Lal PathLabs can fortify its hold if suburban is integrated well

Asia's Tech News Daily

Dr Lal PathLabs, revenue, Diagnostics, cash reserves, industry

ET Intelligence Group:

Dr Lal PathLabs

(LPL), India’s largest diagnostics player by revenue and presence, is slated to become bigger with the acquisition of Suburban Diagnostics, which has a sizable presence in western India. At the total deal value of Rs 1,150 crore, LPL valued Sequoia Capital-backed Suburban at nearly four times its FY21 revenue.

The acquisition is going to provide LPL scale and penetration – it will help it add 44 laboratories and diagnostics centres and over 150 collection centres. It fills the gap for LPL which has dominance in northern and eastern India.

After the acquisition, LPL’s revenue would increase by around a fifth. For LPL, revenue contribution from the western region is expected to increase to 24% from 10%. Greater Mumbai will become the second-largest cluster for LPL after Delhi-NCR.

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Suburban, however, has a lower margin profile compared with LPL. It will be upon LPL’s integration capabilities to drive improvement in Suburban’s margins through post-acquisition economies of scale. The funding of the acquisition through LPL’s existing cash reserves, while being an indicator of its strong financial position, would, on the other hand, largely wipe out its cash reserves.

LPL’s vision is to be the undisputed market leader, and it is targeting to grow ahead of the industry. In this context, the deal is a strong defensive strategy for LPL in wake of the foray of business groups Reliance Industries and Tatas, as well as pharma companies Mankind and Lupin into the Indian diagnostics industry.

Dr Lal PathLabs, revenue, Diagnostics, cash reserves, industry

In India, medical diagnostics has been a promising growth-oriented business. The pandemic, with its emphasis on testing, brought the industry into the limelight. However, in an industry that is largely fragmented and unregulated, with very low entry barriers, consolidation is imminent as organised players scale-up through acquiring smaller regional players.

However, finding good targets at reasonable valuations becomes crucial. In June, online pharmacy player PharmEasy picked up a 66% stake in listed diagnostic company Thyrocare Technologies for ₹4,546 crore- becoming the first unicorn to acquire a listed company. Thyrocare’s FY21 revenue stood at ₹494 crore and net profit at ₹113 crore.

Meanwhile, two new companies – Krsnaa Diagnostics and Vijaya Diagnostics – have got listed on the bourses. There are several more corporate chains springing up, thanks to funding and support from private equity players. As Covid-19 testing wanes, consolidation is going to be the next growth driver for the industry, experts say.

The company’s shares are down 17% from the record high of ₹4,243 they hit last month. Decline in coronavirus testing amid rising competition does not augur well for the market leader. However, the latest acquisition, if well integrated, should make LPL a more formidable player in the Indian diagnostics industry.

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