Brokerage firm Antique Stock Broking thinks the coming years will be challenging for the domestic diagnostics sector and the industry stares at a scenario of lower CAGR in coming years due to intense competition and Covid-19-led tailwinds now behind us.
The Indian diagnostic industry is estimated to be valued at nearly $10 billion with pre-pandemic growth of 12%-14%. Although post-pandemic the growth rate has accelerated, this has resulted in the entry of new competition as the Industry has low barriers to entry, the brokerage firm pointed out.
A slew of new players is entering the market - online aggregators, hospital chains expanding their diagnostic offerings, pharma companies, and pharmacy chains. There is a disruption in the Industry like never before, with new age tech, aggressive pricing, and new bundled offerings. These factors have resulted in lower margins and lower realization per patient for large incumbent chains, Antique pointed out.
It has also resulted in inflated valuations of various diagnostic chains in unorganized space and recent M&A has come at very expensive valuations.
Antique said a closer look at these companies suggests that growth per patient realization is going to remain under pressure for a considerable future and the next leg of patient volume growth will come at the cost of lower prices.
The brokerage firm believes margins reported during FY21 (peak of Covid-19) will not be repeated anytime soon and the industry will revert to its long-term revenue growth in the range of 10%-12%, much lower than the nearly 15%+ CAGR seen in the past few years.
Diagnostic companies have resorted to the asset-light model in order to grow faster.
With more chains opening up in tier one-two towns, the brokerage firm expects patient volume to remain in the low double digits; it believes realization per patient will see downward pressure.
"With negative operating leverage, we believe Dr. Lal PathLabs and Metropolis Healthcare will struggle to achieve their peak margins of FY21 in coming years. At the same time, we expect return ratios such as RoCE to remain under check at 20%-25% for both, a decline in comparison to the pre-pandemic range of nearly more than 33%. In fact, there is a case for de-rating in valuation for the entire sector. We initiate coverage with a 'sell' on Dr. Lal PathLabs and Metropolis Healthcare," Antique said.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.