Price Band: INR

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1 BSE SENSEX S&P CNX 26,169 7,955 Issue Summary Period December 08-10, 2015 Price band (INR) Size (INR m) INR6,264-6,380m offer for sale No. of shares (m) 11.6m offer for sale MCap post issue 45.4 (INR b) Minimum order 20 quantity (Num.) Bid lot (Numbers) 20 Face value (INR) 10 Promoters: DR. ARVIND LAL AND DR. VANDANA LAL Book running lead managers: Kotak Securities and Citi Global Markets Registrars: Link Intime Amount Objects of the issue (INR m) Purchase of goods transportation vehicles [.] Repayment/pre-payment, in full/part, of certain borrowings [.] General corporate purposes [.] Total [.] Share holding pattern Preissue Post issue Promoter (s) Public and Others Offer structure/book building (Shares in M) Shares Offer for sale by existing shareholder 4.1 Fresh issue 7.4 Net offer for public 11.6 QIB* 5.8 Non-Institutional 1.7 Retail December 2015 IPO Note Sector: Healthcare Dr. Lal PathLabs Price Band: INR Strong consumer healthcare brand Pan-India diagnostic services player: Dr Lal PathLabs (Dr Lal) is the second largest diagnostic chain in India with 172 clinical laboratories, 1,554 patient service centers and over 7,059 pickup points as of September 30, Though the company has Pan India presence, more than 72% of its revenue comes from North India region. Established presence in a high growth sector. Share of institutional chain network (which currently stands at just 6% of total market) will continue to improve in the Indian diagnostic market which was historically dominated by standalone and hospital based centers. According to Crisil, institutional diagnostic chains is set to deliver revenue growth of ~19% CAGR between FY15-18E on the back of technological advancement, robust balance sheet and increase in evidence based treatment. Dr Lal is poised to capitalize on this opportunity on the back of strong brand name coupled with capital light hub and spoke business model. Strong growth + margin expansion = robust FCF: 1) expanding presence in existing markets- strengthen position in North India and scale up in East India (setting up a reference lab in Kolkata); 2) expand inorganically; 3) focus on hospital based clinical labs through tie-ups. Strong balance sheet with net cash of Rs2.35bn (at 1H FY16 end) and FCF generation of ~Rs700m will help the company fund growth. Investment view Merits premium valuations: Dr Lal will be the only pure play listed diagnostic business in India. At higher end of the price band, the company would trade at EV/ EBITDA of 27x FY15 and 24x 1HFY16. The valuation multiples are in line with the recent Metropolis transaction (~@27x trailing EV/ EBITDA). Premium valuations is on account of superior margins (>300bps more than SRL in FY15), strong brand franchise, robust growth, net cash balance sheet and cash flow generation. Financials & valuations Valuation summary (INR m) FY12 FY13 FY14 FY15 1HFY16 Revenue 3,422 4,517 5,580 6,596 4,050 EBITDA ,385 1, EBITDA Margin (%) PAT PAT Margin (%) RoE (%) Net Worth 1,160 1,621 2,315 3,411 4,091 Debt Cash Flow from Operations N/A FCF N/A Cash Flow from Investment N/A Cash Flow from Financing N/A Kumar Saurabh (Kumar.Saurabh@MotilalOswal.com); Amey Chalke (Amey.Chalke@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Company Background Dr Lal PathLabs, incorporated in 1995 and headquartered in Delhi is India s first diagnostic service provider to get listed on Indian equity bourses. It offers access to diagnostic healthcare services in India through nationwide network of 172 clinical laboratories, 1544 patient service centers and 7059 pickup points. Initially, the business was established by Dr. S. K. Lal, who commenced the business of providing pathology services and maintaining blood bank in the year Until recently, before getting converted into public company, it was operating as partnership firm with 50:50 shares between Dr. Vandana Lal and Brig. Dr. Arvind Lal. As on December 1, 2015 Dr. Lal Pathlabs Offers a range of approximately 1079 test panels. Capable of performing 1813 pathological tests, 1555 radiology and cardiology tests as well as services that cover a range of specialties and disciplines. Operates in Hub and spoke model, with presence across major cities like Delhi, Mumbai, Bengaluru, Chennai, Hyderabad and Kolkata. Exhibit 1: Pan-India network 2 December

3 Competitive Strengths and Business Strategies Well positioned to leverage upon one of fastest growing segments in India Built a national network consisting of our National Reference Laboratory in New Delhi, 172 other clinical laboratories and 1,544 patient service centers as of September 30, It has coverage across India, including metropolitan areas such as New Delhi, Mumbai, Bengaluru, Chennai, Hyderabad and Kolkata. The combination of our long operating history, nationwide network and reputation for providing quality diagnostic healthcare services positions well to take advantage of the growth of the Indian diagnostic healthcare services industry. CRISIL Research expects Diagnostic industry in India to grow at 16-17%YoY to USD9.6b by 2018 from USD6b in Exhibit 2: Existing infrastructure HFY16 Clinical laboratories Total patient Service Centers Owned Patient Sevice Centers Franchisee Patient Service Centers Pick up Points Hub and spoke model The business is combination of 1) hub and spoke model and 2) an instrument leasing model. Hub and spoke model is scalable for future growth and also ensures better profitability with increase in size of the business activities. The company performs test and services on equipment and instruments which generally are leased under a reagent rental. It benefits company by lowering capital expenditures for diagnostic equipment. Exhibit 3: Hub-and-spoke for a regional chain 2 December

4 Fully integrated operations The company has large centralized information technology platform that fully integrates large network though a common logistics and payment system, thereby allowing the company to collect samples efficiently. The centralized technology platform also gives healthcare providers convenient, online access to diagnostic results. Furthermore, the growth of the network is supported by the scalability of the technology platform, which readily can adapt to the increased data requirements of additional clinical laboratories and patient service centers. Attractive financial performance and return on invested capital. Over FY13-15, total revenues grew 20.7%YoY from INR4.5b to INR6.6b. EBITDA grew 25.8%YoY to from INR1b to INR1.6b, resulting in margin improvement of 190bp from 22.1% to 24.0%. Reported PAT increased 30.7%YoY from INR556m to INR949m. During the same period, Returns on equities stayed elevated at around 28% in FY15 and 35% in FY14. The stellar financial performance is attributed to (i) the growth of the network as well as the expansion of diagnostic portfolio and related healthcare tests and services, (ii) improvements in operating efficiency, including management of costs and expenses, (iii) lower capital expenditure due to use of a reagent rental model (iv) the strategy of prioritizing resources and investments in accordance with their significance to our business. 2 December

5 Business Strategies Consolidating position in existing markets The company intends to strengthen its presence in regions where already operates, particularly in core markets of North India as well as Central and Eastern India. In North India, it plans to opens new franchised patient service centers across this region in order to expand network s reach. In Central and Eastern India, it intends to spread its network through construction of regional reference laboratories, including a large, regional reference laboratory in Kolkata combined with the opening of additional smaller clinical laboratories and several new, complementary patient service centers. The company has also targeted expansion in Southern and Western India by opening additional clinical laboratories and patient service centers. Exhibit 4: Revenue segments (geography-wise) HFY16 North India 3,398 4,085 4,764 2,956 East India South India West India International Total 4,516 5,579 6,596 4,050 Entering into newer markets To explore the expansion opportunities in India through strategic acquisitions of regional diagnostic healthcare service providers who possess brand recognition among an existing patient base and healthcare providers. It also seeks strategic partnerships with key franchisees and hospitals to help sustainably support future growth. It previously had undertaken strategic acquisitions in India of smaller-scale diagnostic healthcare service providers and various partnerships for the management of hospital laboratories and with numerous franchisees. It increased patient base, customer reach and economies of scale. Future acquisitions and partnerships are expected to provide operating synergies and a basis for organic growth in these new regions. These ties will also add purchasing power with suppliers and increased economies of scale. 2 December

6 To expand the capabilities To increase the breadth of diagnostic healthcare testing and services platform by adopting new, cutting-edge diagnostic healthcare testing technology. For example, it intend to offer more preventive healthcare screening and chronic and lifestyle disease management services, given the increasing health awareness of chronic and lifestyle diseases in India. This would include additional development in the areas of genetics, molecular and oncology testing, as well as an expansion of current chronic disease management and wellness programs. It also expected to grow existing corporate customer base by continuing to market healthcare proposition to human resource departments and other corporate decision makers. To focus on maintaining quality of services The company continues to focus on the quality and reliability of diagnostic healthcare services. It would try to improve existing diagnostic healthcare services and turnaround times for testing results. In addition, It will continue to upgrade diagnostic equipment and technology in order to increase the efficiency of our processing capacity. The access to advanced diagnostic technologies and equipment from existing suppliers enhances the quality and reliability of diagnostic healthcare services. The company would also add online initiatives and leveraging data analytics capabilities for customers. Expansion of hospital-based and other clinical laboratories Plans to increase the number of hospital-based clinical laboratories by leveraging the scale and efficiency of existing network to perform the diagnostic healthcare testing services of these hospitals and other clinical laboratories. The company may also seek tie-ups with polyclinics which generally are consolidated partnerships of physicians, consisting of general practitioners and specialists. Polyclinics generally have limited resources, thus presenting an opportunity to provide them both laboratory management and specialized laboratory testing services. 2 December

7 Key Risks Intense competition: India s diagnostics industry is highly competitive with standalone centers having close to a 48% market share, compared to around 37% for hospital-based diagnostic centers. This increases competition for organized diagnostic chains in terms of volumes of patients samples and aggressive pricing of diagnostic tests. Geographical concentration: Many small diagnostic chains operating three or four labs in a particular location or region are susceptible to the supply and demand dynamics of that specific location. Shortage of manpower: Key area of concern is the training and retention of critical staff such as lab technicians, who are employed at labs and collections centers and are responsible for the collection and preservation of patient samples. The situation is even more critical for standalone diagnostic centers, which may not be able to employ well-trained lab technicians and pathologists. Vulnerable to technological advancements: To stay ahead of the competition, diagnostics centers have to constantly upgrade their technology. However, these upgrades not only involve significant capital investments but also increase maintenance costs. This significantly increases cost overheads for service providers. Moreover, two versions of certain equipment could have a significant price differential, making it difficult for service providers to upgrade. This is especially the case for smaller players who face a paucity of funds. 2 December

8 Industry Background CRISIL Research estimates the size of the diagnostics industry at around INR377b in Overall market for wellness and preventive diagnostics, as per CRISIL Research s estimations, was 6-8% of the total diagnostic services market in CRISIL Research expects that the diagnostics industry will continue to grow by 16%-17% over the next three years. CRISIL Research estimates that pathology testing has the larger share of the overall domestic diagnostics market. Pathology includes biochemistry, immunology, hematology, urine analysis, molecular diagnostics and microbiology, among others, whereas imaging diagnostics, or radiology, includes, for example, ultrasound, X-ray, CT scan, MRIs and positron emission tomography computed tomography, or PET- CT. Exhibit 5: Domestic diagnostic industry to grow at 16-17% Exhibit 6: Break-up of pathology market Others, 22% 16-17% CAGR Biochemistry, 39% Hematology, 18% FY14-15E FY17-18E Immunology, 21% Exhibit 7: Comparison with SRL (largest player in diagnostic industry) Dr. Lal SRL Dr. Lal SRL Dr. Lal SRL Revenue 4, , , EBITDA , , EBITDA margin (%) December

9 Story in charts Exhibit 8: Revenue CAGR at 23% over FY11-15E Exhibit 9: EBITDA margins in excess of 22% Revenues (INR b) % YoY growth EBITDA (INR b) EBITDA margin (%) FY11 FY12 FY13 FY14 FY15 2,373 3,422 4,517 5,580 6,596 FY11 FY12 FY13 FY14 FY15 Exhibit 10: EPS CAGR at 27% over FY11-15E EPS (INR/share) % YoY growth Exhibit 11: Industry leading ratios ROEs (%) ROCE (%) FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15 Exhibit 12: Consistent free cash flow generation over last five years Free cash flows (INR m) FCF/EBITDA (%) 7% 14% 15% 12% 10% FY11 FY12 FY13 FY14 FY15 2 December

10 Financials and valuations Consolidated - Income Statement Y/E March FY11 FY12 FY13 FY14 FY15 Income from Operations 2,373 3,422 4,517 5,580 6,596 Less: Excise Duty Total Income from Operations 2,373 3,422 4,517 5,580 6,596 Change (%) Total Expenditure 1,806 2,557 3,540 4,194 5,037 % of Sales EBITDA ,385 1,560 Margin (%) Depreciation EBIT ,113 1,278 Int. and Finance Charges Other Income PBT bef. EO Exp ,192 1,397 EO Items PBT after EO Exp ,192 1,397 Current Tax Deferred Tax Tax Rate (%) Less: Mionrity Interest Reported PAT Adjusted PAT Change (%) Margin (%) Consolidated - Balance Sheet Y/E March FY11 FY12 FY13 FY14 FY15 Equity Share Capital Total Reserves 878 1,110 1,570 1,512 2,598 Net Worth 929 1,160 1,621 2,315 3,411 Minority Interest Deferred Tax Liabilities Total Loans Capital Employed 1,118 1,173 1,642 2,342 3,434 Net Fixed Assets ,085 Goodwill on Consolidation Capital WIP Total Investments Curr. Assets, Loans&Adv ,833 2,610 Inventory Account Receivables Cash and Bank Balance ,057 1,482 Loans and Advances Curr. Liability & Prov ,048 1,173 1,320 Account Payables Other Current Liabilities Provisions Net Current Assets ,290 Deferred Tax assets Misc Expenditure Appl. of Funds 1,118 1,173 1,642 2,342 3,434 E: MOSL Estimates December

11 Financials and valuations Ratios Y/E March FY11 FY12 FY13 FY14 FY15 Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) FCF per share Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Creditor (Days) Working Cap. Turnover (Days) Leverage Ratio (x) Current Ratio Interest Cover Ratio Debt/Equity Consolidated - Cash Flow Statement Y/E March FY11 FY12 FY13 FY14 FY15 OP/(Loss) before Tax ,192 1,397 Depreciation Interest & Finance Charges Direct Taxes Paid (Inc)/Dec in WC CF from Operations Others CF from Operating incl EO (Inc)/Dec in FA Free Cash Flow (Pur)/Sale of Investments Others CF from Investments Issue of Shares Inc/(Dec) in Debt Interest Paid Dividend Paid Others CF from Fin. Activity Inc/Dec of Cash Opening Balance ,057 Closing Balance ,057 1,482 Diff December

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