• Dr. Lal PathLabs (LPL) is the largest and oldest listed diagnostics lab company in the fragmented Indian diagnostics sector. Our hub and spoke model, in combination with our franchisee system, fits well in the industry which is shifting gradually but surely from the unorganised to the organized sector.
  • Given the leadership position in the pathology space, LPL will continue to focus on expanding volumes as that remains a driving force behind our business. To that effect, we are adding newer collection centers that include franchisee centers to our network. I am happy to inform you that our Kolkata Reference Laboratory has been performing as per our expectations and continues to add scale in Eastern and North Eastern India. Rather than aggressively expanding into newer markets, we believe that we can drive volumes, and thereby, grow by penetrating deeper into the regions where we are already strong, like North, Central and Eastern India. Having said that, we will continue to explore selectively in the Western and Southern markets to further leverage our brand proposition.
  • Following key trends are expected to drive sector growth in the ensuing years: • Ageing Population: The population cohort above 65 years old is growing at 4%-4.5% p.a. in India • Rising Income: It is estimated that close to 3%-3.5% of private healthcare revenue growth will come from the rural population moving up to the US$1,500-$2,000 income bracket every year • Preventive Testing: Rising awareness and government’s recent steps to incentivise preventive testing via tax breaks to be a tailwind for volume growth
  • With the rapid technological advancements in the healthcare industry, doctors increasingly prefer evidence based treatment. This creates a sustained driver for the growth of diagnostics industry. The branded players are driving higher marketing and engagement with patients and healthcare service providers thereby creating higher awareness for consumption of diagnostic services. With an emphasis on quality and compliance the larger, organized players are bound to benefit from these trends. The switch from multiple, standalone laboratories in the unorganized space to a more formal arrangement is also positive.
  • The intensity of competition in the diagnostics industry has abated in the past years however structurally the sector lends itself to regular outreach initiatives from the established players both in the unorganized and organized space. The barriers to entry being low there is also a constant influx of new outfits. When this happens in a market where the pricing already operates at the lower band, the established diagnostic chains have to fight for market share at the cost of margins.
  • As a growing enterprise, the Company continually adds new laboratories to its network. Last year, a regional reference laboratory was commissioned at Kolkata. Although the operating model of the Company is primarily asset-light, the aggregate expenses for establishing a new laboratory/ regional reference laboratory and the associated post opening period expenses are usually front ended and the speed of scaling up these new units cannot be guaranteed.
  • The Company very consistently has focused on optimizing its cost matrix in order to create headroom to absorb changing operating dynamics. The key drivers of cost during the year were growth expenses pertaining to strengthening network capacity and diagnostic infrastructure. Costs stood higher by 14.7% YoY.

 

My view: The company has been able to steadily grow its earnings over the past few years. The stock has shown significant strength even in the current downfall. If bought, the stock should be held for as long as the company keeps executing because the company has all the potential to grow multifold.

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