Dr Lal PathLabs' Q1FY20 results (Neutral) - Inline quarter

Q1FY20 result highlights

• DLPL reported sales of Rs3.4b (+15% yoy; Q4:Rs3b) vs est of Rs 3.3bn led by a +16% volume growth (4.9m patients tested; est 4.8m)
• Volume improvement was partially offset by a dip in realisation/patient to Rs684 (-1% yoy) vs our est of Rs696. Mgt cited a higher contribution from cities outside Delhi-NCR for increase in volumes as well as reduced realization. While Delhi-NCR volumes grew 11%, RoI volumes grew 19%.
• GMs came in higher at 78.8% (78.3% in Q4) vs our est of 78.0% while SG&A cost stood inline. Reported EBITDA stood higher at Rs0.95bn. Adj. for Ind AS 116, adj. EBITDA stood at Rs0.87bn (16% yoy) vs est of Rs0.83bn with adj. margins of 26% (22% in Q4) vs est of 25.1%.
• Reported PAT stood higher at Rs0.59bn. Adj. PAT at Rs0.61bn (22% yoy) vs our est of Rs0.57bn.
• DLPL aim to maintain the current volume growth momentum and will continue to focus on improving test mix.  No price hikes are planned in the near term. Cost optimisation continues to be a key focus. Continue to explore inorganic growth opportunities.
• Mgt expects RoW volume growth to keep outpacing growth in Delhi-NCR. While this should adversely impact realization / patient (RoW realisation are ~70% of Delhi-NCR), mgt doesn’t see any adverse impact on profitability per se due to lower operating costs in the RoW markets.

Impact on financials: Maintain earnings estimates

Valuations & view

The fragmented but steadily consolidating Indian diagnostics industry is estimated to post 14-16% CAGR over FY18-20E implying significant opportunities for stronger organised players like DLPL. While the macro story for the diagnostic space remains exciting, increasing competitive intensity along with pricing pressures is beginning to burden the organic profitability growth even of industry leaders. This is reflected in DLPL’s 12% CAGR EBITDA growth over FY16-19. With meaningful price hikes still unlikely in the near term, DLPL’s future profitability growth is likely to stay muted with any change in government regulations, mainly price caps, continuing to be a potential risk. At current price, valuations are rich and offer limited upsides. Maintain Neutral with a price target of Rs1,104 (35x FY21e). DLPL’s ability to leverage ~Rs9.2bn cash on books (FY21E) to generate value accretive inorganic growth opportunities remains a potential upside trigger.