Diagnostics - COVID-19 tests continue to trend higher - ICICI Securities

As per our detailed analysis of the total number of COVID-19 tests (RT-PCR) performed on a daily basis in India, the current average of daily tests is significantly higher than in Q2FY21. This is despite the fact that new positive COVID-19 cases have been declining since Sep'20. Average daily tests till date in Q3FY21 are ~49% higher while total number of tests till date in Q3FY21 have already reached ~82% of the total in Q2FY21. This suggests COVID-19 tests volume may not only remain strong for companies in near term but also help in offsetting the impact from lower pricing. We remain positive on Indian diagnostic sector with a growth potential of ~15% CAGR over medium term and believe large organised players are best positioned to benefit from their scale and healthy balance sheets.

- Average daily COVID-19 tests are ~49% higher than in Q2FY21: The number of average daily tests in Q3FY21 till date stands at 1.08mn vs 0.73mn in Q2FY21, an increase of ~49% while the total number of tests conducted till date in Q3FY21 stands at ~54mn which is already ~82% of total tests conducted in Q2FY21. The key large diagnostic companies (Dr Lal, Metropolis, SRL and Thyrocare) had cumulative volume market share of 2.3% in Q2FY21. We believe this share would have risen in Q3FY21 with the easing of requirements on testing (prescription is no longer mandatory for COVID-19 testing).

- Sector is well poised for sustainable growth momentum: The diagnostic industry in India is well positioned for sustainable growth over long term given growing healthcare awareness, demand for preventive & wellness checks and higher incidence of diseases. Large players may benefit more due to likely faster shift from unorganised to organised market, potential inorganic opportunities in current environment and benefit from larger scale. Large scale helps in effective negotiation with vendors, better operating leverage, attracting more franchisees for asset-light growth and strong free cashflow generation. This is also visible from the potential growth (~15% revenue CAGR) and healthy return profile (>40% RoIC).

- Our view: We remain positive on Indian diagnostic sector and believe multiple growth drivers will support the growth momentum over medium to long term. We maintain ADD on Dr Lal Pathlabs and it remains our top pick, retain ADD on Metropolis and REDUCE on Thyrocare.

Source : Equity Bulls

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