Home >Markets >Mark To Market >Dr Lal PathLabs’ lofty valuations ignore near-term business disruption

Shares of Dr Lal PathLabs seem overoptimistically priced, considering that its trailing price-earnings multiple is hovering around 57 times earnings. One, the lockdown is affecting its business and patient volumes. Second, valuations are lofty compared to other diagnostic firms like Metropolis Healthcare Ltd and Thyrocare Ltd, which are trading at 52 times and 31 times trailing earnings.

Investors are paying a high price eyeing cash flows and high return on capital for diagnostic firms. But with higher fixed costs and lower revenues due to the lockdown, a margin contraction is expected in the next few quarters. The lockdown has shrunk the number of patients visiting diagnostic chains.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

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In fact, the fourth quarter was disappointing for Dr Lal PathLabs as patient volumes fell 8% quarter-on-quarter (q-o-q) with just 10 days of lockdown in March to 4.4 million. Only a modest recovery is expected in coming quarters. Revenue per patient has been steady. However, q-o-q revenues fell about 8% in line with the drop in volumes.

“We expect a sharp 70-80% decline in non-covid revenues during the lockdown period and expect volumes to gradually normalize starting Q2 FY21 as private OPDs resume business along with release of some pent-up demand from elective procedures-led diagnostics," said analysts at Kotak Institutional Equities in a note to clients.

Higher covid-19 testing will also not lead to operational improvement. Higher costs are being incurred on protective gear. Hospitals are deferring payments for tests, that can add to receivables in coming quarters.

“While management has been focusing on costs in terms of rental arrangements, travel, overtime and hiring, expect net cost of operations to rise on account of extensive use of masks and PPEs," analysts at Edelweiss Securities said in a note. Some impact of higher costs is evident in the shrinking Ebitda (earnings before, interest, tax, depreciation and amortization) margin.

While business is set to improve in the second half of this year, earnings are expected to revive only in FY22. Earnings could shrink marginally even with a pickup in the second half of the year. Analysts already expect about a 3.5% fall in earnings over FY21, while a slower revival could drag it even further. Even so, the stock has gained about 45% in the past year, ignoring the above risks.

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