Coronavirus pandemic: Stocks of diagnostic firms could prove safe bets

Prospects remain firm for diagnostic labs led by rising preventive healthcare awareness and increasing inclusion in health insurance
Pathology labs remain in focus in view of news pertaining to the government reaching out to private players for Covid-19 testing. On Sunday, two of them — Thyrocare and Metropolis Healthcare — got final government clearance to start testing Covid-19 among patients.

Among companies in the organised space, top diagnostic chains (SRL Diagnostics, Dr Lal PathLabs, Metropolis Healthcare, Thyrocare and Apollo Hospitals) together have more than 100 accredited labs. This indicates that they will also be able to quickly on-stream their labs to start testing, say analysts.

However, challenges like bureaucracy, availability of skilled manpower, logistical infrastructure, and reimbursement for private players need to be addressed first for an efficient rollout, say analysts at CLSA. Thus, the developments on the same will be watched and the impact on earnings can be ascertained after clarity, particularly regarding reimbursements.

Thyrocare told Business Standard that the cost of testing is Rs 2,500, besides a collection charge of Rs 1,000 and around Rs 1,000 for the cost of protective equipment (total Rs 4,500). If samples come directly to its labs, Thyrocare will charge only Rs 2,500.

Nevertheless, the prospects remain firm for diagnostic labs led by rising preventive healthcare awareness and increasing inclusion in health insurance, among other factors. The stocks have corrected significantly in the recent market crash. Though some more correction is not ruled out, healthcare stocks are being looked at as defensive bets, say analysts.

Players like Metropolis and Dr Lal PathLabs have continued expanding through organic and inorganic routes. Metropolis had acquired four laboratories in Surat, consolidating its leadership in western India, while Dr Lal PathLabs had completed its acquisition of a majority stake in a referral pathology in Gujarat to expand its presence in the western region. Analysts at Anand Rathi Research say the next leg of growth for Dr Lal’s is expected to be driven by western and southern India, as the management focuses on growth via acquisitions.

The top pathological companies are already seeing robust volume growth. While Metropolis recorded 17.5 per cent year-on-year jump in number of tests during the December quarter, its revenue per patient improved to Rs 923 from Rs 898 in the quarter. Dr Lal, too, had seen its volumes improve 11.5 per cent year-on-year while its per-patient realisation had grown marginally to Rs 688 from Rs 683 a year ago.

Thyrocare, which had earlier concentrated on market share gains, is now seeing margin expansion. Price hikes and a franchisee push in the wellness business helped it expand margins by 300 bps to 40 per cent (pre-Ind AS) during the December quarter. The management expects to maintain 40 per cent plus margins going ahead.

Overall, after correction, the above-mentioned stocks are also trading at reasonable valuations now.

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