Brokerages Maintain Caution on Dr. Lal PathLabs Despite Q2 Profit Surge

Dr. Lal PathLabs, a diagnostics services provider, has reported an impressive 52% increase in net profit for the second quarter of FY23. However, brokerages remain cautious in their assessments. Notably, Kotak Institutional Equities and Citi have issued sell recommendations, while Nuvama suggests holding the stock following the company’s Q2 results.

On early November 3, the company’s shares surged over 6 percent. At 11:14 am, the shares were trading 6.25 percent higher at Rs 2,617 on the NSE.

Dr. Lal PathLabs reported a 52.4 percent year-on-year rise in consolidated net profit, reaching Rs 109.3 crore for the July-September quarter of the current financial year, up from Rs 72.4 crore in the same period the previous year. The EBITDA margin improved to 29.6 percent from 26.9 percent in the year-ago period. During a discussion with CNBC TV18, the company’s Managing Director, Om Manchanda, attributed the margin expansion to price increases and a favorable product mix. He indicated that the margins are expected to stabilize at around 26 percent for the company.

Manchanda also mentioned the reduction in steep discounting and a decrease in competitive intensity. He clarified that there are no ongoing M&A plans but expressed interest in pursuing such opportunities in South India in the future. The company’s cash balance for the quarter increased to Rs 780 crore, marking an 86 percent year-on-year growth. Nuvama pointed out that this strong financial position positions the company well for organic investments and exploration of opportunities in South India. Manchanda emphasized the company’s current focus on achieving volume growth and expressed a desire to return to volume growth of 8% CAGRs.

Nuvama highlighted the encouraging results of Dr. Lal PathLabs’ expansion into Tier 3+ cities, presenting an 18 percent+ revenue CAGR from FY19 to FY23, contributing to 34 percent of the overall top line. They also noted that challenges related to high employee turnover have been addressed, and the company’s marketing efforts are yielding positive responses, indicating better growth prospects.

Citi observed that patient volume growth, excluding Covid-related factors, remains subdued at 7.7 percent year-on-year.

Kotak’s view is that while the worst of the pricing-led competition in the diagnostics sector may be behind, new organized players continue to impact the volume growth of established companies. They stressed that a favorable pricing environment is yet to be realized and attributed the underperformance to saturation in larger cities, with hopes of growth recovery through expansion into Tier 3+ markets.