Health Care-Health Care Facilities & Svcs Bloomberg Code: DLPL IN India Research - Stock Broking Strong Position in North India, Expanding in South and West Regions: Dr. Lal Path Labs is the second largest diagnostic chain in domestic market with healthy balance sheet and strong cash flows. The company gets 72% of revenue from North India, and is concentrating more on an engagement model between the company and the clients. The future acquisitions and partnerships would provide operating synergies and basis for organic growth in these new regions. Strategic acquisitions and partnerships would provide additional purchasing power with the suppliers and increased economies of scale. The growth drivers for this business are: rising incidence of lifestyle diseases, increase in evidence based treatments, more focus on preventive diseases and wellness, combined with rising incomes and increased penetration of health insurance which can fuel growth of the industry. The company has posted CAGR of 27.2% in gross turnover for FY11-FY16. The company generated 2.% revenue growth for FY16 and we estimate that there would be steady increase in sales of about Rs. 958Mn and Rs.11615Mn in FY17E and FY18E respectively. Increase the breadth of the diagnostic healthcare testing and services platform in the world: The labs in India receive specimens for diagnostic testing from Bhutan, Srilanka, Nepal, Bangladesh, Myanmar, the United Arab Emirates, Oman, Qatar, Kuwait, Kenya, Tanzania and Nigeria. These samples are imported in compliance with the Indian Council of Medical Research (ICMR). Paliwal Diagnostics and Paliwal Medicare networks in Kanpur act as mini hub. The company offers tests and services which cover a range of specialities and disciplines for use in core testing like Routine testing, Specialized testing, patient diagnosis and the prevention, monitoring and treatment of disease and other health conditions. Valuation and Outlook At CMP of Rs.983, Dr. Lal Path Labs is currently trading at P/E of 5.3x on FY18E EPS of Rs.19.5. Based on DLPL s growth prospects and estimated increase in the operations nationwide, we value the company at 1SD P/E of 6.6x of FY18E EPS for the target of Rs.1182. We initiate coverage on DLPL with a BUY rating for a target price of Rs.1182 representing an upside potential of 2% in 9-12 month period. Key Risks yintense competition. yretention of critical staff. Recommendation (Rs.) Jul 18, 216 BUY CMP (as on Jul 15, 216) 983 Target Price 1182 Upside (%) 2 Stock Information Mkt Cap (Rs.mn/US$ mn) 81328 / 1213 52-wk High/Low (Rs.) 146 / 696 3M Avg. daily volume 6252 Beta (x) NA Sensex/Nifty 27836 / 8541 O/S Shares(mn) 82.7 Face Value (Rs.) 1. Shareholding Pattern (%) Promoters 58.7 FIIs 29.3 DIIs 6.2 Others 5.9 Stock Performance (%) 1M 3M 6M Absolute 3 (3) 25 Relative to Sensex (1) (11) 9 Source: Bloomberg Relative Performance* 13 12 11 1 9 8 Dec-15 Jan-16 Jan-16 Feb-16 Feb-16 Source: Bloomberg; *Index 1 Apr-16 Apr-16 May-16 May-16 Sensex Jul-16 Exhibit 1: Valuation Summary YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Net Sales 5579 6596 7913 958 11615 EBITDA 1386 156 297 2377 288 EBITDA Margin (%) 24.8 23.6 26.5 25. 24.8 Adj. Net Profit 796 957 1322 131 1615 EPS (Rs.) 14.8 17.7 16. 15.7 19.5 RoE (%) 34.4 28. 26.1 21.1 21.2 PE (x) 66.3 55.5 61.5 62.5 5.3 For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Analyst Contact Shamshad Sajitha Gunturi 4-3321 6271 shamshad.sajitha@karvy.com 1
Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs. Mn) FY16 FY17E FY18E Net sales 7913 958 11615 Optg. Exp (Adj for OI) 486 5 618 EBITDA 297 2377 288 Depreciation 283 384 47 Interest 5 8 1 Other Income 5 42 52 PBT 27 226 2515 Tax 675 716 889 Adj. PAT 1322 131 1615 Profit & Loss Ratios EBITDA margin (%) 26.5 25. 24.8 Net margin (%) 16.8 13.8 14. P/E (x) 61.5 62.5 5.3 EV/EBITDA (x) 38.8 34.2 28.2 Dividend yield (%).2.2.2 Balance sheet (Rs. Mn) FY16 FY17E FY18E Total Assets 6252 749 977 Net Fixed assets 1239 1413 1615 Current assets 3514 4577 5963 Other assets 723 723 723 Total Liabilities 6252 749 977 Networth 566 6178 764 Debt Current Liabilities 98 14 1127 Other liabilities 36 45 56 Balance Sheet Ratios RoE (%) 26.1 21.1 21.2 RoCE (%) 24.7 2.1 2.3 Net Debt/Equity (.5) (.5) (.6) Equity/Total Assets 4.7 5. 5.5 P/BV (x) 16. 13.2 1.7 Exhibit 2: Shareholding Pattern (%) Company Background Dr. Lal Path Labs has been founded by Dr.Major S.K.Lal in 1949. Later, in 1995, it was incorporated as Dr.Lal Path Labs Pvt.ltd. It has a pan India integrated coverage with 172 clinical labs, built a national hub-and-spoke network that includes its National Reference Lab at Delhi, 1559 patient service centers and nearly 5 pick-up points. Their customers include individual patients, hospitals, other healthcare providers and corporate customers. It is well positioned and fastest growing segment in the Indian healthcare industry. Three clinical labs received NABL (National Accreditation Board for Calibration and Testing Laboratories) accreditation in 2. Received ISO 91:28 certification in 21 and received International Accreditation from CAP (College of American Pathologists). Having strong presence in North India domestic market, the company gets 72% of business from north India. The company has 4 employees including full time consultants, pathologists, phlebotomists and radiologists. Cash Flow (Rs. Mn) Exhibit 3: Revenue Segmentation (%) FY16 FY17E FY18E PBT 27 226 2515 Depreciation 283 384 47 Interest (net) 5 8 1 Tax (687) (716) (889) Changes in WC 2155 2388 2968 CF from Operations 1468 1672 279 Capex (441) (558) (61) Investment (922) Others (155) CF from Investing (1518) (558) (61) Dividends (156) (189) (189) Others 16 (8) (1) CF from Financing 4 (198) (199) Change in Cash (46) 916 127 FIIs 29.3% DIIs 6.2% Others 5.9% Walk-in Patients 67.% Promoters 58.7% Institutions (Super specialised) 33.% Source: BSE, Karvy Research 2
Industry Outlook Healthcare comprises hospitals, medical devices, clinical trials, outsourcing, telemedicine, medical tourism, health insurance and medical equipment. The Indian healthcare sector is growing at a fast pace due to its strengthening coverage, services and increasing expenditure by public as well as private players. The Department of Health Research (DHR) planned to establish a 3-tier Viral Research & Diagnostic Laboratories (VRDLs) throughout the country. This Scheme was approved by the Cabinet Committee on June 27, 213 for implementation during the 12th Plan Period (213-14 to 216-17). The aforesaid scheme entails establishment of 1 Regional Level Labs, 3 State Level Labs and 12 Medical College Level Labs in the State Government Medical Colleges for timely diagnosis and management of viral epidemics and new viral infection at an estimated cost of Rs. 6468 Mn (Central Share Rs. 4851 Mn + State Share Rs. 1616 Mn). The geographic spread of the laboratories is ensured by establishing the labs across the country. The Government initiative would be of Public Private Partnership (PPP) model. India has a competitive edge over its peers of Asia and western countries with large pool of well trained medical professionals; and also in terms of cost of surgery in India which is about one-tenth of that in the USA or western Europe. The overall Indian healthcare market today is worth about US$1 Bn and is expected to grow to US$28 Bn by 22, at a CAGR of 22.9%. The global healthcare expenditure is increasing due to rising incomes, easier access to high-quality healthcare facilities and greater awareness of personal health and hygiene. Greater penetration of health insurance aided the rise in healthcare spending, a trend likely to intensify in the coming decade. Economic prosperity is driving the improvement in affordability for generic drugs in the market. Exhibit 4: Indian Healthcare sector growth trend (US$ Bn) 3 25 28 2 15 16 1 1 5 45 52 6 68 73 81 28 29 21 211 212 214 215 217E 22E Healthcare sector growth trend (US$ Bn) Source:Health Resource Guide India, Karvy Research Exhibit 5: Global Healthcare Expenditure Forecast, 213-218 1 8 6 7.6 8. 8.4 8.7 9.1 9.5 4 2 213 214 215 216E 217E 218E Global Healthcare Expenditure Forecast, 213-218 (US$ Tn) Source: World Health Organization (WHO) data, Karvy Research Healthcare delivery, which includes hospitals, nursing homes, diagnostic centers and pharmaceuticals, constitutes 65% of the overall market. There is a significant scope for enhancing healthcare services considering that healthcare spending as a percent of Gross Domestic Product (GDP) is rising. The rural India which constitutes of 7% of the Indian population is set to emerge as potential demand source. India requires 6 to 7 additional beds over the next five to six years, indicative of an investment opportunity of US$25-3 Bn. The Indian medical tourism industry is pegged at US$3 Bn per annum, with tourist arrivals estimated at 23. The Indian medical tourism industry is expected to reach US$6 Bn by 218, with the number of people arriving in the country for medical treatment set to double over the next four years. With greater number of hospitals and diagnostic labs getting accredited, receiving recognition and greater awareness on the need to develop their quality to meet international standards. The hospital and diagnostic centers attracted Foreign Direct Investment (FDI) worth US$3.4 Bn between April 2 and December 215, according to data released by the Department of Industrial Policy and Promotion (DIPP). India is a land full of opportunities for players in the medical devices industry. The country has also become one of the leading destinations for high-end diagnostic services with tremendous capital investment for advanced diagnostic facilities, thus catering to a greater proportion of population. With increased private participation, the healthcare sector has also witnessed rise in FDI inflows. The Government of India (GoI) has permitted 1% FDI for all health-related services under automatic route. 3
Indian per capita health spending stands at just $132 (on a PPP-adjusted basis), ranking 145th amongst WHO nations and less than 2% of the $8,632 spent in the United States. India s annual healthcare expenditure stands at just $77 Bn, against $3 Bn in China, despite the fact that India is expected to surpass China as the most populous nation in the next 2 years. Exhibit 6: Indian per capita spending in healthcare ($ Bn) Exhibit 7: Annual Healthcare Expenditure ($ Bn) India $132 India $77 China $3 USA $8632 Source: Healthcare Resource Guide:India, Karvy Research Source: Healthcare Resource Guide:India, Karvy Research Exhibit 8: Highly Fragmented Industry Hospital Based 37.% Diagnostic chain 15.% Standalone centres 48.% Dr Lal Path labs, which is the second largest diagnostic chain in India, has become one of the fastest growing. Diagnostics industry is about 9% of the total healthcare market. The Indian diagnostics industry is about Rs.37 Bn, where unorganized sector consists of 85%; and 48% is of standalone private labs, 37% of hospitals managed labs and the remaining 15% by Diagnostic chains. Of the 15% share of Diagnostic chains, only about 6% share is with the diagnostic chains with pan India presence. Exhibit 9: No. of Clinical Labs of the company 18 172 164 146 12 131 6 213 214 215 216 No.of Clinical Laboratories The company s core markets are northern, eastern and central India and this market is highly fragmented. There are lot of small independent labs, and the company is attempting to make acquisitions from unorganized players. The way they are providing services is creating a consumer facing healthcare brand and also scaling it up by opening lot of franchise collection centers with large pan India network. The company is operating with 172 labs which increased from 131 labs in FY13. The patient service centers increased from 824 centers in 213 to 1559 in 216. DLPL is also penetrating through the pick-up points, where they serve collecting samples from hospitals as well as from small independent labs. Exhibit 1: No. of Patient Service Centers Exhibit 11: No. of Pick-up Points (PUPs) 16 6 12 8 4 824 164 134 1559 4 2 2879 4225 5668 4967 213 214 215 216 No.of Patient Service Centers 213 214 215 216 No.of Pick-up Points (PUPs) 4
The services offered are: y Routine clinical laboratory tests-such as blood chemistry analyses and blood cell counts; Jul 18, 216 y Specialized testing services-such as histopathology analyses, genetic marker-based tests, viral and bacterial cultures and infectious disease tests; and ypreventive testing services-such as screenings for hypertension, heart disease and diabetes. These tests and services in the clinical laboratories are done using sophisticated and computerized instruments. Exhibit 12: India, Highly under-penetrated market 2% 16% 12% 8% 4% 3.1% 4.% 4.% % 4.6% 5.6% 6.% 6.6% 9.1% 9.7% 17.1% India has 85% of unorganized diagnostic segment; and 48% is of independent small labs, 37% being maintained by the hospitals reaching their services to limited patients. There is a huge market to explore in this segment, DLPL is attempting to capture the domestic market with huge network building, acquisitions of independent labs and increasing number of franchisees. It is penetrating with Hub-and-Spoke model through centralized IT platform. The company is promoting its brand awareness, working in the rural areas and testing seasonal diseases at competitive cost for the general public. With strategic acquisitions and partnerships, it is spreading its wings all over the country deepening in the existing markets. What is driving the company with increase in volumes was building trust among the customers, both corporate doctors and individual patients, based on quality and accurate reports, the strong process in the organization and the accreditations making accessible by going closer to the patients. Timely delivery of reports and convenience to the walk-in patients keep them have an edge over the competitors. With increased health consciousness, communicable diseases and weather conditions giving scope for the industry to churn revenues throughout the year. The seasonal business starts from July-September even extend to October, with diseases like dengue, malaria or chicken gunea outbreak. Again from January to March, the cycle resumes. Exhibit 13: Revenue by Geography Exhibit 14: Hub-and-Spoke Model West India 7.% PSC* PSC North India 72.% South India 7.% East India 13.% International 1.% Clinical Lab Reference Lab Clinical Lab PSC PSC PSC PSC, *PSC: Patient Service Center 5
Exhibit 15: Business Assumptions Y/E Mar (Rs. Mn) FY15 FY16 FY17E FY18E Comments Revenue 6596 7913 958 11615 Revenue Growth (%) 18.2 2. 2.2 22.2 EBITDA 156 297 2377 288 EBITDA Margins (%) 23.6 26.5 25. 24.8 PAT (normalized) 957 1322 131 1615 Net CFO 1218 1468 1672 279 Debt Capex (353) (441) (558) (61) Free Cash Flow 865 127 1114 147 Revenues grown to Rs.7913 Mn in FY16 from Rs. 6596 Mn in FY15, representing a YoY of 2.%. The contribution to revenues for FY16 from the North Indian market stood at 72%. The East zone contributed 13%. We estimate that there would be steady increase in sales of about Rs. 958 Mn and Rs.11615Mn in FY17E and FY18E respectively. EBITDA during FY16 showed 34.5% YoY growth to Rs. 297 Mn following healthy accretion to top line and impact from dearness in reagents and consumables. EBITDA reflects the effect of high volumes from dengue testing undertaken in FY16. For FY17E and FY18E, it is expected that there would be 1.5% and 1.7% dip in EBITDA margins respectively, as other expenses are increasing with expansion and building-up capabilities for larger scale of economic benefits. 6
Exhibit 16: Revenue (Rs. Mn) & Revenue Growth (%) 12 9 6 3 32.% 4517 FY13 5579 6596 22.2% 2.2% 23.5% 2.% 18.2% FY14 FY15 7913 FY16 958 FY17E 11615 FY18E 4% 3% 2% 1% % Revenue (Rs. Mn) Revenue Growth (%) Jul 18, 216 On YoY, FY16 has seen a 2.% growth with revenues increasing to Rs.7913 Mn, with the outbreak of seasonal borne diseases like dengue, in Q3FY16. Dr. Lal Path Labs has acquired the small scale labs near Kanpur. With Hub-and-Spoke model, where one central reference lab would act as a hub and the clinical labs and the patient service centers are well integrated to reach out to the patients. With new Regional Reference labs coming up in Lucknow and Kolkata, within a span of 18 months, the diagnostic labs are expected to reach to more patients generating more volumes in sales. Coverage in metros, Tier1 and Tier2 cities, 24*7 access including online collection and home collection with dedicated logistics team stand as strong pillars for the company. We estimate that with all these strengths, the company is expected to grow its revenues to Rs. 958 Mn for FY17E and Rs.11615 Mn for FY18E. Exhibit 17: EBITDA (Rs. Mn) & EBITDA Margins (%) 3 2 1 21.6% 977 FY13 24.8% 26.5% 25.% 24.8% 23.6% 1386 FY14 156 FY15 297 FY16 2377 FY17E 288 FY18E 28% 26% 24% 22% 2% EBITDA (Rs. Mn) EBITDA Margins (%) EBITDA Margin is expected to come down approximately by 1.5% in FY17E and 1.7% in FY18E respectively, compared to EBITDA margins of FY16. The cost of reagents, chemicals, surgicals and laboratory supplies consumed used in the diagnostic healthcare services and tests are the largest expense to the company earlier; but from FY11-FY15, it has been decreased primarily with greater economies of scale, the number of diagnostic healthcare tests and services performed grew, it enabled the process of healthcare tests and services more efficiently at lower costs and the bargaining power with the suppliers. The other expenses are growing YoY indicating they are spending much of their accruals on fees to franchisee patient service centers, rental expenses, sales promotion expenses, periodic remodeling and refurbishing at patient service centers. These expenses are expected to increase in near to mid-term at a rate higher than earlier due to contemplated expansion where higher associated costs are involved. Exhibit 18: EBIT (Rs. Mn) & EBIT Margins (%) 25 2 15 1 5 17.1% 21.3% 22.9% 21.% 2.% 19.4% 773 1113 1278 1814 1992 2473 FY13 FY14 FY15 FY16 FY17E FY18E 25% 23% 21% 19% 17% 15% EBIT (Rs. Mn) EBIT Margins (%) EBIT margins have been increased by 35 basis points at 22.9% for FY16. The company on an average is setting up 15-2 satellite labs yearly, with each lab costing almost Rs. 7.5 Bn to Rs. 1 Bn. In coming years with long term expansions in line, the increased capex maintenance is estimated to bring down the EBIT, as EBIT margin is expected to dip by 1.9% and 1.6% for FY17E and FY18E respectively. Exhibit 19: EPS (Rs.) 21 18 15 12 1.3 14.8 17.7 16. 15.7 19.5 Earnings per share of DLPL is estimated to be at Rs.15.7 and Rs. 19.5 for FY17E and FY18E respectively. 9 FY13 FY14 FY15 FY16 FY17E FY18E EPS (Rs.) 7
Exhibit 2: RoE & RoCE (%) 4% 35% 3% 25% 2% 15% 34.% 34.4% 3.6% 31.3% 28.% 26.1% 26.3% 24.7% 21.1% 21.2% 2.1% 2.3% FY13 FY14 FY15 FY16 FY17E FY18E RoE (%) RoCE (%) DLPL has maintained consistently healthy return ratios. The company s RoE and RoCE are in the range of 26.1% and 24.7% respectively for FY16. We anticipate the company to outperform in the industry with its RoE for FY17E and FY18E at 21.1% and 21.2% respectively; and RoCE in the range of 2.1% and 2.3% in FY17E and FY18E respectively, though there may be a slight dip in percentage terms for FY17E, FY18E vis-a-vis FY16. Its net debt to equity is -.5x and -.6x for FY17E and FY18E respectively, on a consolidated basis. Exhibit 21: Company Snapshot (Ratings) Low High 1 2 3 4 5 Quality of Earnings 33 Domestic Sales 33 Exports 33 Net Debt/Equity 33 Working Capital Requirement 33 Quality of Management 33 Depth of Management 33 Promoter 33 Corporate Governance 33 8
Valuation & Outlook At CMP of Rs.983, Dr. Lal Path Labs is currently trading at P/E of 5.3x on FY18E EPS of Rs.19.5. Based on DLPL s growth prospects and estimated increase in the operations nationwide, we value the company at 1SD P/E of 6.6x of FY18E EPS for the target of Rs.1182. We initiate coverage on DLPL with a BUY rating for a target price of Rs.1182 representing an upside potential of 2% in 9-12 month period. Exhibit 22: PE Band 75 65 55 45 35 Dec-15 Dec-15 Jan-16 Jan-16 Jan-16 Jan-16 Feb-16 Feb-16 Feb-16 Feb-16 Apr-16 Apr-16 Apr-16 Apr-16 May-16 May-16 May-16 May-16 Jul-16 Jul-16 Source: Bloomberg, Karvy Research Average P/E P/E 1SD 2SD -1SD Key Risks yintense competition. yretention of critical staff. ygeographical concentration of small labs. 9
Financials Exhibit 23: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues 5579 6596 7913 958 11615 Growth (%) 23.5 18.2 2. 2.2 22.2 Operating Expenses 317 3645 486 5 618 EBITDA 1386 156 297 2377 288 Growth (%) 41.9 12.6 34.5 13.3 21.2 Depreciation & Amortization 272 282 283 384 47 Other Income 22 29 5 42 52 EBIT 1113 1278 1814 1992 2473 Interest Expenses 2 4 5 8 1 PBT 1192 1397 27 226 2515 Tax 389 433 675 716 889 Adjusted PAT 796 957 1322 131 1615 Growth (%) 44.4 2.2 38.2 (1.6) 24.1 Exhibit 24 Balance Sheet YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash & Cash Equivalents 157 1482 2296 3213 4483 Sundry Debtors 252 31 363 445 542 Inventory 117 143 145 21 228 Loans & Advances 159 457 723 723 723 Investments 828 842 735 735 735 Other current Assets 12 425 71 71 71 Net Block 983 185 1239 1413 1615 CWIP 2 9 41 41 41 Total Assets 3515 4753 6252 749 977 Current Liabilities & Provisions 974 1118 98 14 1127 Debt Other Liabilities 227 225 278 37 347 Total Liabilities 12 1343 1186 1311 1473 Shareholders Equity 83 813 827 827 827 Reserves & Surplus 1512 2598 4239 5351 6777 Total Networth 2315 3411 566 6178 764 Total Networth & Liabilities 3515 4753 6252 749 977 1
Exhibit 25: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E PBT 1192 1397 27 226 2515 Depreciation 272 282 283 384 47 Interest 2 4 5 8 1 Tax Paid (53) (534) (687) (716) (889) Inc/dec in Net WC 1482 1752 2155 2388 2968 Other non cash items 16 69 (139) (31) 36 Cash flow from operating activities 98 1218 1468 1672 279 Inc/dec in capital expenditure (328) (353) (441) (558) (61) Inc/dec in investments (734) (845) (922) Others 165 64 (155) Cash flow from investing activities (897) (1135) (1518) (558) (61) Dividend paid (97) (14) (156) (189) (189) Interest paid (5) (1) (8) (8) (1) Others 97 168 Cash flow from financing activities (12) (8) 4 (198) (199) Net change in cash (19) 75 (46) 916 127 Exhibit 26: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) 24.8 23.6 26.5 25. 24.8 EBIT Margin (%) 2. 19.4 22.9 21. 21.3 Net Profit Margin (%) 14.4 14.6 16.8 13.8 14. Dividend Payout Ratio (%) 12.1 1.9 11.8 12. 9.7 Net Debt/Equity (x) (.5) (.4) (.5) (.5) (.6) RoE (%) 34.4 28. 26.1 21.1 21.2 RoCE (%) 31.3 26.3 24.7 2.1 2.3 Exhibit 27: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) 14.8 17.7 16. 15.7 19.5 DPS (Rs.) 1.8 1.9 1.9 1.9 1.9 BV (Rs.) 43.1 63.1 61.3 74.7 92. PE (x) 66.3 55.5 61.5 62.5 5.3 P/BV (x) 22.8 15.6 16. 13.2 1.7 EV/EBITDA (x) 58.7 52.1 38.8 34.2 28.2 EV/Sales (x) 14.6 12.3 1.3 8.5 7. 11
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