Home >Markets >Mark To Market >Dr Lal PathLabs shares show fatigue, following sharp rally

A sharp spike in covid-19 infections has increased the demand for diagnostic and healthcare tests and services of Dr Lal PathLabs Ltd. Even though the stock declined by around 7% last week to 2,920 per share on the National Stock Exchange, investors are sitting on almost 27% appreciation so far in this calendar year.

Valuations though remain uncomfortably high with the shares trading at nearly 69 times estimated earnings for financial year 2022, based on Bloomberg data.

Last week, analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd downgraded their rating on the Dr Lal stock to ‘reduce’ from ‘neutral’. One key reason for the move is the stock’s expensive valuations. At 45 times financial year 2023 forecasted earnings per share (EPS) of 51.8, Nomura arrives at its target price of 2,333.

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Dr Lal PathLabs’ March quarter results are expected to show good growth on a year-on-year basis but numbers are likely to look tepid sequentially. Analysts expect earnings before interest, tax, depreciation and amortization (Ebitda) margins to drop sequentially due to lower covid-19 test prices and a general increase in other costs.

To be sure, Indian diagnostics companies are expected to continue to gain from the pandemic in financial year 2022 too.

“With increasing covid cases in India, most national diagnostic chains will continue to benefit on covid testing in FY22 as well," said analysts from IIFL Securities Ltd in a report on 9 April. Plus, non-covid business volumes are also likely to improve.

Nomura has factored in higher contribution from covid-19 tests for their Dr Lal estimates and raised their FY22 estimated EPS by 6%.

The brokerage firm has assumed covid-19 test volumes to peak in the June quarter (Q1FY22) and decline thereafter.

But, as mentioned earlier, Dr Lal’s valuations are already stretched. Some analysts reckon that its peer Metropolis Healthcare Ltd fares better from a valuation perspective.

“We prefer Metropolis over Dr Lal PathLabs, given that Metropolis is trading at about 30% lower valuations versus Dr Lal, despite a similar strong B2C (business to consumer) franchise and revenue and cost synergies which can accrue to Metropolis led by its acquisition of Hitech Diagnostics," point out IIFL analysts.

Nikhil Mathur, analyst at Ambit Capital Pvt. Ltd said, "Metropolis’s revenues are slightly more diversified, its home market is not as saturated as that of Lal PathLabs and it is pursuing consolidation opportunities more aggressively. These factors would mean growth prospects of Metropolis are relatively better."

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