Their plan is to implement something similar to what they did in Pune. Even there, they had renamed it after 2 years.
Usually acquisitions of regional chains have contingent consideration clause, and it is dependant on future performance of the acquired chain.
Their reasoning is, since suburban is a stronger name (and it is i believe), they don’t want a dispute later regarding, due to the name change, management rejig, revenues were compromised and the contingent consideration didn’t materialize.
Also lately selling to some part can be attributed to the FII selling in the indian equities and FIIs hold 25% of the float.
I definitely agree, we should look at competition closely. However, the entry maybe easy, but scaling the business is real hard.
Players Vedanta, HCL also tried diagnostics however, they couldn’t scale.
Hence Dr Lal’s strategy has been to make expansion in west through acquisitions recent one being a prime asset suburban.
Now i believe, the dominant regional players have either been sold to Dr Lal, Metro, other organised player and hence making it difficult for any new player to scale by acquisition.
Also market on the unorganized side is very fragmented with enough room for organized players to grow on the back of market share.
Disc : Invested hence views are biased but tracking the business developments very actively to keep generating anti thesis pointers.
Diagnostic is very dependent on the doctor asking report from specific place - as fragmented hospitals getting more organized and more doctors working for big hospital chains rather having independent practice puts up big question mark on real market potential independent diagnostic chain have on grow exponentially like in past?
With this digital market players who will eat market from consumer end ads real question mark for exponential growth.
Hi @nikhil_chowdhary, I went through the con-call and read through your question and the response from management. Thank you for your insightful question that you bought up.
The management point can surely be considered. As you have done the research already do you know how is the performance of Dr. Lal path labs as compared to sub urban in Mumbai?
I am just trying to understand if they change the name after 2 years will the footfall reduce with Dr. Lal branding.
Also in next con-call will it be possible to ask management if they are actually working on the negative google reviews in Bangalore and Mumbai regions as there are a lot of unhappy customers who took time to put negative reviews about staff’s rude behavior, not responding to calls and delay in reports?
In today’s world online reviews matter a lot and a local diagnostic center also care about positive feedback, I see a clear negligence from management on positive online feedback and user experience.
I still see business has an early mover advantage as they know how to scale but with lot of competition from hospitals as well as fintech players with bad user experience it can turn out to be difficult.
A fintech player with a potential to burn a huge VC money and focus on user experience can be a headwind in new regions. As I am pretty sure a good competition will look into the good work of doctor Lal as well as where they are doing wrong.
Disc:- Invested and looking to increase the position.
Also, the loss making funded Startups overall, not just restricted to diagnostic space here is my broad opinion.
Discounting is the only differentiator for them and it cannot be a sustainable source of Moat. You are at the mercy of next fund raise.
When the liquidity tap stops, many will go belly up.
We have started hearing cash crunch at better.com, Meesho, Grofers, LIDO. In the inflationary times we are seeing, many will have hard time raising money.
Also, i don’t see any reason cash rich companies like Dr Lal cant replicate on the App/Website experience like the new age companies (they can hire the best folks in the industry)
Below is Latest ken’s article, which had highlighted about discounting as the only differentiator to play the tech game.
Would like to know impact of Tata 1mg on listed diagnostics players like Dr. Lal Path labs.
I have seen aggressive marketing push and cost effective options provided by Tata 1mg on lab tests (LINK). You might have seen ad in most of leading news papers and digital/TV media. Will there be margin shrinkage of Dr. Lal Pathlab and other players due to big elephant started dancing in this space. (https://www.1mg.com/labs?utm_source=1mg&utm_medium=jewel&utm_campaign=labsgrowth)
I had heard about this company from Sh. Saurabh Mukherjea manyt times in past. Yesterday I read one interview of his where he has mentioned about price drop of Dr Path Lab. After checking the price, I found that it has dropped more than 50% from its peak. It intrigued me. I decided to research further.
I love this franchise for its business model. Not many franchise can compete with it’s business model in this field. So entry of big competitor like Tata does not bother me. Financial looks great with both “Cash Conversion Cycle” and “Working Capital” being negative.
So I moved ahead with my 4 step process : Valuation → Management → Customer → Supplier. It is valuation where I got stuck. Average free cash flow for last 3 years is Rs.171 Cr. Even if I ignore large capex of Rs.471 Cr made last year and take an average capex of 80 Cr., free cash flow for last year comes to 396 Cr.
At such cash level, company needs to grow its FCF at 23% CAGR for next 10 years to justify current valuation.
This is definitely possible but then a lot of things need to fall in place. More importantly, it leaves me with almost NIL margin of safety.
Hence I am giving this stock a miss for time being. Would love to hear others point of view on this.
The longevity of the business should also be considered when looking at FCF, if there will be capex, expansion wise or acquisition wise, FCF will remain low for few more years or could even become negative. So you can look at growth, sales wise, profits wise, from pre IPO days to present and can extrapolate the same to some extent w.r.t the current valuation.
And what do the other models of valuation give, are they the same?
To grow FCF at 23%, they will need to have at least 16-17% operating profit growth. Max 6-7% can come from cost optimization on consistent basis.
Last year there was a spike in capex. I have not got into those details. However past trend clearly suggest that they have to invest 25-30% of their CFO to achieve a 16-17% growth.
They have shown 18-24% operating profit growth in 3/5/7/9 years period. This growth is coming from expansion and if they have to keep growing at such pace, they have to keep investing - that’s my take.
Is there any scenario where they can maintain 18-20% growth without expansion?
Regarding the deep correction in listed diagnostic player’s stocks, following are the views of Aditya Khemka.
we conclude that there is no evidence that suggests the incumbents of diagnostics could be disrupted by traditional or modern / digital / low-priced players.
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We at InCred Healthcare Portfolio believe that even if there were to be a potential disruption due to online players, it is highly improbable to be significant in next 5 years. We currently infer so from the financial performance data of companies like Healthians and Pathkind Labs.
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Further, data suggests that the fabric of the business is akin to that of a branded generic business where the doctor’s trust on the brand is key to business prosperity. Trust can’t be built over short time frames and can only be done through a consistent and quality service at reasonable price, in our view.
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Further, in our view, true potential disruption occurs when the proposition is win – win for both the buyer and the seller. So far, it seems that while the end consumer might benefit from the lower prices, the provider in the absence of critical mass, is unlikely to be cash flow positive any time soon.
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We believe that the recent stock price actions of diagnostic companies could be driven by normalization of trading multiples post Covid and an optical slowdown in business as Covid revenues subside. Hence, we would expect the stocks to start doing well once the base normalizes (goes ex Covid) and multiples might also revert to mean as the street sees lack of evidence of any potential slowdown in the sector.
A key current concern in the stockmarket for Dr Lal is the impact from new entrants like Tata 1mg which are supposedly ‘digitally savvy’ and have announced aggressive pricing campaigns in certain metro cities.
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The diagnostics sector can be divided into two main segments: (1) testing related to an illness which is 90% of the market; and (2) testing related to wellness (preventive measure) which is 10% of the market**.**
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In cases, where a patient is suffering from an ailment, the test results/diagnosis become the starting point for treatment. Also, the costs associated with diagnostics is relatively low compared to the total treatment costs such as hospitalisation charges, doctor fees, medicines etc. Thus, the Turn Around Time (TAT) of test reports, their accuracy and doctor’s trust in them become the most important drivers in the patients’ decision making behind choosing a diagnostics partner.
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The wellness segment (which accounts for just 10% of the market), on the other hand, is more about preventive healthcare and hence is discretionary in nature. As a result, pricing of the tests (and discounts offered) become the most critical decision-making parameter for deciding on a diagnostic partner rather than the three factors mentioned above. This is where most of the competitive intensity is being felt.
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With respect to any edge that new age ‘digital’ firms may have over Dr. Lal from a technological standpoint, it is important to reiterate the importance of TAT, the accuracy of results and the doctor’s trust in the test results – these are key variables which determine the patients’ decision making in the Illness segment about which vendor to choose. These factors in turn are dependent on the efficiency of back-end processes. Our channel checks suggest that Dr. Lal has been implementing automation in sample testing with intelligence fed from in-house data analytics to enable faster & less variable TAT and further improving accuracy of results. For example, the firm’s ‘control tower’ initiative which enables monitoring of a sample lifecycle and identification/correction of bottlenecks has allowed Dr. Lal to meet the ETR (Estimated Time for Report) more than 90% of the time vs. 80% earlier. Additionally, the scope for real time tracking of samples by hospitals has also been increased substantially allowing for better management of the doctor’s time, further building the stickiness of the firm with these doctors.
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Secondly, price competition has for a long time been commonplace in the diagnostics space and Dr. Lal has successfully warded off aggressive price competition in the past as well. As discussed in our May’22 Consistent Compounders newsletter, “even as Dr. Lal Pathlabs’ share price has compounded at an impressive 20% CAGR between Dec’15 to Apr’22, the stock delivered an absolute return of negative 8% over the 3 years from Oct’16 to Jul’19. One of the key reasons was that Dr Lal Pathlabs faced a major price war during 2016-2017 from Thyrocare, which it was able to defend successfully due to the moats created around convenience to the customer. Over subsequent two years from Aug’19 to Aug’21, Dr. Lal Pathlabs delivered share price CAGR (i.e., annualized return) of ~80%, catching up with the fundamental progress made over the preceding three years.”
. The other concern on Dr Lal Pathlabs is surrounding its recent quarterly results. In 2HFY22 Dr Lal Pathlabs witnessed a significant decline in PBT (down 31% YoY), after recording 27% YoY PBT growth in FY21 and 100% YoY PBT growth in 1HFY22. We have already addressed this point in our June 2022 newsletter. The fall in PBT in 2HFY22 was primarily on account of tapering down of Covid-19 testing related revenues in 2HFY22 (decline of 50% YoY) as Covid-19 cases dropped significantly in India. Covid-19 related revenues were never expected to be sustainable and hence tapering down was expected by us and by the broader market. The more sustainable non-Covid revenues have grown for Dr.Lal by 35% YoY in FY22 (30% YoY even after excluding Suburban Diagnostics acquired in October 2021). This growth was despite the increase in Covid cases affecting normal business for around four months during FY22.
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