Upgrade Dr Lal Pathlabs to ‘neutral’ with TP of Rs 2,155

We value DLPL based on 45x (40x earlier) Sep’22 EPS of INR47.9 to arrive at our TP of INR2,155.

Action: Upgrade to Neutral; new TP of INR2,155 implies 1% upside This past week, Metropolis (METROHL IN, Not rated) and Thyrocare (THYROCAR IN, Not rated) released 2QFY21 business updates, and reported 25% and 37% y-y growth in revenues, respectively. While the companies’ non-Covid-19 businesses improved, it was the higher contribution from Covid-19 tests that surprised us positively.

We note that EBITDA contribution from Covid-19 tests was much higher than we had previously estimated due to high volumes and a drop in raw material costs. We expect Covid-19 tests to continue to boost DLPL’s near-term earnings, as the number of cases remains high in India and the positive test rate at ~6.5% is higher than the WHO’s recommended rate of below 5%; efforts will be made to increase the proportion of RT-PCR tests (this test is the main contributor to Covid-19 revenues), which are more accurate than Rapid Antigen Tests; likely higher demand for antibody tests for surveys; and some tail demand beyond the pandemic for patients exhibiting normal flu-like symptoms. These positives are likely to be negated by reduced pricing of tests, as dictated by state government orders. Covid-related revenues should peak in 2QFY20F.

We factor in 21% and 6% revenues in FY21F and FY22F, respectively. We lift our estimates to reflect the increased contribution from Covid-19 tests in revenue and margins. Hence, our FY21F/22F/23F earnings are up by 30%/19%/17%.

We value DLPL based on 45x (40x earlier) Sep’22 EPS of INR47.9 to arrive at our TP of INR2,155. Our TP implies upside of 1%, hence we upgrade to Neutral. Our target valuation multiple is slightly higher than the past 4.5 years average multiple of 42.2x.

We had argued for a fair value range of 30-50x. The downside of the valuation range was driven by our concerns over Covid-19’s impact. With our concerns on Covid-19 impact now significantly lower, we expect fair value range at 40-50x.

Our DCF model suggests a fair value range of 38-51x. One could argue for a higher multiple given low capital intensity and growth supported by under-penetration and market share consolidation. We think the entry barriers are low, and there is risk of competition from other large industry participants or regulatory interventions driving down pricing.


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