'Add' Dr. Lal Pathlabs Maintains HDFC Securities But Lowers Target Price —  Here's Why

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HDFC Securities Institutional Equities

Dr. Lal Pathlabs Ltd. is expected to sustain steady revenue growth, led by-

1. patient and sample volume growth, with no price test increase in the near term,

2. increasing traction from its wellness segment (Swasthfit share at 24% in 9M FY25 versus 21% in FY24), and

3. an expansion strategy to drive volumes.

We expect Dr. Lal’s future growth to be driven by a combination of strengthening its operations in core metro and tier-1 cities; penetration in tier-3/4 cities in the North and East; and building clusters in the South and West regions.

The company is focusing on innovation, including new wellness packages and high-end, super-specialty tests, with a focus on capturing prescription shares. For its Suburban business, scale-up will continue with a dual branding strategy in core markets (Mumbai, Pune, and Goa) to balance sales growth and margin expansion.

The company expects save costs through liquidation of Suburban within Dr. Lal. It is also exploring mergers and acquisitions, with a focus on expanding its test offering capabilities in genomics/immunology and adjacencies (radiology), given its strong net cash position of Rs 11.23 billion (as of Dec’24).

Given the gradual improvement in specialty and Swasthfit mix, and cost controls, Dr. Lal is expected to sustain a margin of ~28% (FY24 was at 27.4%). This will improve its operating cash flow/free cash flow and return ratios (RoE at ~22% and RoCE at 29% in FY27E, up from 20% and 25% in FY24).

The diagnostic sector experienced de-rating in the last few quarters due to moderate earnings growth, and Dr. Lal is trading at 42x/37x PE; this is at an 15/24% discount to its long-term mean of 49x.

We tweak our estimates and roll forward the target price to Rs 2,910, based on a 43x FY27E EPS (~10% discount to the average PE of 49x), which implies 26x EV/Ebitda. While we have built in 5% patients and 10% samples volume CAGR for FY25-27E, we will keep track of the improvement in volume and earnings growth. Maintain Add.

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