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1QFY21 earnings were higher than our estimate as 1) All collection centers and labs resumed operations much earlier than expected 2) higher revenue contribution from other regions than Delhi-NCR and 3) Bundled test not impacted during the lockdown. However, 1QFY21 witnessed lower level of realization with Revenue/Patient (ex-COVID test) to Rs636 v/s Rs685 YoY and Test/Patient to 2.27 v/s 2.42. DLPL highlighted increase in patient’s preference for sample collection from homes led to higher payout of incentives to collection centers. We remain negative on the entire diagnostic chain with a belief of 1) premium players losing their market share to unorganized players, 2) B2B (40% of revenue) partners negotiating for higher profit share, 3) Inability to hike prices causing lower realization level (Revenue/Patient) and 4) higher fixed costs (60-65% of operating cost for DLPL), new compliance expense and home collection of samples will lead to lower EBITDA margin. Assuming 1QFY21 as base case to stress tests its revenues and headline margins, we revised our earnings estimates for FY21E-23E. With assumptions 15% CAGR in earnings (derived on EPS growth in FY18-20) and normalized 1-yr forward PE of 35x, the current valuation of DLPL reflects forward earnings of FY25E. With challenging valuation of 12.5x EV/sales(FY21E), we maintain ‘SELL’ recommendation and revised TP to Rs1,006 (from Rs895) on PE 40x of FY22E.
We believe COVID could structurally change the industry dynamics and spending patterns of consumers. Low-middle income groups could change their preference towards low cost and unorganized players while High-cost diagnostic players would battle out to gain market share at the expense of steep price discounts which would lower their realization. With rising COVID cases in India, the inflow of patients to diagnostic centers to remain muted and Q1FY21E to be a complete washout. We believe DLPL can generate only 28-30% of revenue compared to last year in Q1FY21E and gradual recovery from Q2FY21E. As per the management, 60-65% of DLPL’s total operating cost is fixed in nature and the new additional expense (cost of safety for employee and home collection of samples) related to COVID can keep EBITDA margin below 20%. We reduce revenue/EBITDA/EPS by 22.5%/51.1%/59.5% for FY21E and 26%/26%/23% FY22E on the above concerns and change our rating to ‘SELL’ (earlier REDUCE) with new TP Rs895 (earlier Rs1,310) on PE 40x (earlier 45x) of FY22E.
Management guided next leg of growth to be led by Western and Southern India, while its core region (Delhi-NCR) will continue to grow between 6-8%. We expect competitive intensity to remain strong with price war as new organized players would try to capture the market share, regulatory interference and expected price ceiling of government. DLPL however remain confident of its brand power, service quality, high-end test capability, network of collection centers and KRL to drive volume growth and profitability in FY20E-22E. With increase in earnings estimates, we increased our TP to Rs1,797 (from Rs1,437) on PE 40x of FY22E earnings. The valuation of the company however increased by 20% post introduction of the new tax regime of GOI and hence been discounted in our earnings estimates and valuation. We maintain ‘Hold‘.
We downgrade the stock to a ‘HOLD’ rating and value Dr Lal PathLabs at 38x FY21E EPS of Rs. 33.8 for a target of Rs. 1285. Slower than expected penetration in Rest of North, East and Central India pose a threat to our call.
Q1 in line; Favorable product mix leads margin DLPL’s revenue, adj. EBITDA and PAT grew 15%, 21% and 19% YoY respectively in Q1FY20 and in line with our estimates in margin and earnings. With strong cash flow and growth in new customers and packaged offer, the company expects to maintain current growth in FY20E. The expansion of bundle-test offer and gradual ramp up of central lab in Kolkata (KRL) to improve further volume addition in FY20E and FY21E. Management expects competitive intensity to remain strong with price war, regulatory interference and expected price ceiling of government. DLPL remain confident of its brand power, service quality, high-end test capability, network of collection centers and KRL to drive volume growth and profitability in FY19-21E. We maintain“Accumulate” and retain TP at Rs1,120.
Management expects competitive intensity to remain strong with price war, regulatory interference and an expected price ceiling from the government. DLPL remains confident of its brand power, service quality, high-end test capability, network of collection centers and KRL which will drive volume growth and profitability in FY20-21E. We maintain“Accumulate” and move forward our base of valuation to 32x of FY21E earnings estimates to derive new TP at Rs1,120 (from Rs1,009).
SOURCE: Data from D'Market via Quandl. Intraday data delayed 15 minutes.
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