I am still little confused, How economy of scale will work here ?
I see low entry barrier in retail grocery store business but economy of scale works because one can obviously have better trade terms from lets say Britannia buying 10’s of lacs biscuits over the small grocery store buying 1000s of it.
Grocery stores runs on very thin margins because they are just enabler buying bunch of stuff from one and passing on to others, their Major cost is inventory they hold.
Now with diagnostics how economy of scale going to help ?
Their major cost is mostly one time in nature i.e, setting up the lab and then they do recurring buying of small small stuff like syringe cotton etc which even they get favourable terms of trade from syringe cotton manufacturer that will not be a deciding factor in terms of price.
That’s why they all (small or big) enjoy very high ROC , high margins.
As far as i see economy of scale works mostly in trading kind of play where you are just enabler like logistics , grocery shops etc .
7 companies mentioned here having same traits - https://www.dividendmonk.com/7-companies-with-unrivaled-economies-of-scale/
I am just curious do we have a example globally like Cosco, Wallmart etc for a diagnostic company which proved economy of scale works here too ?
also another point you mentioned Niche, I see most of the Niche diagnostic tests happens in Hospital labs for a reason. Patient reach their on emergency.
No matter how close to the hospital they open their lab its not going to work. I saw in your presentation they derive 50% of the revenue from B2B but if that becomes so, profitable what stops hospitals themselves to rent a equipment and start doing it themselves ?
What i know is small hospitals who cannot afford additional path lab, send out test samples to these guys like Thyrocare and SRL but its hard to believe these small hospitals going to flourish over time.
As far as i see all Major hospital chains have their own Path Lab, SRL is as bigger as Thyrocare or Dr Lal and if it’s such an exciting business , why would a guy like Piramal (who understand value better than many of us) would sell out the SRL away many years ago ?
and there is a chance of disruption, which often gets ignored while doing DCF.