Kotak Institutional Equities says worst of price war in diagnostics behind us but stays cautious; here’s why
The brokerage has a 'sell' call on Dr Lal with a target price of ₹1,740, implying a potential downside of over 30 percent. Meanwhile, it has a 'reduce' call on Metropolis with a target price of ₹1,350, indicating an over 7 percent downside.
In a recent report, brokerage house Kotak Institutional Equities retained its cautious view on the diagnostics space with sell/reduce calls on the two stocks under its coverage.
The brokerage noted that while the worst of pricing-led competition in diagnostics is behind us, the space is still far from a benign pricing environment. In particular, Reliance’s Netmeds has considerably upped the ante in the past six months, with its pricing now 25 percent and 65 percent lower than Tata 1mg and the national incumbents, respectively.
Due to the impending risk on long-term sales growth amid elevated valuations, the brokerage reiterates its bearish view on Dr Lal Pathlabs (DLPL) and Metropolis Healthcare (METROHL).
The brokerage has a 'sell' call on Dr Lal with a target price of ₹1,740, implying a potential downside of over 30 percent. Meanwhile, it has a 'reduce' call on Metropolis with a target price of ₹1,350, indicating an over 7 percent downside.
Dr Lal has gained a little over 10 percent in the last 1 year and over 12 percent in 2023 YTD, giving positive returns in 6 of the 10 months so far this year. It rose the most in September, up 16 percent, and shed the most in March, down 8 percent.
Metropolis, on the other hand, has lost 6 percent in the last 1 year but rose 13 percent in 2023 YTD, giving positive returns in 6 of the 10 months of the current calendar year so far, same as Dr Lal. It advanced the most in June, up around 15 percent, and declined the most in July, down 8 percent.
Factoring in a volume recovery, the brokerage has baked in 12-14 percent sales CAGRs over FY2023-26E for DLPL and METROHL.
Both the stocks were not a part of the recent bull run in the Indian markets and hit their 52-week highs last year.
Currently trading around ₹2,545, Dr Lal is still over 5 percent away from its 52-week high of ₹2,684.80, hit on November 2, 2022. Meanwhile, it has advanced over 44 percent from its 52-week low of ₹1,762.70, hit on March 20, 2023.
Similarly, Metropolis is almost 16 percent away from its 52-week high of ₹1,789, hit on November 2, 2022 and has risen over 28 percent from its 52-week low of ₹1,176, hit on March 27, 2023. It is currently trading around ₹1,509.
Pricing Wars
The brokerage noted that post price hikes of 4 percent in Delhi NCR in 4QFY23 and some minor hikes in other cities in Q1FY24, DLPL maintained its pricing QoQ in 2QFY24. DLPL continues to focus on home collections in Mumbai, through Suburban, aided by incremental capacity and capabilities from the Vidyavihar reference lab.
On the other hand, after dropping prices in Delhi NCR by 15 percent in Q1FY24, seemingly on an experimental basis, METROHL has raised prices in Q2FY24. METROHL's pricing remained largely unchanged in other cities.
However, most other stocks have largely maintained their pricing.
Apollo Hospital's oscillating pricing strategy (5 percent hike in 1QFY24, flat in 4QFY23, 50 percent cut in 3QFY23) continued with the company doubling its diagnostics pricing in 2QFY24. On a yoy basis, this translates into a 4 percent hike, noted Kotak.
Other hospitals and offline players have also broadly maintained their pricing, it added. For now, Medplus’ diagnostics' foray stays solely focused on Hyderabad with no change in its aggressive pricing strategy. Within online, while Tata 1mg, Healthians, Redcliffe, mFine and MediBuddy have raised prices in 2QFY24, Netmeds, PharmEasy and Orange Health have reduced prices QoQ. Netmeds continues to be the most aggressive player in metros. On the other hand, Tata 1mg and Healthians have raised prices progressively over the past 6-9 months, informed the brokerage.
"Even as the worst of pricing-led competition is behind us, pricing of incumbents stays 2-3X higher than the cheapest organized alternative across cities, even for specialized and semi-specialized tests. Given the high pricing differential, we stay guarded on any meaningful advantage to listed incumbents even if competitive intensity from online players ebbs. In addition, volume growth for diagnostics companies, particularly DLPL, is yet to recover fully," noted Kotak.
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