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Thursday, December 03, 2015 Click here for Rating Reckoner
 Dr.Lal Pathlabs
On a steady growth path 
CM RATING45/100
Founded in 1949 by Dr Major S Lal, Dr Lal Pathlabs is a provider of diagnostics and related healthcare tests and services in India. The established consumer healthcare brand in diagnostic services has a catalogue of 1,110 test panels, 1,934 pathology tests and 1,561 radiology and cardiology tests to undertake the entire gamut of routine and specialized tests. Customers include individual patients, companies and institutions, healthcare providers as well as hospital and clinical labs. Through a nationwide network, patients and healthcare providers are offered a broad range of diagnostics and related healthcare tests and services for use in core testing, patient diagnostics and prevention, monitoring and treatment of diseases and other health conditions.

With presence in metros, tier 1 and tier 2 cities, walk-in customers account for the highest share of revenues. There was pan India network of 172 clinical labs, 1,554 patient service centers and 7,059 pick-up points including a National Reference Laboratory in New Delhi end September 2015. About 2.18 crore samples from 99 lakh patients were processed in the fiscal ended March 2015 (FY 2015). About 1.34 crore of samples were collected from 62 lakh patients in the first half ended September 2015.

The business model is integrated through a centralized IT platform. The hub-and-spoke with centralized diagnostic centers provides greater turnaround time and economies of scale.

Currently, north India accounts for 72% of the revenues, east India about 13%, western India 8% south India 6% and international geography 1%. The north Indian market has grown 18%, east India 35%, south India 24%, west India 23% and international 23% in the two years to FY 2015. The aim is to increase presence in north, east and central India. There are plans to set up another reference lab in Lucknow and increase the number of hospital labs under management.

The Offer and the Objects

The issue comprises offer for sale of 1.16 crore equity shares of Rs 10 each. At the lower price band of Rs 540 per share, the issue size works out to Rs 626.40 crore and at the higher price band of Rs 550 per share, the issue size is Rs 638 crore. The selling shareholders comprise promoters Dr Arvind Lal, Dr Vandana Lal, Eskay House (Hindu undivided family) and Anjaneya Lal offering 0.41 crore shares and other selling shareholders West bridge Crossover Fund LLC, Wagner and Sanjeevini Investment Holdings offering 0.75 crore shares.

The minimum bid lot is 20 equity shares and in multiples of 20 equity shares. The issue is through book building and will open on 8 December and close on 10 December.

Retail individual bidders will get a discount of Rs 15 on the offer price.

The objective is to achieve the benefits of listing the equity shares on the BSE and NSE stock exchanges through offer for sale.

Strengths

Well positioned in one of the fastest growing segments of the Indian healthcare industry.

The diagnostic services industry is expected to be around Rs 37700 crore end March 2015 and to grow at CAGR of 17% to reach to Rs 60000 crore by FY 2018. About 85% of the diagnostic business is controlled by unorganized single centers. Lab chains control the rest.

Some of the growth drivers are increase in evidence-based treatments, focus on preventive diseases and wellness, screening, early detection and ongoing monitoring. Given the changing life style, the demand for services related to lifestyle diseases such as diabetes, heart diseases, hypertension and cancer creates significant market opportunities to grow. Testing is a small component of the total cost of healthcare treatment, while it plays a major role in influencing decisions and reaching conclusions.

Because of wide network coverage and integrated service offerings, higher revenues per patient are realized on account of growth in walk-in customers, higher number of tests per patient and demand for higher end tests.

Given the strong track record and a pan India network, acquisitions will drive the next phase of growth as the aim is to expand through multiple hospital lab management services and increase the reach to corporate customers

The asset light model had an asset-turnover ratio of 3.3 times end March 2015. There were cash and cash equivalent of around Rs 153 crore end September 2015 and nil debt.

Weaknesses

Entry barrier is low and the industry is fragmented and competitive. Competition will be from unorganized players including new entrants and large multinational companies that are fast penetrating the segment.

The industry is sensitive to brand, speed and accuracy of information. Any delay or inaccuracies can spoil the efforts of brand building undertaken in the past.

The current high margins might be impossible to retain due to the strategy of growing through increase in reach and penetration as there will be competition from regional and local players and some gestation period.

Around 85% of the total revenues generated in FY 2015 and in the six months ended September 2015 was from north and east India. Any significant loss of business in these regions might disproportionately affect the business and cash flows.

Any state- or Central-level interventions can restrict the fees that pathology labs can charge customers such as tests for swine flu, whose cost was capped by the Delhi state government. So, regulations can restrict growth and profitability.  

Valuation

Net consolidated revenues grew 18% to Rs 659.59 crore and consolidated profit after tax (Pat) was up 18% to Rs 94.25 crore in FY 2015. Net sales stood at Rs 405.04 crore and consolidated Pat after extraordinary loss of Rs 16.63 crore was Rs 36.93 crore in the six months ended September 2015.

The consolidated EPS for FY 2015 on equity share capital of Rs 82.64 crore stood at Rs 11.4. At the higher price band of Rs 550, the issue is offered at 48.2 times FY 2015 EPS. The high P/E factors in 29% CAGR in revenues and 34% CAGR in Pat over the past four years. However, it will be difficult to sustain such growth rates in future. Nevertheless, the scarcity premium (it will be the only large established listed pathological lab) can support the high valuations in the short term. 

Dr. Lal Pathlabs: Issue highlights
For Offer for Sale Offer size (in Rs crore)
- On lower price band626.40
- On upper price band638.00
Offer size (in no. of shares )1.16 crore
Price band (Rs)*540-550
Pre & Post-issue capital (Rs crore)82.64
Pre-issue promoter shareholding (%)63.67
Post-issue promoter shareholding (%)58.70
Issue open date8/12/2015
Issue closed date10/12/2015
ListingBSE,NSE
Rating 45/100

 

Dr. Lal Pathlabs: Consolidated Financials
1103(12)1203(12)1303(12)1403(12)1503(12)1509(06)
Total Sales237.27342.21451.66557.95659.59405.04
OPM (%)23.9%25.3%21.6%24.8%23.6%21.1%
OP56.6286.5197.65138.60155.9685.54
Other in. 0.770.822.822.242.932.67
PBDIT57.3987.33100.47140.84158.8988.21
Interest-0.941.08-0.13-5.60-9.00-6.32
PBDT58.3386.25100.60146.44167.8994.52
Dep.13.6019.8320.4027.2328.1913.59
PBT 44.7366.4280.20119.21139.7080.93
EO0.000.000.000.000.0016.63
PBT after EO44.7366.4280.20119.21139.7064.30
Tax (including Deferred Tax)15.1821.2524.5538.9544.7026.83
PAT29.5545.1755.6580.2695.0037.47
MI0.430.450.520.680.750.54
PAT after MI29.1244.7255.1379.5894.2536.93
EPS*3.55.46.79.611.4#
*EPS is on post issue equity capital of Rs 82.64 crore of face value of Rs 10 each
# EPS not annualised due to seasonality of business
Figures in crore
Source: Capitaline Database

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