Despite markets being close to record highs, investors have shown little interest in major diagnostic stocks. Dr. Lal Pathlabs, Vijaya Diagnostic, Krsnaa Diagnostics, and Metropolis Healthcare shares have all seen a 30-to-55% decline in value over the past year.
Over the last year, Metropolis Healthcare has lost 52% of its value. After reaching its all-time high of ₹3,579.90 in December 2021, the stock began to fall and continued till February. But during March, the stock gradually began to rise and rallied 30 percent, but it failed to hold on to this rally after Bloomberg reported that the company's promoters were planning to sell a partial stake in the company. Since April, the stock has fallen by nearly 40%.
Metropolis made its stock market debut on April 15, 2019. The company raised ₹1,204 crore by issuing shares at a price of ₹880 per share. The stock hit a record high of ₹3,579 on December 30, 2021, and an all-time low of ₹907.10 on May 13, 2019. At current levels, the stock is at a 3-year low. So far in 2022, the stock plummeted by 58.78 percent.
In August, Morgan Stanley downgraded the rating to 'equal-weight' from 'overweight' on the shares of Metropolis with a target price of ₹1,547, down from ₹2,211. It reduced EPS estimates for FY23, FY24, and FY25 by 15%, 11%, and 11%. These cuts reflect the expectation of slower growth and higher costs.
Another global brokerage firm, Credit Suisse, on Tuesday, initiated coverage on the stock with an "Underperform" rating and trimmed the target price to ₹1,165, implying a potential downside of 22 percent from Monday's closing price.
The consolidated net profit of Metropolis declined to ₹33.4 crore in the June quarter as against a net profit of ₹74.9 crore in the last quarter of the same year.
The listed diagnostic players face stiff competition from new entrants. A slew of new players, including online aggregators, hospital chains expanding their diagnostic offerings, pharmaceutical companies, and pharmacy chains, resulted in unprecedented industry disruption, said Antique Stockbroking.
Aggressive pricing and new bundled offering will lower margins and lower realization per patient for large incumbent chains, it added.
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, said Antique Stockbroking.
Similarly, Dr. Lal Pathlabs' shares have tanked 44 percent from its 52-week high of Rs. 4,245.5. The stock gave a negative return of 42.57% in the last year. Year to date, it is down 37.28 percent.
Despite the significant decline, Credit Suisse anticipates further losses for Dr. Lal Pathlabs. The brokerage has initiated an "underperform" call on the stock with a target price of ₹1,400, implying a potential downside of 44 percent from Monday's closing price.
Credit Suisse expects Dr. Lal Pathlabs' Return on capital employed to fall from 40–50 percent to 20–25 percent over the next five years. It is also concerned about the company's expansion into South India as it sees growth being gradual due to entrenched competition and low brand awareness, CNBC TV18 reported.
A slow ramp-up of digital health platforms and a quick turnaround of the Suburban acquisition are some of the key risks for DR. Lal Pathlabs, according to Credit Suisse's estimates.
The company's net profit declined 57 percent to ₹58 crore in Q1 FY23 as against a net profit of ₹134 crore in the April-June period of the last fiscal. The revenue from operations declined to ₹503 crore from ₹607 crore a year ago.
The diagnostic industry is facing high competition, particularly in the high-margin routine test segment in metro cities, said Sayantan Maji, analyst at Credit Suisse.
New entrants with deep pockets like Lupin, Torrent Group, and Tatas are already disrupting the diagnostic sector. To add to that, digital platforms like Tata and 1 MG are enjoying pricing power compared to the existing players, he said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.