4 Recommendation BUY Dr Lal Path Labs (DLPL) is India s second largest provider of diagnostic and related healthcare tests and services in India. Dr Lal Path Labs has strong CMP Rs 973 pedigree of promoters. Target Price 15-20% Sector Stock Details Healthcare BSE Code 539524 NSE Code Bloomberg Code LALPATHLAB DLPL IN Market Cap (Rs cr) 7945 Free Float (%) 41.39 52- wk HI/Lo (Rs) 1279/793 Avg. volume BSE+ NSE (Qrty) 194,710 Face Value (Rs) 10.0 Dividend (FY 16) 24.5% Shares o/s (Cr) 8.3 Relative Performance 1Mth 3Mth 1Yr DLPL 4.3% -9.7% 3.3% Sensex 3.7% 12.3% 18.4% 1300 1200 1100 1000 900 800 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Shareholding Pattern 31 st Dec 16 Promoters Holding 58.61 Institutional (Incl. FII) 12.93 Corporate Bodies 23.12 Public & others 5.34 Runjhun Jain Sr. Research Analyst 022 3926 8177 runjhun.jain@nirmalbang.com Investment Rationale Growing Industry: CRISIL Research estimates the size of the diagnostics industry at around Rs 377 billion in 2014-2015 and expects it to grow by a CAGR of 16%-17% over the next three years to over Rs 600 billion by 2017-2018 led by Evidence-based treatment which is slowly becoming the norm for many doctors as a correct diagnosis enables correct therapy and faster patient recoveries. Organised players eating up unorganised market share: With inherent cost efficiencies in their business model, the chains are able to offer competitive prices as compared with other service providers in the market. Diagnostic chains also focus on creating a better brand name to increase patient walkins. CRISIL Research believes that the share of pan india diagnostic chains in the overall market will increase to 16% by 2017-2018 on account of a robust CAGR of 19% over the next three years. Strong Brand: Dr Lal Path Labs (DLPL) is India s second largest provider of diagnostic and related healthcare tests and services. We believe the company enjoys strong brand recall based on its integrated model and its focus on quality and reliability of diagnostic services. Robust Financials: The company has demonstrated strong growth over last 4-5 years. Sales have grown at CAGR of 23.3% over FY12-16 with higher growth in EBITDA of 24.8% over the same period. EBITDA Margins are on stable to improving trend. DLPL is a net debt free company with strong ROE of 26.3% in FY16. Valuation & Recommendation Between FY12-16 DLPL s revenues grew at CAGR of 23.3% while EBIDTA grew at a CAGR of 24.8% and PAT by 31.1%. We expect DLPL to maintain healthy growth rate of 15-20% going forward as well, on the back of expansion of its base, opening of 2 new national reference laboratories, eating share of standalone laboratories and increase spend by people on preventive and curative healthcare. At the time of IPO the stock was offered at 24x PE on trailing PE however we had justified the premium valuation by comparing it with consumer companies due to its consumer centricity. Post its listing in Dec 15, DLPL has been trading between 40x-50x one year forward PE. However, due to dull Q3FY17, the stock has corrected 33% from its peak. At CMP, the stock is trading at 41x FY18E consensus earnings which we believe gives an attractive opportunity to enter a high quality stock. Considering the healthy balance sheet, improving growth prospects and strong profitability, We recommend BUY on Dr Lal Path Labs for 15-20% upside in 3-6 months. Year Consol Sales (Rs cr) Growth (%) EBITDA (Rs cr) Margin (%) PAT (Rs cr) Margin (%) Adj EPS (Rs) P/E (x) RoE FY13A 451.7 32.0% 97.7 21.6% 55.6 12.3% 6.7 144.5 34.3% FY14A 557.9 23.5% 138.6 24.8% 80.3 14.4% 9.7 100.2 34.7% FY15A 659.6 18.2% 156.0 23.6% 96.4 14.6% 11.7 83.4 28.3% FY16A 791.3 20.0% 209.7 26.5% 133.2 16.8% 16.1 60.3 26.3% 1 P a g e
INVESTMENT RATIONALE Growing Industry India total expenditure on healthcare is 4% of GDP (WHO) which trails not only developed countries (~10%) but also developing countries (5-6%). This is due to underpenetration of healthcare services and lower consumer spending on healthcare. Diagnostic services would have a lower share in overall healthcare spends, yet play a vital role in identifying problem areas and major illnesses. CRISIL Research estimates the size of the diagnostics industry at around Rs 377 billion in 2014-2015 and expects it to grow by a CAGR of 16%-17% over the next three years to over Rs 600 billion by 2017-2018 led by Evidence-based treatment which is slowly becoming the norm for many doctors as a correct diagnosis enables correct therapy and faster patient recoveries. Additionally, increase in literacy rates and disposable income is boosting the preventative healthcare and volume of pathology tests. Organised players eating up unorganised market share The diagnostics industry is highly competitive with the presence of standalone centers, hospital-based labs and diagnostic chains. o Hospital Based centers (37%) o Diagnostic centers (15%; pan india chains 35-40% and regional chains 60-65%) o Standalone centers (48%) A large number of hospitals are also unorganized hence it is safe to assume to that almost 70% of market come under unorganized segment. To counter such intense competition, a diagnostic chain usually opens more collection centers in an area, which enables it to cater to a larger catchment area. Moreover, with inherent cost efficiencies in their business model, the chains are able to offer competitive prices as compared with other service providers in the market. Diagnostic chains also focus on creating a better brand name to increase patient walk-ins through strategies such as organizing health camps, launching testing various packages (where five or six routine tests are offered at lower prices) and offering home collection facilities, and so on. CRISIL Research believes that the share of pan india diagnostic chains in the overall market will increase to 16% by 2017-2018 on account of a robust CAGR of 19% over the next three years. Strong Brand Establishing a strong brand name in diagnostics business is essential as it helps to increase patient walk-ins. Dr Lal Path Labs (DLPL) is India s second largest provider of diagnostic and related healthcare tests and services. We believe the company enjoys strong brand recall based on its integrated model and its focus on quality and reliability of diagnostic services. Hub & Spoke Model DLPL adopts the hub-and-spoke model to extend its catchment area. The components of a hub-and-spoke model typically include a reference lab, satellite labs and collection centers. This helps the company to achieve incremental volume and revenue. Larger volumes also helps it to achieve economies of scale and offers a scalable platform for the continued growth of the business. 2 P a g e
*CC = Collection centers The company s core market is North India (72% of sales) however Central and Eastern India also plays significant role (13% of sales). Currently DLPL has one National Reference Laboratory in New Delhi with 172 other clinical laboratories, 1559 patient service centers and around 5000 pickup points. The company is now expanding further in Central and Eastern India through the construction of regional reference laboratories, including a large, regional reference laboratory in Kolkata and Lucknow combined with the opening of additional smaller clinical laboratories and several new, complementary patient service centers. It is also expanding in Southern and Western India by opening additional clinical laboratories and patient service centers. Robust Financials: The company has demonstrated strong growth over last 4-5 years. Sales have grown at CAGR of 23.3% over FY12-16 with higher growth in EBITDA of 24.8% over the same period. EBITDA Margins are on stable to improving trend. DLPL is a net debt free company with strong ROE of 26.3% in FY16. Being a pioneer in the segment, we believe DLPL would be able to maintain healthy growth rates and stable margins going forward on the back of (i) the growth of its network as well as the expansion of the portfolio of diagnostic and related healthcare tests and services, (ii) improvements in the operating efficiency, including management of costs and expenses, (iii) lower capital expenditure model, including use of a reagent rental model (leasing of equipment), which lowers company s capital expenditures for diagnostic equipment and (iv) its strategy of prioritizing resources and investments in accordance with their significance to the business. 3 P a g e
COMPANY OVERVIEW Dr Lal Path Labs (DLPL) is India s second largest provider of diagnostic and related healthcare tests and services in India. They provide a broad range of diagnostic and related healthcare tests and services for use in core testing, patient diagnosis and the prevention, monitoring and treatment of disease and other health conditions. Their customers include individual patients, hospitals and other healthcare providers and Corporate customers. Dr Lal Path Labs has strong pedigree of promoters. Late Dr. Major S.K. Lal, commenced the business of providing pathology services and maintaining a blood bank in the year 1949. Subsequently, Late Dr. Major S.K. Lal and (Hony.) Brig. Dr. Arvind Lal (current CMD) continued the business. However, the company is run by experienced professionals. Region Wise Breakup International, 1% South, 6% West, 9% East, 13% North, 72% 4 P a g e
QUARTERLY RESULT Stdalone (Rs cr) Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 Q1FY17 Q2FY17 Q3FY17 Net sales 155.8 171.8 659.6 189.3 215.7 188.6 197.7 791.3 222.8 262.2 207.4 Cost of Materials 33.6 37.2 139.2 39.5 48.6 41.7 43.2 172.9 48.4 59.6 44.1 Staff cost 30.4 29.4 134.4 34.6 57.8 12.0 32.4 136.8 37.5 42.1 41.1 Other Exps 53.5 61.4 230.1 65.9 73.0 64.9 68.0 271.8 76.5 80.6 75.3 Total Expenses 117.6 128.1 503.6 140.1 179.4 118.5 143.6 581.6 162.4 182.4 160.5 EBITDA 38.3 43.8 155.9 49.2 36.3 70.1 54.1 209.7 60.4 79.8 46.9 margins 24.6% 25.5% 23.6% 26.0% 16.8% 37.1% 27.4% 26.5% 27.1% 30.4% 22.6% Depreciation 7.3 7.9 28.2 6.5 7.1 7.4 7.3 28.3 6.5 6.7 7.1 EBIT 30.9 35.9 127.7 42.7 29.2 62.6 46.9 181.4 53.9 73.1 39.9 Interest 0.0 0.4 0.4 0.0 0.2 0.1 0.3 0.5 0.0 0.0 0.1 Other income 3.2 3.5 12.4 4.1 5.1 4.4 6.2 19.8 6.0 6.3 6.8 PBT 34.2 39.0 139.7 46.8 34.1 67.0 52.8 200.7 59.9 79.4 46.5 Tax 11.3 10.3 43.3 15.9 11.0 22.5 18.1 67.5 19.8 26.5 15.5 Tax rate 33.1% 26.3% 31.0% 33.8% 32.2% 33.6% 34.4% 33.6% 33.0% 33.4% 33.3% MI & EO 0.2 0.0 0.8 0.2 16.9-16.3 0.2 1.0 0.4 0.3 0.1 PAT 22.7 28.8 95.7 30.8 6.2 60.8 34.4 132.2 39.8 52.5 30.9 Equity Capital 82.8 82.8 82.8 82.8 82.8 82.8 82.8 82.8 82.8 82.8 82.8 FV 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 EPS 2.7 3.5 11.6 3.7 0.7 7.3 4.2 16.0 4.8 6.3 3.7 Q3 results were impacted due to demonization as business was highly dependent on physical cash paying patients. Hence the volume was subdued at 5% and sales growth came down to 10% from average 20% earlier. Despite this, the management is confident of growth. Hub and Spoke Model No of Clinical Labs FY13 131 FY14 146 FY15 164 FY16 172 No of Patient Service Centers FY13 824 FY14 1064 FY15 1340 FY16 1559 No of Collection centers FY13 2879 FY14 4225 FY15 5668 FY16 4967 5 P a g e
PEER COMPARISON Given the strong cash flow generation, robust return ratios and healthy financials we believe it is more appropriate to compare DLPL with consumer companies. We are also comparing it with Thyrocare technologies (only other listed Diagnostics companu) however we believe that DLPL would always be valued at premium to Thryocare due to brand value it holds. Godrej Consumer Jubilant Foods Asian Paints Thyrocare Dr Lal Path FY16 Sales 8968 2438 14092 241 791.3 CAGR FY12-16 16.5% 24.4% 10.1% 21.9% 23.3% EBITDA FY16 1624 277 2769 100 214.8 margins 18.1% 11.4% 19.7% 41.5% 27.1% WC Cycle 0.50-1.45 1.14 0.93-0.06 ROCE 16.6% 10.8% 31.6% 16.4% 26.2% ROE 15.0% 10.8% 31.1% 16.4% 26.2% FY18E EPS 44.7 20.5 23.65 18 23.7 FY18E P/E 37.4 54.2 45.7 38.9 39.8 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. Also, recently the management has indicated that the sector has seen heightened levels of PE backed deals which is increasing the competitive intensity is the Diagnostics space. 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. Margin dilution: The management has been reriterating that margins are expected to come down over the years as the company is in investing in new territories. 6 P a g e
VALUATION AND RECOMMENDATION Between FY12-16 DLPL s revenues grew at CAGR of 23.3% while EBIDTA grew at a CAGR of 24.8% and PAT by 31.1%. We expect DLPL to maintain healthy growth rate of 15-20% going forward as well, on the back of expansion of its base, opening of 2 new national reference laboratories, eating share of standalone laboratories and increase spend by people on preventive and curative healthcare. The strength of the business model can be seen from the first 6MFY17 results. It posted sales growth of 20% with ~700 bps improvement in margins to 29%. Though the management has reiterated that the margins are likely to come off slightly on account of new centers commencement, we believe EBITDA margins would settle somewhere near FY16 level of 26-27%. Q3FY17 was an aberration and we expect growth to normalize from Q1FY18 onwards. At the time of IPO the stock was offered at 24x PE on trailing PE however we had justified the premium valuation by comparing it with consumer companies due to its consumer centricity. The company has zero working capital and 4.2x asset turnover which enables the company to have higher scability with healthy ROCE. Post its listing in Dec 15, DLPL has been trading between 40x-50x one year forward PE. However, due to dull Q3FY17, the stock has corrected 33% from its peak. At CMP, the stock is trading at 41x FY18E consensus earnings which we believe gives an attractive opportunity to enter a high quality stock. Considering the healthy balance sheet, improving growth prospects and strong profitability, We recommend BUY on Dr Lal Path Labs for 15-20% upside in 3-6 months. 7 P a g e
Financials Consolidated Rs cr Profit & Loss FY13A FY14A FY15A FY16A Balance Sheet FY13A FY14A FY15A FY16A Net Sales 451.7 557.9 659.6 791.3 Share Capital 5.0 80.3 81.3 82.7 % change 32.0% 23.5% 18.2% 20.0% Reserves & Surplus 157.0 151.2 259.8 423.9 EBITDA 97.7 138.6 156.0 209.7 Net Worth 506.6 231.5 341.1 506.6 EBITDA margin 21.6% 24.8% 23.6% 26.5% MI & Share Appln 1.6 1.8 2.3 3.6 Depn & Amort 20.4 27.2 28.2 28.3 Total Loans 0.4 0.9 0.0 0.0 Operating income 77.3 111.3 127.8 181.4 Other LT Liab 10.9 14.4 11.8 14.0 Interest -0.1-5.6-9.0-14.2 Trade Payables 36.8 39.3 42.6 52.5 Other Income 2.8 2.2 3.0 5.0 Other CL 57.3 63.6 77.6 48.5 PBT 80.2 119.2 139.7 200.7 Total Liabilities 269.0 351.5 475.3 625.2 Tax 24.6 38.9 43.3 67.5 Net Fixed Assets 98.6 98.3 108.5 123.9 MI & EO 0.0 0.0 0.0 0.0 Capital WIP 0.5 0.2 0.9 4.1 PAT 55.6 80.3 96.4 133.2 Goodwill 27.9 41.6 41.6 41.7 PAT margin (%) 12.3% 14.4% 14.6% 16.8% Investments 54.8 8.6 37.9 64.3 Sh o/s - Diluted 8.3 8.3 8.3 8.3 Cash & Bank 21.5 105.7 148.2 229.6 Adj EPS 6.7 9.7 11.7 16.1 Inventories 8.6 11.7 14.3 14.5 Cash EPS 9.2 13.0 15.1 19.5 Debtors 19.8 25.2 31.0 36.3 Qtrly-Stdalone Mar.16 June.16 Sept.16 Dec.16 L&A & Others 37.3 60.5 92.9 110.7 Revenue 197.7 222.8 262.2 207.4 Total Assets 269.0 351.5 475.3 625.2 EBITDA 54.1 60.4 79.8 47.0 Cash Flow FY13A FY14A FY15A FY16A Dep & Amorz 7.3 6.5 6.7 7.1 Op CF before tax 97.7 138.6 156.0 209.7 Op Income 46.9 53.9 73.1 39.9 Change in WC -16.5-12.3-20.5-53.6 Interest 0.3 0.0 0.0 0.1 Tax -24.6-38.9-43.3-67.5 Other Inc. 6.2 6.0 6.3 6.7 CF from Operation 56.6 87.3 92.2 88.6 PBT 52.8 59.9 79.4 46.5 Capex -18.9 0.4-0.8-191.3 Tax 18.1 19.8 26.5 15.5 Oth Inc & Investme -59.1 41.7-32.2-8.0 EO 0.0 0.0 0.0 0.0 CF from Investing -78.0 42.0-32.9-199.4 PAT 34.4 39.8 52.5 30.9 Financing EPS (Rs.) 4.2 4.8 6.3 3.7 Diviend Paid 0.0 0.0 0.0 0.0 Performance Ratio FY13A FY14A FY15A FY16A Share Capital 11.6 75.3 1.0 1.4 EBITDA margin(%) 21.6% 24.8% 23.6% 26.5% Loans 0.0 0.5-0.9 0.0 EBIT margin (%) 17.1% 20.0% 19.4% 22.9% Interest 0.1 5.6 9.0 14.2 PAT margin (%) 12.3% 14.4% 14.6% 16.8% Others 7.9-126.5-25.8 176.6 ROE (%) 34.3% 34.7% 28.3% 26.3% CF from Financing 19.6-45.1-16.7 192.2 ROCE (%) 47.5% 47.9% 37.5% 35.8% Net Chg. in Cash -1.8 84.2 42.5 81.5 PAT growth (%) 23.2% 100.2% 83.4% 38.2% Cash at beginning 23.3 21.5 105.7 148.2 Debt/Equity (x) 0.0 0.0 0.0 0.0 Cash at end 21.5 105.7 148.2 229.6 Valuation Ratio FY13A FY14A FY15A FY16A Per Share Data FY13A FY14A FY15A FY16A PE (x) 144.5 100.2 83.4 60.3 Adj EPS 6.7 9.7 11.7 16.1 Price/BV (x) 6.0 4.2 2.9 1.9 BV per share 19.6 28.0 41.3 61.3 EV / Sales 17.8 14.2 12.0 9.9 Cash per share 2.6 12.8 17.9 27.8 EV / EBITDA 82.1 57.3 50.6 37.2 Dividend per share 0.0 0.0 0.0 0.0 8 P a g e
Disclaimer: Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. We have been granted certificate of Registration as a Research Analyst with SEBI. Registration no. is INH000001766 for the period 23.09.2015 to 22.09.2020.NBSPL or its associates hold more than 1% financial interest/beneficial ownership in the company covered by Analyst. NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001 Fax. : 022 3926 8010 9 P a g e