AVOID: Dr Lal Pathlabs Limited- Research Report By Angel

Dr Lal PathLabs is one of the largest companies in the Indian diagnostic industry, having a market share of 12.0% amongst diagnostic chains. It’s one of the fastest growing companies in the space with strong profitability. Dominant player in the industry: The company, according to our estimates, is the second largest player with an estimated ~12% market share in the organised diagnostic chains. It has grown at a CAGR of 20.7% over FY2013-15, primarily driven by volumes which grew 16.7% during the period, while the rest was on back of pricing power. Thus, given the company’s dominance in its industry and its cash flows (~Rs148cr cash on the books of the company as of FY2015), we believe that the company can easily leverage growth in the diagnostic healthcare services industry in India, which will grow by a CAGR of 16-17% till FY2018. Strong financials: The company has strong business fundamentals, which are reflected in its financials. It has exhibited a strong 20.7% CAGR on the sales front over FY2013-15, predominately led by volumes and partially on the back of pricing power. On the profitability front, the company has maintained healthy and steady margins in the range of 22-25%. The same has been driven by improvement in operating efficiency, including prudent management of costs and expenses and lower capital expenditure due to use of a “reagent rental” model. Outlook and Valuation: The company is valued at a P/E multiple of 43.5x-44.3x its FY2016E EPS at the lower and upper end of the price band respectively, assuming industry led growth. On P/BV basis, the company trades at 10.3x-10.5x FY2016E, which factors in a higher-than-industry growth and continuance of the current profitability of the business, which the company has been maintaining over the past few years. However, though we believe that the company can sustain the profitability trend and is fundamentally strong, we believe that the valuations demanded through the IPO factor in the company’s business fundamentals as well as the scarcity premium with it being the only listed company in the space. Hence, we recommend an “Avoid” on the issue. Investors could consider waiting for a possible correction in the stock price post the listing of the IPO.