Dr Lal Pathlabs shares drop 5% after Q1 results; Is more pain left in the diagnostic stock?

Shares of Dr Lal Path Labs dropped about 5 per cent during the early trading session on Friday despite the company reporting a strong performance in the June 2023 quarter. However, the brokerage firms are not much enthused by the company's Q1 performance, with some analysts expecting the stock to lose one-third of its value.

Dr Lal PathLabs reported a 44 per cent year-on-year YoY rise in net profit at Rs 84 crore in the first quarter ended June 30, 2023 led by growth in non-covid testing and higher realizations. Dr Lal PathLabs reported Rs 58 crore net profit during the corresponding period of previous year.

Revenues increased about 8 per cent to Rs 541 crore in Q1FY24, while the non-covid revenues advanced by 10 per cent YoY to Rs 528 crore in Q1FY24, Covid testing revenues stood at Rs 13 crore in the same period. EBITDA for the quarter surged 24.4 per cent YoY to Rs 146 crore, with EBITDA margins improving 360 basis points YoY to 27 per cent.

Shares of Dr Lal Pathlabs dropped about 5 per cent to Rs 2,366.45 on Friday, before recovering slightly, as the company commanded a total market capitalization of close to Rs 20,000 crore. The stock had settled at Rs 2,483.50 on Thursday.

However, the brokerage firms continue to remain negative on the stock as they believe that most of the positives are majorly priced in the prices and expensive valuations leave little headroom for the further upside. Also, non-covid revenues and performance continue to be a challenge.

Dr Lal Pathlabs's 1QFY24 EBITDA beat estimates, driven by lower SG&A expenses, a better test mix and seasonality boost. However, sluggishness in organic non-Covid patient volumes remains a concern, said Kotak Institutional Equities. It sees sales to be line, while higher aggression by Metropolis in Delhi NCR is a monitorable

"Furthermore, traction in Suburban stays lower than expectations. In our view, the increasing sanity in diagnostics pricing is well captured in the recovery built in our estimates for the company. At 53 time FY2025E EPS, valuations remain elevated. We retain a 'sell' rating with a fair value of Rs 1,675," it added, signaling a 33 per cent crash in the price from its previous close.

As on March 31, 2023, the pan-India diagnostic chain player had 277 clinical laboratories, 5,102 Patient Service Centers (PSCs) and 10,938 Pick-up Points (PUPs)

Dr Lal’s Q1FY24 revenue was in-line, but EBITDA and PAT beat estimates. Non-covid revenues grew 10 per cent YoY, of which, volume growth was a mere 2.5 per cent. Price hikes and better test mix coupled with lower opex led to impressive EBITDA margin of 27 per cent. Its efforts in improving cost is visible given mere 3 per cent opex growth, said Nuvama Institutional Equities.

"We share management’s views that pricing pressure seen in the last year and a half is behind, and industry gears for price hikes. Hence, we increase our target multiple to 45 times, from 40 times," it added while revising the target price to Rs 2,370 from Rs 2,100 earlier. Nuvama maintained its 'hold' added to await evidence of sustainable volume uptick and turnaround in Suburban before turning constructive on the stock.

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