Dr Lal PathLabs (DLPL) is the second largest diagnostic chain in India with 172 clinical laboratories, 1554 patient service centers and over 7059 pickup centers on pan India basis. It operates in hub and spoke
model, with presence across major cities like Delhi, Mumbai, Bengaluru, Chennai, Hyderabad and Kolkata. DLPL is capable of performing 1813 pathological tests, 1555 radiology and cardiology tests as well as services that cover a range of specialties and disciplines. In FY16, DLPL had collected and processed ~21.8 mn samples from ~9.9 mn patients.
Asset light business model:
The hub and spoke model enables the company to achieve greater economies of scale which will reduce cost per test also a scalable model for future growth.
The size of its network provides it greater bargaining power with suppliers, thereby allowing it to reduce costs and improve its profit margin.
The company has adopted an asset light model where in it leases equipment thereby reducing the upfront capital cost [instrument leasing model that results in lowered capital expenditures for diagnostic equipment].
DLPL performs its tests and services on equipment and instruments which generally are leased under a “reagent rental” model.
Fully integrated operations:
DLPL’s centralized information technology platform fully integrates its large network through a common logistics and payments system, thereby allowing it to collect more efficiently samples and payments from patients and healthcare service providers. In addition, its technology platform tracks its operations and internal performance metrics, thereby enabling it to improve the operating efficiency of its business. Furthermore, the growth of the network is supported by the scalability of the technology platform, which readily can adapt to the increased data requirements of additional clinical laboratories and patient service centers. Also, the number of tests increases, the cost per test declines, giving economies of scale to the company.
The company’s core markets are North India (72% of sales) as well as Central and Eastern India (13% of sales). DLPL is further strengthening its position in North India by opening new franchised patient service centers across the region in order to expand its network’s reach. It is also expanding its presence in Central and Eastern India through the construction of regional reference laboratories, including a large, regional reference laboratory in Kolkata combined with the opening of additional smaller clinical laboratories and several new, complementary patient service centers.
Dr Lal Path Labs is also expanding in Southern and Western India by opening additional clinical laboratories and patient service centers.
Product Mix and Revenue Break up:
DLPL has a revenue break up of their test in below category.
Biochemistry 39% [Sugar & Lipid Profile 29-31 % , Other tests 69-71 %]
Well-positioned to leverage segment growth:
The Company is well-positioned to leverage upon one of the fastest-growing segments of the Indian healthcare industry. Diagnostics segment is a fragmented market and dominated by unorganized players (with single lab – 48% or associated to hospitals – 37%). Diagnostics chain players constitute just 15% of market and out of this 60% are with players with just 2 labs. DLPL is second largest diagnostics chain in India.
CRISIL Research expects that the diagnostics industry will continue to grow by a CAGR of 16%-17% over the next three years to over Rs 860 billion by 2020-2021.
I believe the company has enjoys strong brand recall based on its integrated model and its focus on quality and reliability of diagnostic services (for example, many of its clinical laboratories are National
Accreditation Board for Testing and Calibration Laboratories (NABL) and its National Reference Laboratory is CAP accredited – international accreditation).
They are mainly focusing on volume growth in account for low margin area.
Focusing on tie-ups with various hospitals to manage their pathology in a vision to become leading pan Indian brand. Hence the margin might be lower in future.
Stepping in Preventing health care and wellness to incur the leverage of this sector.
In a management, what I look for is honesty, performance & aggression. I found all three in their management.
Dr. Arvind Lal and Dr.Vandana Lal are veteran name in this sector with strong medical background and depth knowledge in this arena.
First thing that attract me is their honesty of declaring a possible margin contraction of 6-7% due to their focus on low margin high volume sell. Which needs guts to declare after being a public company.
Aggressive volume based growth & focusing majorly on building a trusted loyal pan Indian brand.
Targeting 22-25% growth with 20% margin is really good opportunity.
Over the last 10 years it has make a sales growth of 21% .
EBITDA margin stable at 27% with zero debt, high cash flow, huge cash in bank coupled with operational efficiency and economy of scale in placed.
1 Margin Contraction
2 Price disruption
3 Quality of the test in long term
4 Quality and Price of the reagent supplier
5 Any tax impose by govt on Healthcare Service
6 Reach valuation at current price
7 Any down turn in Indian economy
1 Scalable Model
2 Strong Brand in growing segment
3 Strong financials
4 Positive Industry Outlook
[Views might be biased since invested]