Margin pressures likely to cap upside for Dr Lal Pathlabs: Analysts

The hit to revenues led to a significant impact on the operational performance with reported operating profit falling 49 per cent over the year-ago quarter.
The June quarter performance of Dr Lal Pathlabs was severely affected by the Covid-19 pandemic, denting volumes and revenues. After a 62 per cent fall in volumes in April, patient testing increased gradually and the decline was restricted to 25 per cent in May. The company posted a 3 per cent increase in June. 

Gains towards the end of the quarter were led by opening up of more centres across its network, market share gains from the unorganised segment, and a favourable base. The company highlighted non-Covid tests in July were at 90 per cent of normal levels, though a complete recovery could be expected only in the December quarter. 

The 29 per cent fall in volumes in the quarter was responsible for revenues declining 21 per cent year-on-year (YoY). Aided by higher Covid volumes, realisations, however, improved 11 per cent. Excluding Covid tests, the revenue fall was steeper at 37 per cent.

 

 
The hit on revenues led to a significant impact on the operational performance, with the reported operating profit falling 49 per cent over the year-ago quarter. Margins contracted by 10 percentage points to 18.2 per cent. Margins have been on the decline since the September quarter last year when they had hit 30 per cent. 

Still, analysts are positive on the prospects of the company, given its focus away from the NCR region, which now accounts for 39 per cent of revenues. The de-risking strategy should gain momentum if there is an inorganic expansion, especially in the south and west regions. 

 
Analysts at Edelweiss Securities believe the shift from unorganised to organised diagnostics will be a structural tailwind, though move away from NCR could dent margins in the near term.

Even as the results were above estimates, the stock is down 7 per cent from July highs as valuations are captured in the price. Nomura’s analysts believe the company’s track record of operational excellence, balance sheet, and consolidation gains in the diagnostic market are adequately reflected in the stock price. The stock, which is up 47 per cent from its March lows, is trading at over 50 times its FY22 earnings estimates.



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