Dr Lal PathLabs Limited (LPL) - Concall Notes - Feb 2016
Business Overview
The foundation of this company was laid in 1949 by Dr. Major S. K. Lal, who is the father of Dr. Lal.
LPL operates under a hub and spoke model. This includes LPL’s National Reference Laboratory which is located in New Delhi, supported by 175 clinical laboratories, 1,592 patient service centers and over 7,300 pickup points presently. Under this arrangement, samples are collected across multiple locations within a region and are forwarded to pre-designated clinical laboratories for centralized diagnostic testing. This provides the company greater efficiencies and of course better economies of scale while making available a scalable platform.
LPL is networked across India, including large cities such as New Delhi, Mumbai, Bengaluru, Chennai, Hyderabad and Kolkata. A key factor which binds the LPL’s operations and is responsible for smooth execution is the centralized information technology platform. It integrates LPL’s large network through a common registration and reporting system and tracks the operations and internal performance metrics, thereby enabling LPL to improve its efficiencies. This is really the heart of the operation.
LPL’s catalog includes over 1,110 test panels, 1,934 pathology tests and 1,561 radiology and cardiology tests and it keeps appending to this list. LPL caters to an audience base which comprises not only individual patients but also corporates, institutions, healthcare providers as well as hospital and clinical labs.
The business doesn’t incentivize the doctors for referring patients. The patients decide for themselves and choses the lab. There are two times it can occur, regular checkup for chronic lifestyle diseases like diabetics and cholesterol or due to seasonal outbreaks like dengue, malaria etc.
The business is significantly much higher on consumer facing than B2B like hospital management. 95% of services offered are related to pathology and the rest of them are related to radiology.
LPL runs two types of tests - (a) Routine Test (b) Specialized Test. Roughly about one-third of pathology business comes out of Specialized Tests and balance comes out of Routine Tests. Normally, the Routine component is higher for direct walk-in patients that walk-in to the labs, while the Specialized segment is higher for pick up business that LPL’s collection agents go and pick up from the hospitals.
Large selling tests are - Vitamin D3, Thyroid Profile, Blood Sugar, Liver Function Test, Kidney Function Test and Lipid Profile
Company is still north-centric with over 70% of revenues coming from North India.
Routine biochemistry and routine hematology tests are done everywhere, while other tests are done in the reference lab.
Market Research
The market for diagnostic healthcare services providers such as LPL has been independently ascertained at Rs. 377 billion in FY15, with this number expected to grow over Rs. 600 billion by FY18.
At a broad level and as per industry reports one can expect a growth CAGR of 16-17% by FY18 for the sector.
The Diagnostic healthcare market is about Rs.37,000 crore, half of it is Radiology, half of it is Pathology, which let Pathology about Rs.18,000 crore. Only 6% is in the hands of organized players, 94% is still unorganized, and all these organized players are trying to create a shift from unorganized to organized. LPL’s direct competition at organized level is relevant but its competition is really at shifting the balance 94% of the unorganized sector. For now, SRL and Metropolis are two direct competitors of LPL in the organized space.
Profitability Levers
Cost of servicing is higher in the B2C segment compared to B2B (Hospital based management) as it needs to set up registration counters, the lab etc. but at the same time profit realization is also equally higher compared to Hospital Lab realization as it ends up competing and sharing of revenues. So, on EBITDA operating margins both segments are fairly similar but B2B is more competitive in nature than B2C.
The Diagnostics healthcare industry is highly unorganized, only about 6% is in the hands of organized players, the balance 90-94% is lying with unorganized players. So one of the reasons for high growth in this space for the LPL is not only the organic growth or secular growth but also the shift from unorganized to organized. LPL will continue to drive that shift. Keeping that in mind LPL does not want to get priced out and charge a very high premium. So LPL focus would be to have a premium but not a very high premium. It could actually vary from market-to-market LPL can be benchmarked with let us say two or three large city based players and accordingly will price it.
LPL doesn’t have any strategy to increase price per annum and rather focus on the long term, expand the market and increase volume share.
Currency (dollar) fluctuation might impact as reagents and consumables, which are purchased are 85%-90% dollar linked. It can’t be hedged as most of the purchases are done in rupees whereas the ultimate supplier is doing the FOREX hedge.
Growth Levers
LPL is planning to grow its revenue by below four major strategies -
By expanding its network geographically
By strengthening business operations & its quality and improving turnaround time for testing
Expanding breadth of tests and service offerings
Expanding management of in-hospital clinical laboratories to conduct onsite routing testing and provide offsite support for more complex testing on a revenue sharing basis
The market size is about Rs.37,000 crore which consists of both Radiology and Pathology and even if we take half of the market as Pathology which is Rs.18,000 crore, LPL still has market shares which are fairly low. So growth rates across the North as well other regions seem similar.
Right now, LPL’s core market has evolved as North, Central and East India and the plan is to continue driving market share in these markets as well as keep seeding other new markets.
Today’s high end test will become routing tests tomorrow and the plan is to keep introducing new types of tests across the entire country.
The Hospital Lab is an upside to the LPL’s business as presently it does not contribute a large percentage to the revenue. Although, it picks some samples from these hospitals as these labs do not conduct an entire test menu and usually outsource high end tests. LPL believes that there is an opportunity to manage these labs onsite, especially the mid-size hospitals with about 200-250 beds. Currently, it manages close to around 14 labs.
Labs accreditation like NABL & CAP will help the company in future as business will start moving from unorganized to organized sector. Accreditation will remain voluntary for some time but consumer awareness is increasing.
Capital Expenditure
As the diagnostic healthcare market in India is highly fragmented and due to the presence of a lot of unorganized players, there is an opportunity to acquire these small assets as part of M&A.
There is a plan to put Rs. 90 crore for setting up two new labs in Lucknow & Kolkata.
Normally it has been observed that each satellite lab comes back to normal corporate margin in about 3-years time.
In the healthcare diagnostic industry, space utilization is not a big issue because many of the machines used are very modular in nature and don't require very high additional space. Though the issue is with utilizing these machines between 12-noon to about 3 in the afternoon because turnaround time is critical and it is usually resolved easily by renting these instruments from vendors and they are more than happy to put machines any time LPL wants.
LPL's major focus will be expanding its collection network and collection network will be expanded through franchising Patient Service Centers as well as Pick Up Points. Because this is the way asset light part of this model comes in, this is where the scalability comes in. As LPL rapidly expands its collection network, it has to support that network through opening Satellite Labs as well. But massive focus will be on expanding the collection network.
LPL works on asset light model whereas the CAPEX is required for mostly IT and putting up new labs whereas Patient Service Centers are franchised out.
CAPEX for the next few years is expected to be around Rs. 70-80 crore.
Financial Performance
For LPL kind of business it is very important to examine trends on an YTD basis as there is an element of seasonality associated with some quarters where the performance could be influenced by certain occurrences during the period.
LPL is a debt free Company and all the required investments are being funded from its balance sheet.
The company has had an EBITA margin of 24% to 27% for the last 3 years and expects to be around 25% in the next 2-3 years.
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