Home >Markets >Mark To Market >Diagnostic firms’ valuations get pricey amid health fears

Diagnostic companies continue to see a sharp rally in their stock prices. Dr Lal PathLabs Ltd and Metropolis Healthcare Ltd scaled fresh highs on Thursday, up 26-47% in the last six months. Shares of Thyrocare Technologies Ltd have risen more than 17% from its March lows. The gains are being led by improved growth and earnings prospects.

These firms are accruing benefits from rising testing revenue. The firms saw significant impact of lockdowns in H1FY21, but started witnessing strong demand thereafter. While covid-19 testing helped drive revenues, non-covid revenues continued to rise at clinics and hospitals. The companies also have adapted to new norms of rising home sample collections and testing. Besides, they have gained market share from the unorganized sector. The weak business cycle in H1FY21 gave avenues for consolidation, and acquisitions made by some of these firms will drive future growth.

Robust growth
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Robust growth

With large number of cases in the second wave and government diktats on testing, revenue growth is expected to get a further boost.

On the inorganic growth front, Dr Lal PathLabs had acquired companies in Gujarat and Karnataka . Metropolis said it has acquired Hitech Diagnostics to strengthen its position as the second-largest diagnostics firm in India and the largest brand in South and West India.

Most companies are focusing on increasing their share of B2C and per-patient revenues. For instance, Metropolis saw per-patient revenue (including covid testing) improve 12% year-on-year (y-o-y) to 1,029 in Q3. For Dr Lal, realization per patient in Q3FY21 stood at 824 ( 688 in Q3FY20). These firms are also de-risking business models by expanding in new geographies.

The firms are expected to report good numbers in Q4, too. Edelweiss Securities Ltd expects Dr Lal’s top-line to increase 36% y-o-y driven by non-covid testing (up 23%), higher realizations (up 7%) and additional business from covid-19 and allied testing.

For Thyrocare, they expect revenue to grow 45% y-o-y led by similar factors. Nevertheless, the impact of reduced covid testing realizations will be watched and can impact operating profits sequentially.

As growth prospects remain strong, Dr Lal and Metropolis are trading at 75 and 61.7 times FY22 earnings estimates, respectively. This leaves little room for any disappointment

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