Dr Lal Pathlabs - Strong recovery close to pre-COVID level - ICICI Securities

Dr Lal Pathlabs' (Dr Lal) Q2FY21 performance was above estimate even in a challenging environment, aided by COVID-19 tests and speedy recovery to near pre-COVID level in base business. COVID-19 tests contributed ~17% to sales. Other revenues declined 2.1% YoY, vs estimated 12.9% decline. Overall, revenue grew 18.1%, EBITDA margin was down 30bps to 29.5% and adj PAT was up 6.0% to Rs853mn. The business has recovered to ~98% of pre-COVID levels and we expect healthy growth in coming months. We believe Dr Lal would benefit the most with multiple growth levers such as faster shift of unorganized business to organized players in current scenario, potential consolidation in industry via inorganic or partnership route and upside from COVID-19 related tests. Downgrade to ADD from Buy mainly due to recent ~25% rally in stock.

- Strong recovery in non-COVID business: Dr Lal witnessed speedy recovery in non-COVID revenue which inched to ~98% of Q2FY20 sales as compared to 70-85% for peers. COVID-19 tests helped in reporting 18.1% positive revenue growth and contributed ~17% to revenue and we expect it to drop in ensuing quarters as non-COVID revenue picks-up. The volumes (patients) in base (ex-COVID) business has recovered to ~98% in Q2FY21 and we estimate double digit growth Q3FY21 onwards. However, number of samples were flattish and realisation/patient increased 2.4%. We believe business would improve materially with easing of lockdown in coming quarters and estimate healthy growth in in H2FY21.

- Higher revenue and cost control supported margin: Dr Lal reported an EBITDA margin of 29.5% (-30bps YoY) against estimated 25%. Cost control initiatives, which started in Apr'20, included negotiating new rentals, reducing promotions etc. Revenue from COVID-19 related tests also helped in absorbing fixed costs. We expect EBITDA margin to improve 330bps over FY20-FY23E with pick-up in patient volumes, sustaining benefits of cost control and low base due to Q4FY20.

- Outlook: We expect Dr Lal to outperform industry growth and register revenue, EBITDA and PAT growth at CAGRs of 14.4%, 19.1% and 23.3%, respectively, over FY20-FY23E. RoE and RoCE would remain strong at 26.1% and 25.0%, respectively, in FY23E whereas RoIC would move to 131.3%. We are positive on the long-term outlook considering the company's strong brand franchise with sustainable growth, expansion potential, healthy FCFF generation and strong return ratios.

- Valuation: We raise FY21-23 EPS estimates by 3-10% to factor in higher revenue from COVID-19 tests in FY21E, faster recovery in volumes and better margin as seen in Q2FY21. However, considering recent rally in stock which has limited upside potential, we downgrade Dr Lal to ADD from Buy with a revised DCF-based target price of Rs2,430/share (earlier: Rs2,142/share) implying 50.8xFY23E EPS and 32.1xFY23E EV/EBITDA. Key downside risks: Higher-than-expected competition, pricing pressures and prolonged impact of COVID-19.

Shares of Dr. Lal PathLabs Ltd was last trading in BSE at Rs.2194.35 as compared to the previous close of Rs. 2174.25. The total number of shares traded during the day was 1040 in over 193 trades.

The stock hit an intraday high of Rs. 2370 and intraday low of 2182.1. The net turnover during the day was Rs. 2281245.

Source : Equity Bulls

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