Buy Dr. Lal Pathlabs, target Rs 1,320: CLSA

CLSA has a buy call on Dr. Lal Pathlabs with a target price of Rs 1,320.

The current market price of Dr. Lal Pathlabs is Rs 964.95.

Time period given by the asset management firm is one year when Dr. Lal Pathlabs price can reach the defined target.


CLSA's view on the company:
For the third consecutive quarter, Dr Lal reported 25%+ sample volume growth, but this came with a realisation decline of 6 per cent. Revenue growth of 17 per cent was in-line, but margins were 50bps ahead of expectations due to operating leverage.

The company remains completely focused on volume growth buoyed by its new bundled offerings and Kolkata lab operationalisation. Competitive intensity remains stable and volumes are likely to continue moving from unorganised to organised. We increase our volume assumptions, but moderate pricing, leading to 2-1 per cent EPS increase for FY19/FY20CL. We retain BUY with an unchanged TP of Rs1,320.

In-line sales, 50bps beat on Ebitda margin: Dr Lal’s 1QFY19 revenue was at Rs2.9bn, up 17 per cent YoY, in-line with our estimates. This was led by 25 per cent volume growth and 6 per cent YoY decline in pricing. Ebitda margin of 25.7 per cent was down 60bps YoY, but 50bps ahead of estimates. Profits were in line with estimates at Rs494m up 12 per cent YoY. Kolkata-related costs have reflected for the full quarter. Fees to collection centre moved up to 12.5 per cent of sales vs 11.8 per cent in 1QFY18, indicating greater volume growth being driven by franchisees.

Continued focus on volume-led growth: Dr Lal continues to focus on volume growth, reflected in the third consecutive quarter of 25 per cent YoY volume growth. The company is not planning to increase price anytime soon but will try to harmonise prices across geographies. Dr Lal’s Kolkata facility is now fully operational. It expects to achieve cash-breakeven in three years and is looking to capture ~15 per cent share in the region. For FY19, management expects revenue growth of 16 per cent led completely by volumes.

Stable competitive scenario: Dr Lal’s management said that competitive intensity in the industry remains stable. The company is also working with aggregators but with the same price as their own offerings. The company has been seeing increasing volumes from mom-and-pop stores to organised players. Dr Lal expects consolidation in the sector with more and more unorganised players becoming collections centres for organised players.

Retain BUY: We increase our volume assumptions but moderate pricing post 1QFY19 results, leading to 2/1 per cent EPS increase for FY19/FY20. Retain BUY with TP of Rs1,320.