Dr Lal PathLabs Limited (LPL) - Concall Notes - Feb 2023

Industry Overview

Industry at large is experiencing operating deleverage in this financial year due to sharp decline in COVID and COVID-related revenue. The decline in COVID business has been to the extent of 80% to 85% compared to last year in general.

Industry also experienced tough competitions in these couple of years, entry of many players coming from pharma, hospitals and even e-commerce as well.

Most large players in the industry also haven't taken meaningful price increases in the last five to six years. 

Bundling of tests may have led to higher realization per patient but has resulted in an effective decline in realization per test.

It's very clear in recent trends that patients or consumers are looking for a higher level of convenience. Those days have gone, where people will come to a lab and stand in the queue and wait for 30-35 minutes for their turn to come and give blood samples. So, they are expecting collection to be done near them, which could be in the format of a collection center or a home collection, etc.,

Business Overview

The combined infra between LPL and Suburban put together now stands at 50 labs in the state of Maharashtra, and out of which, 20 labs are in Mumbai. The central lab at the top of this pyramid gives LPL a huge competitive edge in the West region

LPL portfolio mix comprising of super specialty tests and bundled tests offering under the brand name, “Swasthfit”.  Contribution from “Swasthfit” now stands close to 19% to 20% of overall sales.

Purchase frequency in this diagnostic healthcare business is at least once a year.

Dependence on Delhi NCR is very high and Delhi NCR has slightly lower growth overall.

LPL will have to widen the footprint, because this is a very asset light business, the supply side is abundant, and will always have somebody just entering the business, whether it's a hospital side or pharma or even smaller players. So, technically, somebody having a very high market share in one market is probably a difficult thing to achieve.

Suburban business was highly dependent on COVID and struggled to manage costs when this business came down heavily.

LPL overall visibility in the market, especially amongst the medical fraternity, has gone up. Suburban in earlier avatar was outsourcing a lot of high-end tests to other large companies. Now, the whole thing is flipped upside down and now people start outsourcing it to Suburban. And Suburban is positioned as a central Lab, which actually is doing the entire test menu. It is well supported by NRL in Delhi, but it is giving a report on Suburban letterhead. So, that's the way it is. It is a (CAP) College of American Pathologists accredited lab now. So, it is positioned as an ultimate lab, which is doing every test. We don't say no to any test anymore.

Suburban is very well positioned on the corporate health checkup in the city of Mumbai.

Profitability Levers

Suburban in relative terms has a higher manpower cost compared to LPL.  Given the low turnover base, it's justifiable. But it has an infrastructure, which is slightly different from a LPL infrastructure. It has x-ray, ultrasound, and a manning model, which is suited for a corporate health checkup. So, the company wants to aggressively drive that part of the business as well so that it is able to reduce as a percentage of its manpower cost.

Rental cost will also come down as the company has started the Vidyavihar Lab and some of the testing facilities will get consolidated.

There are a lot of higher-end tests that have very high manual components inbuilt in that, while routine tests are very machine-driven tests, let's say biochemistry tests, etc., there, the productivity is very high. But let's say the histopathology department, where the company professionals read the biopsies, manual components and it is also read by top notch doctors, their cost is very high. So, traditionally, what has been happening is that, since this biopsy business or histopathology business was very small, one didn't bother too much about margins, but it was like real brand positioning, because it really mattered from an image perspective. But now these businesses are becoming really large, so, one has to look at the entire price structure keeping that in mind.

Growth Levers

LPL has launched a state-of-the-art reference lab in Mumbai. This move is in line with its long-term strategy of driving the West region as a long-term growth pillar.

To continuously keep on widening its geographical presence. 

To add more centralized labs and then put a lot of spokes in the format of collection centers.

There are three clear buckets that LPL has in its business; one is the maintenance markets, then there are growth markets, then there are emerging markets. The entire belt of East, rest of North which consists of UP, Punjab, Haryana, Himachal, Rajasthan, they are really a big growth market for LPL. While there will be effort on reviving Delhi NCR, but still NCR growth will not be in line with our overall company growth. LPL will try to push this up though and would be considered as a maintenance market. Growth would be East, UP, Bihar, Rajasthan, Punjab, Haryana and then there are emerging markets, I would put, South and West in that, where it will take definitely a year time for LPL to really put them back into a growth market, but right now, the company will invest more in infrastructure in select pockets like Maharashtra and a couple of other places.

LPL is working with the medical fraternity and with companion diagnostics work with pharma companies to see how how-end portfolios like specialized tests volume could be grown. 

Bringing some synergies between the infrastructure of LPL and Suburban, that gives LPL both cost side synergy as well as revenue side, because it gives the company a widening sort of presence in the market.

Technical Expertise

LPL has set up a  first private lab in West India to have a BSL III, biocontainment lab, inclusive of mycobacteriology, mycology and molecular biology departments.

LPL has invested in Second Electron Microscope at its National Reference Lab in Delhi.

In last couple of years, LPL has created three verticals; #1, Genevolve focuses on genomics; #2, L-CoRD focuses on reproductive diagnostics; #3, L-ACE focuses on auto-immune disorders.

Over the last three years, LPL has significantly enhanced its digital capabilities. Its new consumer app today has a very good rating on android and also custom built and integrated 1x view across all channels.

Financial Performance

For the organic business, LPL sees an improving trend in its three-year CAGR on a sequential basis, which has moved up from 9.4% in H1 FY23 to 10.8% in Q3 FY23. 

There is an increase in patient volume growth as well, which is three-year CAGR volume growth in Q3 FY23 was at 8.3%.

Non-Covid revenue has grown by 9.1% whereas overall revenue de-grew by 1.5%.  On a YTD basis, COVID contribution has fallen sharper from 21% to just 3% now

Better realization per patient is due to the test mix and higher contribution of “Swasthfit” which is 19% now.

Net cash and cash equivalents as on 31st December 2022 are Rs.489 crore.

The normalized EBITDA margin for this quarter is at 25%, whereas PAT margin is at 14%.

There is lower volume growth compared to last year as last year it was due to dengue and that has resulted in the low realization number as well, because a lot of people once somebody is dengue patient, follows up a lot for platelets tests, which are very, very low value tests.