higher efficiency and higher market share in itsregion to reach more and more patients, but this might lower FCF.

Dr Lal Pathlabs which has close to 70 years of experience and 30-35% market share (as of FY16)and good brand name in the market.

In Diagnostic industry, unorganised has highest share of 47% which is standalone centersfollowed by hospital-based laboratories of 37% market share then diagnostic chain with just16%, so there is still lot of space for companies to grow.

Hence, for following reasons we have taken 15% growth for first 5 years and 14% for next 5years growth.

So if company’s CMP comes down by 38% then it will be balanced with growth in FCF ofcompany, so company is clearly overvalued.

2. Reverse DCF

ParticularsFCF (Last 3 years average) 93.15

Growth Rates 28% 27%Terminal Growth Rate 2%

Discount Rate 12%Shares Outstanding 8.33

FCF Growth Rate PV1 119.23 28% 106.462 152.62 28% 121.673 195.35 28% 139.054 250.05 28% 158.915 320.06 28% 181.616 406.48 27% 205.937 516.23 27% 233.518 655.61 27% 264.799 832.62 27% 300.2510 1057.43 27% 340.46

2052.64


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Terminal Year CF 2093.70

Terminal Value 20936.95

PV of Terminal FCF 6741.14

PV of FCF between 1-10 years 1979.57

Total FCF 8720.71

Investment 144.80

New FCF 8575.91

Intrinsic Value per share 1029.52

CMP 1042.80

To match the company’s CMP, company required 28% growth in first 5 years and 27% for next5 years.

Currently company is giving almost less than 50% of 28% growth in FCF. Company requiresmore than double growth in FCF to match with CMP.

3. Based on Revenue per Sample

Scenario-1

Particulars Part-1 Part-2 Part-3No of Sample Processed FY19 4.18 4.18 4.18

Growth Rate 11% 13% 15%FY20E 4.64 4.72 4.81FY21E 5.15 5.34 5.53

Per Sample Revenue 301.74 301.74 301.74FY21E Revenue 1554.01 1610.52 1668.03PAT MARGIN 16% 16% 16%

PAT 248.64 254.95 266.89P/E 46.00 48.00 50.00Mcap 11437.55 12237.37 13344.27

Current Mcap 8377.36 8377.36 8377.36Expected Return 36.53% 46.07% 59.29%

In this valuation we have done through number of samples processed each year.Using FY19, we assumed three scenario one with 11% second with 13% and third with 15%growth.

17% growth is last 5 years CAGR in samples processed but we have taken range of 11-15%. 11% growth is to be on conservative side if company could not sustain with rise in competition

and loses its market share or could not keep pace with growth in industry.


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With this growth rate, we get samples processed for FY21E. Then we have to multiply withrevenue per sample which we have taken as average of last 5 years average. This gives us totalrevenue for company FY21E.

Multiplying with PAT margin which is last 5 years average we get PAT for FY21E. P/E is 46,48, 50 so it is the response that market will give depending on the growth, lower

growth in samples processed lower will be the P/E and vice-versa. This scenario is kind of neutral scenario where majority parameters used are depending on

past performance of company like PAT margin and sample price is average of last 5 yearsaverage. Even if company gives constant performance it gives return in range of 36% to 59%.

Scenario-2

ParticularsNo of Sample Processed FY19 4.18

Growth Rate 14%FY20E 4.77

Per Sample Revenue 281.70Revenue FY20E 1342.34PAT MARGIN 15%

PAT 201.35P/E 48Mcap 9664.87

Current Mcap 8377.36Expected Return 15.37%

In this scenario, we found expected return at the end of each year FY20 and FY21, using thesimilar method as above.

In first year we assumed revenue per sample is down by 7% and services are available atlower cost this might lead to volume growth so 14% growth in number of samples processedhigher than 13% (CAGR of last 5 years) and this lead to margin hit PAT margin will be lowerthan last 5 years average hence we have taken 15%. (Last 5 years average is 16.3%)

For next year FY21, revenue per sample is down by 5% hence higher volume growth thanprevious year and price erosion will lead to margin hit hence further lower PAT margin.

Then with same calculation as above we get 15.37% return in one year and 17.76% for nextyear.

We have reduced revenue per sample due to ayushman bharat where government is going togive benefit cover of Rs 500000 per family per year to poor families and government incur thiscost. So for healthcare companies it will be volume business but at lower cost.

Thyrocare provides services at affordable cost compared to Dr Lalpathlabs so in future Dr Lalmight have to reduce the cost to sustain in industry.

ParticularsFY20E 4.77

Growth Rate 15%FY21E 5.4855

Per Sample Revenue 267.61Revenue FY21E 1467.99PAT MARGIN 14%

PAT 205.52P/E 48Mcap 9864.87

Current Mcap 8377.36Expected Return 17.76%


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4. Based on Revenue per Patient

Particulars Part-1 Part-2 Part-3No of Patients FY19 1.76 1.76 1.76

Growth Rate 12% 14% 16%FY20E 1.97 2.01 2.04FY21E 2.21 2.29 2.37

Per Patient Revenue 671.38 671.38 671.38FY21E Revenue 1482.24 1535.64 1590.00PAT MARGIN 16% 16% 16%

PAT 237.16 245.70 254.40P/E 46 48 50Mcap 10909.25 11793.75 12720.00

Current Mcap 8377.36 8377.36 8377.36Expected Return 30.22% 40.78% 51.84%

It is very similar to valuation we did for revenue per sample, in this we have used revenue perpatient 671.38 which is down by 1% of average of last 5 years average (Rs 678.16) because incurrent result Patient per revenue is down by 1.36% in FY19.

Growth in patients is 14% CAGR in last 5 years that is part-2 that is constant performance, soone we have taken good scenario with 16% and another with 12% to take possibility of rise incost of reagent that is risk from vendors, company is doing aggressive selling andadvertisement cost to stay in market but this strategy might not work in long-term as it leadsto margin hit and thyrocare with lower selling cost is able to give higher margins, hence lowergrowth.


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Conclusion

Dr Lal Pathlabs provides diagnostic and related healthcare services in India, it has experience inthis industry of approx 70 years. Dr Lal Pathlabs comes under large diagnostic chains. Companyhas larger presence in North and East with 72.5% and 12.8% business respectively.

Among listed peers, we think Dr Lal Pathlabs is strong compared to Metropolis and Thyrocare.Though lower growth and margins but rest all factors like return ratios is higher compared topeers. Important reason is that company has strong balance sheet that is 50% of balance sheetsize is liquid, with minimum capital it runs its operation much efficiently (WC as % of Sales, Capitalemployed as % of Sales, higher RoIC) so this proves its higher possibility of sustainability inindustry. Growth in company is highly dependent on Industry, more people become aware ofpreventive and healthcare tests higher will be demand for this services.

But when it comes to investment in this company, company seems overvalued, we will trackcompany regularly. Overall company is efficient, good market share, robust financials, strongsustainable in industry.Hence, we recommend our investors Dr Lal Pathlabs as “NETURAL” call for this company which iscurrently trading at TTM P/E 43.63 and CMP of Rs 1042.80.


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Technical View

Observation from Dr Lal Pathlabs Ltd Daily Chart :-

Stock has given breakout from symmetrical triangle pattern. However, we have seen supplyzone near 1100 level.

Stock is also trading below its 50 SMA ~ 1014. The 14 period RSI is also in "no trade zone". Therefore for short term we are looking to buy only if prices are sustaining above 1100 only

with trading stoploss of 50 SMA. For the long term we have seen prices are taking very good support at 200 SMA ~ 985. So if price falls below 1000 than 985 to 950 is first to demand zone to buy 50% and if prices

below 950 then 850-880 is the final demand zone to add rest 50% with trading stoploss below750 level.


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Source

Company’s DRHP

Annual Report

Investor Presentation

Name Designation Email IdTejas Jariwala Research Head [email protected] Jani Technical Head [email protected] Zaveri Sr. Research Analyst [email protected] Patel Sr. Research Analyst [email protected] Agarwal Assistant Research Analyst [email protected] Pareek Assistant Research Analyst [email protected] Patel Assistant Research Analyst [email protected] Modi Assistant Research Analyst [email protected] Nalbandh Sr. Research Executive [email protected] Patel Jr. Research Executive [email protected] Bakshi Jr. Research Executive [email protected]

Research Analyst Details:


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DisclaimerResearch Analyst Details

Name: Riva Patel Email Id: [email protected] Ph: +91 0261-6725518

Analyst ownership of the stock: No

Details of Associates: Not Applicable

Analyst Certification: The Analyst certify (ies) that the views expressed herein accurately reflect his (their)personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is orwill be directly or indirectly related to the specific recommendation(s) or views contained in this research report.

Disclaimer: www.jainam.in is the domain owned by Jainam Share Consultants Pvt. Ltd.

SEBI (Research Analyst) Regulations 2014, Registration No. INH000006448

The views expressed are based solely on information available publicly and believed to be true. Investors are advisedto independently evaluate the market conditions/risks involved before making any investment decision.

This report is for the personal information of the authorized recipient and does not construe to be any investment,legal or taxation advice to you. This report should not be reproduced to any other person in any form. This documentis provided for assistance only and is not intended to be and must not alone be taken as the basis for an investmentdecision. Jainam Share Consultants Pvt. Ltd. or any of its affiliates or employees shall not be in any way responsible forany loss or damage that may arise to any person from any inadvertent error in the information contained in thisreport. Neither Jainam Share Consultants Pvt. Ltd., nor its employees, agents nor representatives shall be liable forany damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits thatmay arise from or in connection with the use of the information. Jainam Share Consultants Pvt. Ltd. or any of itsaffiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matterpertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particularpurpose, and non-infringement.

The recipients of this report should rely on their own investigations. Jainam Share Consultants Pvt. Ltd. and/or itsaffiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in thisreport. Jainam Share Consultants Pvt. Ltd. has incorporated adequate disclosures in this document. This should,however, not be treated as endorsement of the views expressed in the report. We submit that no material disciplinaryaction has been taken on Jainam Share Consultants Pvt. Ltd. by any regulatory authority impacting Equity ResearchAnalysis.

mailto:[email protected]


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Disclosure (SEBI RA Regulations) Yes / NoWhether the research analyst or research entity or his associate or his relativehas any financial interest in the subject company/companies and the nature ofsuch financial interest

No

Whether the research analyst or research entity or his associates or his relativeshave actual/beneficial ownership of 1% or more securities of the subjectcompany (at the end of the month immediately preceding the date of publicationof the research report or date of the public appearance)

No

Whether the research analyst or research entity or his associate or his relativehas any other material conflict of interest at the time of publication of theresearch report or at the time of public appearance

No

Whether it or its associates have received any compensation from the subjectcompany in the past twelve months

No

Whether it or its associates have managed or co-managed public offering ofsecurities for the subject company in the past 12 months

No

Whether it or its associates have received any compensation for investmentbanking or merchant banking or brokerage services from the subject company inthe past 12 months

No

Whether it or its associates have received any compensation for products orservices other than investment banking or merchant banking or brokerageservices from the subject company in the past 12 months

No

Whether the subject company is or was a client during twelve months precedingthe date of distribution of the research report and the types of services provided

No

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