The stocks of diagnostic service providers have been standout performers within the healthcare sector over the past year, posting returns between 16 and 80 per cent.
In comparison, the Nifty 50 saw returns of 8 per cent.
Image used for representation purpose only. Photograph: Wolfgang Rattay/Reuters
Stable pricing, expectations of gradual volume growth, and market share expansion for the larger players have stoked increased optimism for listed companies.
Some of the expected operational gains could materialise in the October-December or January-March quarters of 2024-25 (FY25).
The three largest listed players — Dr Lal PathLabs, Metropolis Healthcare, and Vijaya Diagnostic Centre — are expected to report a 14 per cent increase in sales compared to the same quarter last year.
This growth is expected to be primarily driven by volume expansion, followed by an improved product mix.
Analysts Sumit Gupta and Varad Patil of Centrum Research highlight that easing competitive pressures, steady volume growth, and continued demand in the wellness and bundled packages segment will contribute to this growth.
Realisation growth for Dr Lal PathLabs and Vijaya Diagnostic Centre is projected to remain flat compared to the previous year.
Centrum Research does not foresee price hikes in the short term, as the companies are focused on expanding their networks.
The brokerage maintains an ‘add’ rating on Dr Lal PathLabs, Metropolis, and Vijaya Diagnostic Centre.
Metropolis Healthcare, in its third-quarter update, reported an 11 per cent increase in growth, driven by volume expansion (both in patient numbers and tests), changes in product mix, and realisation gains.
The business-to-consumer segment grew by 15 per cent, supported by TruHealth wellness and bundled test offerings.
Despite seasonally lower revenue growth and constrained operating leverage, Metropolis posted a modest year-on-year (Y-o-Y) increase in margins.
The growth is attributed to wellness revenue and the bundling effect compared to the previous year.
Metropolis is considering price hikes in certain cities in the current quarter.
BNP Paribas Securities forecasts a 6-7 per cent growth for the top two players, along with improvements in test realisations.
Operating profit margins are expected to increase by 100-200 basis points Y-o-Y.
However, the brokerage believes that promotional offers, marketing expenses, and network expansion costs will persist in the upcoming quarters.
The sector is benefiting from several tailwinds, and Kotak Institutional Research remains optimistic about its prospects.
Analysts at the brokerage, led by Alankar Garude, observe: “We continue to highlight that the intensity of pricing-led competition has ebbed over the past two years, thereby driving higher sanity in the market.”
While the growing number of organised competitors will continue to restrict sizeable volume bounce-back, the brokerage expects test volume growth for Dr Lal PathLabs and Metropolis to inch up gradually from the current 9-10 per cent Y-o-Y.
Despite a sluggish volume ramp-up, both diagnostic companies are projected to clock organic sales growth of 13-14 per cent over 2023-24 through 2026-27 (FY27).
Kotak Institutional Research has upgraded Dr Lal PathLabs, noting that after a recent correction, the stock is now trading in line with Metropolis, compared to the earlier one-year forward price-to-earnings (P/E) premium of 20 per cent.
IIFL Research also expects similar organic revenue growth (12-13 per cent) for Dr Lal PathLabs and Metropolis over FY25-27, driven by test volume growth of 9-10 per cent and realisation growth of 2-3 per cent.
A large portion of the ongoing network expansion and digital investments is expected to be completed by FY25, with faster growth in bundled test packages.
Analysts at IIFL Research, led by Rahul Jeewani, expect that this will result in operating profit improvements for Dr Lal PathLabs and Metropolis, likely rising from pre-pandemic levels of 26-27 per cent to 27-28 per cent by FY27.
The brokerage favours Dr Lal PathLabs and Metropolis within the diagnostic sector at current valuations. Dr Lal PathLabs and Metropolis are trading at reasonable valuations of 42x and 38x their FY27 P/E, respectively, compared to Vijaya Diagnostic Centre’s valuation at 55x.
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