Dr Lal Path Labs Q2FY18 Concall Summary

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 Financial Highlights

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  • The board has recommended an interim dividend of Rs 1.50 per share of Rs 10 each
  • September quarter witnessed a record highest ever revenue at Rs 2,781 million
  • Revenue growth 6.1% and volume growthof 6.7% in the quarter; high base last year as there was a severe incidence of chikungunya and dengue last year during this quarter
  • The first half revenue growth stands at 8.7% with the volume growth of 7.6%
  • Revenue realization per patient was similar as Q2 last year at Rs 6.96; reason- price rationalization
  • Normalized EBITDA in Q2 at Rs 807 million after eliminating the impact of RSU and other stockbasedremuneration charges was slightly lower than Q2 last year which was at Rs 819 million
  • Cumulative EBITDA for the first half at Rs 1,487 million was 3.8% higher than first half last year which was at Rs1,432 million
  • Normalized EBITDA margin for Q2 continue to be healthy at 29% and 28.2% for the first half this year
  • The company targets 14-15% revenue growth for FY18
  • Other income includes dividend from liquid funds and interest on FDs
  • Average returns on cash surpluses was 7% p.a. for the quarter
  • Cash and liquid funds balance as at end September is at Rs 4,330 million or Rs 433 crore and has increased from Rs 4,226 million in June 2017
  • PBT is Rs 778 million in Q2 againstRs 803 million in the previous year
  • The first half PBT grew 2.2% to Rs 1,438 million from Rs1,408 million last year
  • PAT is Rs 510 million in Q2 vsRs 529 million in Q2 last year
  • First half PAT grew 3% to Rs 955 million from Rs 928 million last year
  • Q2FY18 EPS diluted at was Rs 6.19 vsRs 6.43 last year
  • Kolkata lab would lead to Rs 7 to Rs 8 crore cost increase which is less than a percent impact on margins
  • Other than the amount being spent on Kolkata, the company has been spending about Rs 30-34 crore per year and will continue doing it

Business Highlights

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  • The number of patients tested increased from 3.75 million last year in Q2 to 4 million in Q2 this year, also a highest ever during the quarter
  • The tests per patient have increased from 2.24 to 2.28 in Q2 this year
  • Hospital lab management business is a high volume, high value but low margin business, it also has slightly longer sort of a collection time, payment cycle is a little longer compared to other business
  • Rough estimates of the market- north & south is ~25-30% each, the balance is west and east
  • Kolkata cluster Pathology market is ~Rs 800 crore out of the ~ Rs 3000 crore total market
  • Market share in Delhi for the company is higher, but other places will all be in single-digit
  • The company targets to secure 10% to 15% market share in the next four to five years
  • In the last four quarters after demonetization, company’s growth rates fell down; hence, no price hike objective will help the company to fosterquicker original volume growth
  • Most of the R&D tests are outsourced from outside and the company does the commercialization of those tests in India

Strategic initiatives

  • Kolkata Reference Laboratory Project is in its final stage, awaiting final regulatory clearances and assumed to stimulate demand in the entire Northeast, Eastern region, Bangladesh and Nepal; it is not seen cannibalizing the high end test that are transferred to Rohini Lab
  • Extended preventive healthcare practices to all the channels of Dr. Lal Path Labs
  • Certain organisational structure changes with very senior resource will lead the wellness initiative (like “Swasth”)amongst other initiatives
  • This year, given the competitive pressures, we have decided to absorb all the inflationary pressures like higher minimum wages, etc., and drive growth through volumes and test mix rather than through upward revision of prices
  • The company has started driving mix growth by focusing on increasing the contribution of high end tests as well as panels like health packages, thereby impacting test per patient growth higher than patient volume growth
  • The company has built a strong network of labs, collection points and pick up points and this network has a very strong potential to drive high growth in times to come
  • The company has taken measures to improve productivity, manage cost structures and have thereby absorbed some of the inflationary pressures relating to GST, minimum wage corrections and even competitive pricing pressures
  • With selective price rationalizations of panels in select markets, the company has seen an improvement in growth rates and realization per patient in those markets
  • Regional pricing strategy is reflected in lower price realization like in Manipal
  • Cost structure and better management would help the company survive the local competition
  • The company is considering medically guided preventive health packages against “70 tests at Rs 1500” competition, along with renegotiating prices on reagents
  • “Preventive Health Checkup”- bundling of many tests and offering at a very-very attractive price to the patient
  • Focuscity approach in South areas like Bangalore, Pune

Short Term Objectives (3 year period)

  • Adjust price value equation in relation to the competition; this should lead to more volume growth than higher realization per patient
  • Next objective is to aggressively participate in preventive health segment
  • Lastly, to stay focused on high end testswhile company’s large base is from routine biochemistry tests

GST Impact

  • Healthcare is an exempted industry; hence, the company do not charge any GST on their output services and theyare not eligible to take the benefit of input GST costs which ends up as an inflationary cost for them
  • Reverse charge mechanism for payment of GST on certain services also adds to the cost
  • The GST impact is estimated at Rs 9-10 crore for the financial year alone

DIdruptions in Healthcare Sector

  • Disruption is going to be on automation and application of technology
  • Healthcare start-ups help to augment the area on the patient interfaSt
  • Innovations are very-very slow to get accepted in medical field because they have to be certified by regulators