Dr Lal Pathlabs Q3FY18 Concall Summary

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Financial Highlights

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  • Revenue growth for Q3FY18 is 26.6% resulting into YTD 9 months’ growth of 14.1%.
  • This growth was predominantly led by strong patient volume growth of 26.1% (from 3.03 million last year in Q3 last year to 3.82 million in Q3 this year) which has been achieved through LPL’s ever-growing network reach and other initiatives to drive volumes.
  • Current quarter had the advantage of favorable base primarily due to two variables–
    • Demonetization and
    •  Festival timings varying from quarter-to-quarter
  • Normalized EBITDA in Q3 isRs. 596 million, after eliminating the impact of RSU and other stock-based remuneration charges. It grew at 22.5% over Q3 last year which was at Rs. 487 million.
  • EBITDA for the nine months period is Rs. 2,083 million is 8.6% higher than YTD last year, which was at Rs. 1,919 million.
  • Cash and liquid funds balance as at end December is Rs. 4,903 million.
  • PBT is Rs. 555 million in Q3 Vs. Rs. 472 million in the previous year, a growth of 17.6%.
  • PAT at Rs. 364 million in Q3 grew 17.7% Vs. Rs. 309 million in Q3 last year.YTD nine months PAT grew 6.7% to Rs. 1,319 million from Rs. 1,237 million last year.
  • Q3 FY18 diluted EPS is Rs. 4.40 Vs. Rs. 3.75 in the previous year.
  • Management hopes that  LPL will surpass 15% growth this year.
  • There is relatively higher growth in the other regions outside of Delhi, where the channel margins are higher. So, guidance of ~25% EBITDA margin is sustainable.
  • Cost for Q3FY18 has been significantly higher due to increased expenditure on Administrative & Personnel (A&P), repairs & maintenance, some other initiatives and infrastructure costs and a little bit contributed by Kolkata Lab.
  • Tests per patient have increased from 2.19 to 2.28 in Q3 this year.
  • Revenue realization per patient at Rs. 688 was similar as Q3 last year which was then at Rs. 685.This reflects the price rationalization taken this year in select geographies and tests and partially offset by higher realizations of bundled tests.
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External Variables

  • There may be wild swing in volume growth depending upon the infections like dengue etc. So it would not be right to unnecessarily jump to conclusion that 26% growth is going to be sustainable. There are 2 external variables involved:
  • Competitive Intensity - Internally what LPL is doing is that it iscontinuously focus on cost of doing business and stay productive in relation to competition.
  • Price Regulation – LPL needs to stay prepared for that if this happens.

Operating Strategy

  • Right now LPL is resisting the price increase. Last price increase of LPL was in 2016 and next is to be done in 2019.
  • LPL is continuing its efforts to drive growth through volumes and test mix rather than through upward revision of pricing.
  • Focus will continue on cost and productivity improvement to protect margins and reinvest in the business.
  • With the promotion of test bundles, the price per test may come down but the realization per patient will go up and this combination should help them.

Two vericals are created – Wellness and Illness segment

  • LPL were already doing wellness business at a small scale in Delhi NCR and they have just stepped up the efforts in this direction.
  • Launch of new test packages in both labs and collection network has given good volume growth.
  • Although LPL is witnessing a very good growth in this segment, the growth is not entirely due to Wellness segment and there could also been upselling or cannibalization from existing portfolio.
  • More drill down analysis is required to arrive at an accurate breakup of growth.

Swasth Initiative

  • LPL don’t want to be seen as pushing sales of various tests even if they are not required unnecessarily.
  • What LPL is trying to do is to create healthcare awareness and make people aware about their health needs so that they are little more conscious about that, and LPL make their offerings of preventive health checkups.
  • Through Swasth, LPL is making people about various wellness packages.
  • LPL has good brand equity in Northern India and being a preferred brand, people do not mind paying slightly higher premium.
  • LPL is moving away from a transactional model to an engagement model.
  • LPL has launched a facility where patients can access all their earlier reports, not only for themselves, but also for the family members, which becomes all records in one place, which is bringing in the feeling of one definition for all the healthcare needs of the family.

Kolkata Lab

  • Final regulatory clearance for Kolkata Reference Lab Project has been received and pilot test operations have been started.
  • First 6 months to 1 year growth will be coming from higher end tests or complex tests.
  • The brand equity tends to trickle down, which will have a positive rub off on building up of infrastructure as more and more collection centers and franchisees will come forward, want to become associated with LPL.
  • From this expanded infrastructure, business for routine tests will sustain. So, inflection point may probably come after 1.5-2 years.
  • Fixed cost for the Kolkata Lab on a full year basis annualized going forward will be in the range of Rs.6 to 8 crores including employees cost.
  • Dependence from Kolkata region on Delhi isin the range of 10% to 15%. After setting up of Kolkata Lab 10% to 15% reduction in Delhi testing would take place. This would help to serve the expected growth of northern region.
  • Commercialization of the lab will formally begin in Q1FY19.
  • Gross margins from East region are lower than Northern region as brand premium is much more in the North compared to East. Currently, LPL is looking at volume growth rather than growth in margin.

RSU (Restricted Stock Units)

  • RSU charge is spread over the life of the RSU, which is four years and is calculated as per the Black-Scholes formula.
  • This is a cashless charge so there is no cash outflow. Also, bulk of the charge being taken in the first year itself, and then it goes on over the remaining life of the vesting period.
  • This is not dilutive any further now as all RSU are going to be issued out from the old ESOP trust which is already holding the shares.

Western and Southern India markets

  • Competition is uniform all across, but since LPL’s dependence on North is high, they tend to feel it more there.
  • Revenue split is: About 70-72% coming from North, 12-13% from East, and about 13-14% in south and west combined.
  • Two focus cities in South and West. In South it is Bangaloreand in West it is Pune.
  • In both these cities, LPL continue to aggressively market and build B2C business.
  • Two elements of strategy –
    • Once LPL reach the critical mass of Rs.30-50 crores in a city, then it is set for expansion in the region.
    • LPL continues to market pan India high end and complex tests and are investing behind building specialty sales force and bringing in lot of focus on high end test like genetics etc.,
  • LPL will continue to market to all healthcare institutions and focus on B2B segment, which will help in building B2C at a later stage with parallel effort on M&A.

High-end tests: Importance

  • High end tests need not necessarily gives higher gross marginsdue to fierce competition in B2Bsegment.
  • But it positions the player as a quality player because the contact with the medical fraternity at top end is very high.
  • It also helps the brand to travel longer distances and much higher level of involvement of patient as well as the family to the brand compared to routine tests.

Diagnostic industry Price Variation

  • Prices do vary mainly because various labs across India have various quality standards. But in diagnostic industry, there is not much of difference in the prices of the organized players.
  • Clinical Establishment Act will create a level playing field as far as the quality is concerned.
  • As LPL’s strategy of holding onto current prices pans out for a few years, it would put pressure on the unorganized players.
  • Similarly as compliance issue of Clinical Establishment Act start building up, cost structure of unorganized space will move. Then, there would be apparent shift from unorganized to organized.
  • Patient will be the biggest gainer as he is going to get test of a great quality at the most competitive price. Also players who are aiming for scale and who can build good quality network would be benefited.

Government Intervention

  • If government start initiatives for free diagnostics, LPL will surely try to participate in them as their mission is to create sort of a healthcare accessible as well as affordable.
  • So LPL want to help as an enterprise in whatever way without diluting their stakeholders’ interest.
  • If price control is done by government, volumes will tend to go up and LPL being a preferred brand, its volumes should multiply as it had happened for a couple of times in the past.