Indian diagnostics chains on the cusp of inflection, says Emkay; initiates coverage on these 2 stocks with 'buy'

The brokerage emphasised that the Indian healthcare scenery station pandemic is poised to capitalise connected structural tailwinds specified arsenic heightened user awareness, favorable demographics, emergence successful manner related diseases, and important nationalist assemblage investments successful infrastructure.

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According to the brokerage, the country's healthcare expenditure, presently astatine lone 3% of GDP, has historically lagged down planetary counterparts owed to higher 'out of pocket' expenses (51%), and little wellness security penetration (39%). 

However, with diagnostics representing astir 7% of the healthcare industry, there's important imaginable for maturation arsenic India focuses connected enhancing spending connected indispensable healthcare services.

Despite contention from branded infirmary diagnostics chains and hyperlocal standalone centres, Indian specialised diagnostics chains person managed to summation their marketplace stock from 15% to 18% implicit the past 5 years. With competitory strength reducing aft emergence of the caller mean station pandemic, the brokerage believes Indian organised diagnostics chains basal astatine the cusp of inflection.

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"Additionally, tempered expectations pursuing the important run-up during the pandemic present contiguous investors with an unassailable accidental to enactment successful the burgeoning healthcare manufacture via organized diagnostics chains," the brokerage added. 

Tempered expectations contiguous an opportunity

Valuation multiples for diagnostics companies expanded importantly (1.5x vs. LTA) during the pandemic. However, station Covid, multiples person reverted to their humanities mean arsenic they grappled with uncovering the caller normal, fixed Covid-based revenues shrinking faster than expected. 

Diagnostics chains connection speedy scalability and higher profitability and are asset-light, thereby commanding higher multiples versus larger adjacent hospitals. However, pursuing normalisation of maturation station pandemic, the EV/EBITDA premium of diagnostics has reduced from 2x to a specified 23% pre-Covid to post-Covid, Emkay noted. 

Target price 

The brokerage has assigned a 'buy' standing to Dr Lal Path Labs, mounting a people terms of ₹2,800 per share. Dr Lal Path Labs is the undisputed marketplace person successful the diagnostics space. 

The brokerage suggests that the company's exceptional way grounds successful executing strategies, on with its asset-light concern model, beardown marque reputation, and specialised investigating capabilities, volition proceed to heighten its marketplace dominance.

It expects the institution to timepiece a income CAGR of 12% implicit FY24–26E, with the borderline remaining level owing to web enlargement and branding-related investments. 

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Similarly, a 'buy' standing has been assigned to Metropolis Healthcare with a people terms of ₹2,200 per share. MHL has been capable to modulation from being a challenger determination relation into the third-largest pan-India diagnostics chain, leveraging its specialised offerings and marque loyalty with the aesculapian fraternity. 

According to the brokerage, the company's tiered strategy and assertive web enlargement program volition fortify its enactment presumption successful absorption cities arsenic good arsenic grow sum successful seeding and different cities.

Furthermore, the brokerage has assigned an 'add' standing to Vijaya Diagnostics, mounting a people terms of ₹725 per share. Highlighting the company's distinctive concern model, the brokerage noted that it has efficaciously addressed the cardinal situation of achieving profitable scalability successful the diagnostics industry.

Elevated upfront capex and precocious attrition convolute the radiology conception successful presumption of scale-up, dissimilar pathology, wherever astir organised and online players scramble for marketplace share. 

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Vijaya’s higher attraction of B2C revenues (94%), beardown marque equity successful location markets, and skew towards radiology (35% of the business) are apt to enactment industry-best margins, whereas assertive web enlargement successful Pune and Kolkata volition support instrumentality ratios muted, arsenic per the brokerage.

Disclaimer: The views and recommendations fixed successful this nonfiction are those of idiosyncratic analysts. These bash not correspond the views of Mint. We counsel investors to cheque with certified experts earlier making immoderate concern decisions.

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Published: 10 May 2024, 02:24 PM IST