I don’t have any specialized knowledge of this. Anecdotally at least, nothing much has changed post Covid from the end user perspective, except that the people are asking for home pick up of samples and online delivery of reports. This is just a channel change but doesn’t create incremental demand. I haven’t heard of doctors insisting on a particular Lab’s report or prescribing more tests than before. Are people taking more tests? Depends on whom you ask. A nutrition company would say people have become more health-conscious post Covid, which means more attention to diet, exercise and hygiene and less sickness! I don’t know whom to believe but we should take management’s lofty claims with a pinch of salt.
I had a tracking position in this sector last year but exited soon as I thought there was too much hype and valuations were sky high. Last year’s numbers were all distorted due to Covid and using them for any analysis would be misleading. Even though companies reported Covid & non-Covid revenues separately, last year even the costs (e.g. solvents, equipment, rent, manpower etc.) would have got distorted, for which there was no break-up. I had thought of revisiting the sector again this year but there are many other issues as well.
Firstly, businesses are flush with funds and making acquisitions. Acquisitions almost always lead to sub-optimal capital allocation and year-on-year comparisons become difficult. Secondly, business models are changing – the so called “asset light” model of growing through the franchise mode is becoming popular. Even though this may sound attractive, one must remember that for this model to sustain in the long run, the franchisee has to make money. Underlying business viability cannot improve just by shifting the burden of rent & equipment to someone else. Thirdly, there are the new generation start ups entering the space. While I am not very gung-ho about the threat posed by them, some with deep pockets like the Tatas will have a lot of nuisance value.
Overall, the whole sector is in a state of flux, and it is difficult to visualize how the industry will look 5 years from now. Somewhere I saw a Tweet by Thyrocare ex-promoter boasting that he exited at the right time! So, I thought better to stay away from this sector for now.
Sorry if I exceeded my brief here but writing this down just helped me clarify my thoughts. If I am proven wrong, I will change my mind and enter again!
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