Dr. Lal Pathlabs Ltd. (DLP) is a provider of diagnostic and related healthcare tests and services in India. It provides a range of diagnostic and related healthcare services which are used in core testing, patient diagnosis and the prevention, monitoring and treatment of disease and other health conditions. DLP is coming with an initial public offering (IPO) of 11.6mn shares in offering to raise around Rs. 6,380mn, with subscription starting from 08 th Dec. 2015. The issue will close on 10 th Dec. 2015. Not more than 50% of the issue will be allocated to qualified institutional buyers (QIBs). Further, not less than 15% of the issue will be available for non-institutional bidders and the remaining 35% for retail investors. Net proceed from the issue will be used for following purpose: The company will not receive any proceeds from the issue. All the proceeds will go to the selling shareholders. To provide liquidity and benefits of listing to the existing shareholders Valuation & Recommendation: DLP is the first healthcare diagnostic company to be listed, hence there are no listed comparable peers. The company has recorded strong financials; i.e top-line, EBITDA and PAT grew by 29.1%, 28.8% and 32.9% CAGR, respectively, over FY11-15. Over the same period, EBITDA and PAT margins stood in the range of 22%-25% and 12%-14%, respectively. Moreover, cash flow from operations increased by 23.7% CAGR. RoE stood in the range of 28%-38%. At higher price band, the company s shares are available at a P/E multiple of 48.4x to its FY15 earnings, which seems to be stretched, but given its strong profitability, cash flow generation capacity; brand name and low capex business model, we feel the demanded valuation justified. Thus we recommend investors to SUBSCRIBE for the issue. Recommendation Price Band Rs. 540 - Rs. 550 Retail Discount Rs. 15 per share Total Issue Size (OFS) Rs. 6,380mn SUBSCRIBE Bidding Date 08 th Dec. 10 th Dec. 2015 Book Running Lead Manager Registrar Sector/Industry Promoters Kotak Mahindra Capital Company Ltd. and Citigroup Global Markets India Pvt. Ltd. Link Intime India Pvt. Ltd. Healthcare (Hony.) Brig. Dr. Arvind Lal, Dr. Vandana Lal and Eskay House (HUF) Shareholding Pattern Pre-Issue Post-Issue Promoters 63.7% 58.7% Institutions 32.2% 23.2% Non-Institution 4.1% 18.1% Total 100.0% 100.0% Retail Application Money at Higher Cut-Off Price per Lot Number of Shares per Lot 20 Application Money Rs. 10,700 Cheque Payable to Dr Lal PathLabs Public Issue Escrow - R Sahil Nandkumar Equity Research Analyst (022-6707 9999; Ext: 914) Email: sahil.nandkumar@choiceindia.com FY11 FY12 FY13 FY14 FY15 H1 FY16 Total Operating Revenue 2,372.7 3,422.1 4,516.6 5,579.5 6,595.9 4,050.4 Total Operating Expenditure (1,806.3) (2,557.0) (3,540.1) (4,193.9) (5,036.4) (3,195.0) EBITDA 566.3 865.1 976.6 1,385.5 1,559.5 855.4 Depreciation Charge (136.0) (198.3) (204.0) (272.3) (281.9) (135.9) Finance Cost (7.8) (25.3) (4.4) (2.0) (4.1) (1.9) Finance Income 17.2 14.5 5.7 58.4 94.1 65.0 Other Income 7.7 8.2 28.2 22.4 29.3 26.7 Exceptional Item 0.0 0.0 0.0 0.0 0.0 (166.3) Reported PAT 447.3 664.2 802.0 1,192.1 1,397.0 643.0 Restated EPS (Rs.) 3.5 5.4 6.7 9.6 11.4 4.5 Restated BVPS (Rs.) 11.2 14.0 19.6 28.0 41.3 49.5 EBITDA margin (%) 24.1% 25.5% 22.1% 25.1% 24.0% 21.6% Reported PAT Margin (%) 12.4% 13.2% 12.2% 14.3% 14.3% 9.2% RoE (%) 31.8% 38.9% 34.3% 34.7% 27.9% 9.2% RoCE (%) 36.5% 52.6% 44.4% 44.5% 35.9% 17.2% * Represents per share calculation based on number of shares o/s post issue; IPO UPDATE 1
Healthcare Market in India: Underpenetrated Healthcare Markets: As per the Global Health Expenditure database compiled by the World Health organization, India s total expenditure on healthcare stands at 4% of its gross domestic product (GDP) as of 2013. India not only trails behind developed countries in terms of healthcare spending as portion of GDP, but also developing countries such as Brazil, Russia, China and Thailand. This is primarily due to under-penetration of healthcare services and lower consumer spending on healthcare. The government s expenditure on healthcare also ranks lower than other developing countries in terms of general government expenditure on health as a percentage of total expenditure. 18 16 14 12 10 8 6 4 2 0 Total Healthcare Expenditure as % of GDP (2013) 17.1 9.7 9.1 6.6 5.6 4.6 4.0 3.1 Expanding Healthcare delivery Industry: CRISIL Research estimates the Indian healthcare delivery industry at Rs. 3.8tn in FY15 and expects it to grow at a CAGR of 12% and be worth Rs. 6.8tn by FY20. The increase is expected due to changes in demographics, penetration of health insurance, health awareness, rising incomes and increasing opportunities for medical tourism. Indian Diagnostic Industry Diagnostic industry provides useful information for the correct treatment of patient diseases, the services make up a low share of the overall healthcare spends. The industry can be classified into imaging diagnostics and pathology testing services. CRISIL estimated the size of the industry to be at Rs. 377bn in FY15 and expects it to be over Rs. 600bn by FY18 (i.e. CAGR of 16.8%). Pathology business accounts for major share of diagnostic industry due to lower price and increase in prescription. Urban Diagnostic 67% Rural Diagnostic 33% IPO UPDATE 2
Indian Diagnostic Industry (Contd ): India s urban population (28%) contributes up to 67% of the overall diagnostic market revenue. CRISIL Research believes that towns having populations of 0.3mn-1mn are underserviced in terms of diagnostic centers, have the potential to be served in the long term. Demand drivers for the Indian diagnostic Industry: Increase in prescribed diagnostic tests by doctors Demand-supply gap i.e. low penetration of healthcare facilities and increasing demand Growth of lifestyle diseases such as cardiac diseases, diabetes, cancer are expected to boost demand for diagnostic services Rising income levels make quality healthcare services affordable Increasing population and improving life expectancy Business Model of diagnostic centers in India: Diagnostic centers in India can be classified into three types; hospital- based centers, diagnostic chains and standalone centers. They operate in two business segments i.e. pathology and radiology. Below are the business models adopted by the diagnostic centers: Hospital based: Diagnostic centers located within hospitals. Mostly owned by hospital: are also given to third parties to manage Diagnostic Chains: Privately owned diagnostic centers with two or more centers. Operate mostly through a hub & spoke model of collection centers. They adopt the hub & spoke model to expand their networks, which helps to maximize revenues Standalone Centers: They are diagnostic centers with a single center. Majority have a small scale of operations and offer basic diagnostic tests. IPO UPDATE 3
Indian Diagnostic Industry (Contd ): The diagnostic industry in India is a highly fragmented industry with the standalone centers commanding 48% market share followed by the Hospital based labs (37%) and Diagnostic chains (15%). Diagnostic Chains to eat into market share of standalone centers: Diagnostic chains have grown rapidly with the emergence of pan-india players. Historically, standalone diagnostic centers and hospital based diagnostics have dominated the industry. However, modern management tools and private capital have facilitated the expansion of some of the standalone centers since 2000, leading to emergence of large chains. The success of many large chains has also encouraged smaller regional players to adapt the hub & spoke model. Key Factors for success of Diagnostic centers: Establishing strong brand name, as it helps to increase patient walk-ins Wide network of satellite labs and collection centers aligned through the hub and spoke model Strong logistics network, so as to reduce turnaround time from sample collection to final report generation Tie ups with multiple sources so as to generate steady volumes of tests in the initial growth phase of the network in a given region Adopting latest technology and proper maintenance of equipment to ensure quality and accuracy of tests Location is critical for the success of a diagnostic center, hence factors such as competition, age profile and income demographics of target customers should be considered IPO UPDATE 4
Company Introduction: DLP is a provider of diagnostic and related healthcare tests and services in India. It provides a range of diagnostic and related healthcare services which are used in core testing, patient diagnosis and the prevention, monitoring and treatment of disease and other health conditions. The customers include individual patients (largest customer group), corporate customers, hospitals and other healthcare providers. Diagnostics healthcare testing is an essential element in the delivery of healthcare services, as it provides healthcare service providers with useful information for the diagnosis and treatment of diseases. The company offers over 3,495 diagnostic and related healthcare tests and services which include; (i) routine clinical laboratory tests -such as blood chemistry analyses and blood cell counts; (ii) specialized testing services -such as histopathology analyses, genetic marker-based tests, viral and bacterial cultures and infectious disease tests; and (iii) preventive testing services-such as screenings for hypertension, heart disease and diabetes. These tests are performed using sophisticated and computerized instruments in the company s clinical laboratories. DLP s Infrastructure FY13 FY14 FY15 H1 FY16 Clinical Laboratories 131 146 164 172 Total Patient Service Centers 824 1,064 1,340 1,554 Owned patient Service Centers 48 55 69 79 Franchisee patient Service Centers 776 1,009 1,271 1,475 Pickup Points 2,879 4,225 5,667 7,059 As of 30th Sept. 2015, the company has built a national hub and spoke network, that includes its National Reference laboratory in New Delhi, 171 other clinical laboratories, 1,554 patient service centers and 7,059 pickup points. The hub & spoke model, whereby specimens are collected across multiple locations within a region for delivery to a pre designated clinical laboratory for centralized diagnostic testing, provides greater economies of scale and offers a scalable platform for the continued growth. DLP provides pan India services including in large cities such as New Delhi, Mumbai, Bengaluru, Chennai, Hyderabad and Kolkata. The company also has a centralized information technology platform which fully integrates its large network through a common logistics & payments system and tracks operations & internal performance metrics, thereby enabling it to improve the business efficiency. DLP has a sales team of 498 personnel who are divided into two strategic business units, one covering Delhi, certain states of North India and international business, and the other covering rest of India. Most of the laboratories equipment and instruments are acquired from vendors under reagent rental agreements, unless the equipment is not available under such an agreement or the agreement is less cost effective. Some of the major diagnostic laboratory services provider from which the company faces competition are; Fortis/SRL, Metropolis and Thyrocare. DLP has 12 registered trademarks and eight copyright registrations, moreover, it has also applied for the registration of 36 trademarks. IPO UPDATE 5
Company Introduction (Contd ): As of 30th September 2015, the company has 3,253 full time employees and 83 full time consultants engaged on a contractual basis including pathologists, phlebotomists and radiologists, located in India. At present, DLP receives specimens for diagnostic testing at its clinical laboratories in India from the following countries; Bhutan, Sri Lanka, Nepal, Bangladesh, Myanmar, the United Arab Emirates, Oman, Qatar, Kuwait, Kenya, Tanzania and Nigeria. It has no laboratories or testing facilities outside India. However, it is planning to expand its clinical laboratory beyond India. Geographical Revenue Break-up Zone FY13 FY14 FY15 H1 FY16 North India 3,398.4 4,085.4 4,763.7 2,955.6 East India 457.8 670.6 829.3 510.2 South India 239.6 292.9 367.8 222.6 West India 374.6 472.3 565.3 325.4 International 45.7 57.9 69.5 36.2 Total 4,516.2 5,579.1 6,595.6 4,050.0 The company believes that its focus on customers is a critical differentiator in the diagnostic and healthcare industries and, together with its brand recognition for quality services, results in individuals and healthcare providers choosing DLP as their diagnostic healthcare service provider. In FY15 and the six period ended Sep. 30, 2015, the company collected and processed approx 21.8mn samples and 13.4mn samples from approx 9.9mn and 6.2mn patients, respectively. IPO UPDATE 6
Competitive Strengths: Established consumer healthcare brand with focus on quality services to customers: DLP focuses on providing quality diagnostic healthcare services. It offers patient convenient locations for diagnostic healthcare services and efficient service. The company believes that its focus on patients as customers is a critical differentiator in the industry as; (i) in India, patients generally choose their diagnostic healthcare service provider and (ii) patients and healthcare providers seek quality healthcare service providers. Well positioned to leverage upon one of the fastest growing segments of the Indian healthcare industry: As of Sept. 30, 2015, the companies network consist of a National reference laboratory, 171 other clinical laboratories and 1,554 patient services centers. The network has coverage across India, including metropolitans such as New Delhi, Mumbai, Bengaluru and Chennai. The combination of its long operating history, nationwide network and reputation for quality services positions DLP well to take advantage of the Indian diagnostic healthcare service industry. Combination of Hub & spoke model and instrument leasing model: With increase in size of the network, the company is able to achieve greater economies of scale. DLP has incorporated an hub & spoke model, which is scalable and thus provides opportunities for future growth of the business. The reagent rental model (Instrument leasing model) provide economic benefit by lowering capital expenditure for diagnostic equipment as no payment is made on receiving the equipment, but instead the amount is effectively amortized through purchase of reagent inputs necessary to perform the test and services. Scalable and fully integrated Information technology platform: DLP s centralized information technology platform fully integrates its large network through a common logistics and payments system, enabling it to collect sample and payments more efficiently. The centralized technology gives healthcare providers convenient, online access to diagnostic results. The growth of its network is supported by the scalability of its technology platform, which can readily adapt to the increased data requirement of additional clinical laboratories and patient service center. Strong Financial performance: Between FY13-15, top-line grew from Rs. 4,544.8mn to Rs. 6,625.2mn (CAGR of 20.7%), EBITDA margin grew from 22.1% to 24% and profit grew from Rs. 556.5mn to Rs. 950mn (CAGR of 30.7%). The company has a low level of indebtedness. The attractive financial performance is due to growth of network, expansion of tests and services, improvements in operational efficiency, low capital expenditure model and the strategy of prioritizing resources and investments in accordance with importance to business. Business Strategies: Expand market presence: DLP intends to strength its presence in regions in which it operates, with particular emphasis on its core markets of North India as well as Central and Eastern India by opening new franchised patient service centers and regional reference laboratories. The company also has an expansion plans in Southern and Western India by opening additional clinical laboratories and patient service centers. DLP also intends to continue explore expansion opportunities in India through strategic acquisitions and partnership with regional diagnostic healthcare service providers. Increase the breadth of diagnostic healthcare testing and services platform: The company plans to increase the breadth of its diagnostic healthcare testing and services platform through, among other things, the adoption of new, cutting-edge diagnostic healthcare testing technology, as it expects this to increase it sources of revenue and enhance its reputation. It also intends to further grow its corporate customer base by continuing to market its health proposition to corporate decision makers. Continued focus on providing quality services: DLP will continue to focus on the quality and reliability of its diagnostic related healthcare services as it is essential for the success. It will also continue to upgrade technology in order to increase the processing capacity efficiency. The company will also enhance customer experience by further developing its online initiatives and leveraging potential data analytics capabilities. Leverage network efficiency to expand hospital based and other clinical laboratories: DLP plans to increase the number of hospital based clinical laboratories by leveraging the scale and efficiency of its existing network to perform the diagnostic healthcare testing services of these hospitals and other clinical laboratories. The company may seek tie ups with polyclinics as these clinics have limited resources, thus presenting an opportunity for both laboratory management and specialized laboratory testing services. IPO UPDATE 7
Risk and Concerns: 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. IPO UPDATE 8
Consolidated Financial Statements: Consolidated Profit and Loss Statement Particulars (Rs. mn) FY11 FY12 FY13 FY14 FY15 H1 FY16 Revenue from Operations 2,372.7 3,422.1 4,516.6 5,579.5 6,595.9 4,050.4 Cost of reagents, chemicals, surgical and laboratory supplies consumed (608.7) (761.7) (973.0) (1,176.6) (1,391.6) (881.1) Employee benefit expenses (377.9) (537.7) (938.0) (1,015.7) (1,343.9) (924.6) Other Expenses (819.8) (1,257.6) (1,629.1) (2,001.6) (2,300.9) (1,389.4) EBITDA 566.4 865.1 976.6 1,385.5 1,559.5 855.4 Depreciation and Amortization (136.0) (198.3) (204.0) (272.3) (281.9) (135.9) EBIT 430.3 666.8 772.6 1,113.2 1,277.6 719.5 Finance Cost (7.8) (25.3) (4.4) (2.0) (4.1) (1.9) Finance Income 17.2 14.5 5.7 58.4 94.1 65.0 Other Income 7.7 8.2 28.2 22.4 29.3 26.7 Exceptional Item (166.3) EBT 447.3 664.2 802.0 1,192.1 1,397.0 643.0 Tax Expenses (151.9) (212.6) (245.5) (389.4) (447.0) (268.4) Reported PAT 295.5 451.7 556.5 802.6 950.0 374.7 Consolidated Balance Sheet Particulars (Rs. mn) FY11 FY12 FY13 FY14 FY15 H1 FY16 Share Capital 50.6 50.2 50.2 803.1 812.6 822.7 Reserves & Surplus 877.9 1,109.5 1,570.3 1,511.8 2,598.2 3,268.6 Minority Interest 6.5 11.1 16.2 18.4 23.0 23.8 Long Term Borrowings 41.3 0.0 0.0 0.0 0.0 0.0 Deferred Tax Liabilities (Net) 2.7 2.0 1.7 0.2 - - Trade Payables 16.0 31.9 53.2 64.8 84.3 94.8 Other Long Term Liabilities 50.5 63.6 107.1 140.8 115.5 132.6 Long Term Provisions 12.2 15.5 0.5 2.6 2.1 2.1 Short Term Borrowings 141.7 0.1 3.7 8.7 - - Trade Payables 169.5 227.1 314.4 328.4 341.5 537.6 Other Current Liabilities 212.2 71.1 423.6 504.4 585.9 770.0 Short Term Provisions 115.5 188.3 149.2 132.1 190.2 136.6 Total Liabilities 1,696.5 1,770.5 2,690.2 3,515.2 4,753.1 5,788.8 Goodwill (On Consolidation) 182.5 182.5 279.3 415.8 415.8 417.2 Tangible Fixed Assets 707.3 707.0 753.2 770.8 905.6 971.4 Intangible Fixed Assets 233.5 193.4 233.1 211.7 179.5 150.7 Capital Work in Progress 0.3 4.0 5.2 1.7 9.5 17.9 Intangible Assets Under Development - 58.3 - - - - Deferred Tax Assets (Net) 23.2 28.7 128.8 196.3 254.0 298.6 Long Term and Advances 84.0 151.8 85.8 188.1 139.4 241.7 Other Non Current Assets 26.4 25.3 37.4 27.6 32.7 39.9 Current Investments 10.1 47.7 547.7 85.9 379.2 817.1 Inventories 77.5 62.3 86.3 116.6 142.8 160.4 Trade Recievables 96.9 143.3 197.9 251.6 309.6 410.1 Cash And Bank Balance 224.6 134.4 214.6 1,056.7 1,481.9 1,532.8 Short Term Loans And Advances 24.4 28.0 117.3 158.7 457.2 644.5 Other Current Assets 5.9 3.9 3.7 33.9 46.2 86.4 Total Assets 1,696.5 1,770.5 2,690.2 3,515.2 4,753.1 5,788.9 IPO UPDATE 9
Consolidated Financial Statements (Contd ): Cash Flow Statement Particulars (Rs. mn) FY11 FY12 FY13 FY14 FY15 H1 FY16 Net Profit Before Tax 447.3 664.2 802.0 1,192.1 1,397.0 643.0 Depreciation / amortization 136.0 198.3 204.0 272.3 281.9 135.9 Interest expense 7.8 25.3 4.4 2.0 4.1 1.9 Interest income (17.2) (14.5) (5.7) (58.4) (94.1) (65.0) Others 6.7 12.9 238.8 163.1 245.1 413.9 Change in Working Capital 1.8 (0.4) (28.1) (94.5) (321.2) (164.9) Taxes Paid (164.6) (204.6) (334.0) (502.6) (534.3) (248.5) Cash Flow from Operating Activities 417.9 681.3 881.3 973.9 978.5 716.3 Purchase of Fixed Assets (240.7) (211.3) (196.2) (327.6) (352.9) (194.9) Interest Received 27.1 15.5 6.4 29.0 83.4 22.8 Others 27.7 (66.8) (460.5) (598.2) (625.8) (594.3) Cash Flow from Investing Activities (185.9) (262.6) (650.4) (896.9) (895.3) (766.3) Proceeds from Issuance of Equity Share Capital - - 0.1-105.4 115.7 Equity Shares Bought Back (240.0) (66.0) - - - - Proceeds of Long-Term Borrowings 50.0 70.0 - - - - (Repayment) of Long-Term Borrowings (0.1) (124.7) - (4.9) - - (Repayment) Proceeds of Short Term Borrowings 126.8 (141.7) 3.5 4.9 (8.7) - Interest Paid (8.8) (24.5) (1.7) (5.3) (0.5) (0.4) Dividend Paid Including Dividend Tax (149.4) (96.5) (149.9) (96.6) (104.2) (150.0) Cash Flow from Financing Activities (221.5) (383.4) (148.0) (102.0) (8.0) (34.7) Net Cash Flow 10.4 35.3 83.0 (24.9) 75.2 (84.7) Opening Balance of Cash and Cash Equivalents 32.5 44.5 79.8 173.0 157.6 232.8 Closing Balance of Cash and Cash Equivalents 42.9 79.8 162.8 148.0 232.8 148.2 IPO UPDATE 10
Financial Statements (Contd ): Consolidated Financial Ratios Particulars (Rs. mn) FY11 FY12 FY13 FY14 FY15 Revenue Growth Rate (%) 44.1% 32.5% 23.3% 18.3% EBIDTA Growth Rate (%) 52.1% 15.0% 40.1% 12.8% EBIDTA Margin (%) 24.1% 25.5% 22.1% 25.1% 24.0% EBIT Growth Rate (%) 54.1% 18.6% 41.8% 15.1% EBIT Margin (%) 18.4% 19.7% 17.6% 20.3% 19.7% Reported PAT Growth Rate (%) 52.9% 23.2% 44.2% 18.4% Reported PAT Margin (%) 12.4% 13.2% 12.2% 14.3% 14.3% Liquidity Ratios Current Ratio 0.9 0.8 0.7 1.7 2.2 Quick Ratio 0.7 0.6 0.6 1.6 2.1 Interest Coverage Ratio 55.9 26.7 182.4 573.6 322.7 Debt to Equity Ratio 0.2 0.0 0.0 0.0 0.0 Net Debt to EBITDA (0.1) (0.2) (0.8) (0.8) (1.2) Net Debt to Equity (0.1) (0.2) (0.5) (0.5) (0.5) Turnover Ratios Inventory Turnover Ratio 30.7 55.1 52.7 48.0 46.4 Receivable Turnover Ratio 24.6 23.9 23.0 22.3 21.4 Accounts Payable Turnover Ratio 14.0 15.1 14.5 17.1 19.4 Fixed Asset Turnover Ratio 2.1 3.0 3.6 4.0 4.4 Total Asset Turnover Ratio 1.4 1.9 1.7 1.6 1.4 Return Ratios RoE (%) 31.8% 38.9% 34.3% 34.7% 27.9% RoCE (%) 36.5% 52.6% 44.4% 44.5% 35.9% Per Share Data Restated EPS 3.5 5.4 6.7 9.6 11.4 Restated BVPS 11.2 14.0 19.6 28.0 41.3 Restated Cash EPS 5.2 7.9 9.2 13.0 14.9 Restated Operating Cash Flow per Share 5.1 8.2 10.7 11.9 11.8 * Represents per share calculation based on number of shares o/s post issue; IPO UPDATE 11
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