Why are Stocks in Diagnostics Industry are Falling?

Overview of the diagnostics Industry in India

The growth in the industry is largely volume-driven and is highly fragmented. That is, dominated by a few large (organised) players and various small and regional players. Analysts point out that 80-85% of the industry is unorganised or dominated by regional players.

So far, higher life expectancy and changes in lifestyle, a health-conscious population, and improvement in testing services, could directly contribute to the growth of the companies in the diagnostics industry.

The outbreak of Covid in 2020 has helped improve volumes and realisations for the companies including Metropolis, Dr Lal Pathlabs and Vijaya Diagnostics. This also helped in increasing the penetration of testing services across the country. Government too has promised to increase healthcare spending which bodes well for all the companies operating in this industry.

While all the indicators appear to be positive for the industry, it has pricing pressure. That is, the players in the diagnostics industry cannot take advantage of the pricing. Their services are offered at a steep discount considering the competition, particularly from small regional players.

Potential for growth in the diagnostics industry in India

According to various reports in the media, experts expect consolidation in the industry as various Government healthcare-related policies are introduced and implemented. This not only offers potential for growth in the coming years but could also offer pricing advantages for the companies. 

Further, the penetration of testing centres in India is still low, especially in the rural regions where the dependence on primary health centres is high. This bodes well for diagnostics companies in terms of expansion. For instance, in December last year, Lupin announced the launch of diagnostic labs. Similarly, SRL Diagnostics has planned investments for expansion purposes. Metropolis too said in a statement about expanding to smaller cities.

The diagnostics industry has two categories – pathology (offered by all and accounts for nearly 58% of the revenue in the industry) relates to testing of all major illnesses. And radiology (which accounts for 42% of revenue in the industry) relates to imaging diagnoses such as x-rays, CT scans and Ultrasound.

According to multiple DRHP documents, the radiology category has a higher potential to grow in the coming years (Estimated at Rs 425 billion by FY23).

The key differentiator among the large, organised players including Metropolis, Dr Lal Pathlabs and Vijaya Diagnostics services include pathology and radiology tests, pricing, and services offered.

For instance, Dr Lal Pathlabs offer better radiology tests compared to other large players. The company offers 1947 radiology tests as of 31, March 2021. Vijaya Diagnostics offers nearly 550 radiology tests. 

About the Companies

There are multiple companies operating in the diagnostics space. One of the key reasons for the stocks to correct could be due to falling in covid-related tests revenue. Though their mainstream revenue (income from other tests) appears to be steady.

Here is an overview of a few companies.

Vijaya Diagnostics:

The company is among the largest diagnostics chains in the country with nearly 89 centres across 15 cities in India. It is one of the dominant players in Southern India. Unlike other diagnostics players in the industry, the key differentiating factor for Vijaya is that it offers its services directly to customers. Nearly 92% of its revenue is from B2C. It also has an extensive presence in both pathology and radiology offering a balanced income stream.

Explore Vijaya Diagnostics Stock Historical Price

Since January this year the stock has corrected 26%.

• Q3 FY22 update:

The company reported a revenue increase of 11% y-o-y during the December quarter of FY22 to Rs 111 crore. While non-Covid tests registered a growth of 20% y-o-y, Covid related tests declined 40% y-o-y in the recent December quarter when compared to the same period last year. The company’s profit reported an increase of 2% y-o-y during the same period.

According to the management, during the quarter the company had opened 4 new centres and has partnered with corporate organizations for providing comprehensive health and wellness services for employees and their families. The management also plans to expand its presence in eastern India.

Dr Lal Pathlabs:

The company is one of the largest players in the diagnostics industry. It has a majority presence in the Northern regions of India. The company derives nearly 60% of its revenue from B2B segments (where services are offered to hospitals or smaller chains). The remaining 40% comes from services to customers (B2C). The company has among the highest radiology (image scanning) tests that include basic radiology offerings including X-ray, ultrasound and mammography, and advanced radiology offerings such as bone densitometry.

Explore Dr Lal Pathlabs Stock Historical Price

Since January this year, the stock has corrected nearly 42%. 

• Q3 FY22 update:

The company reported a revenue increase of 10% y-o-y to Rs 467 crore in the December quarter of FY22. Like any other players in the industry, the non-covid revenue registered a growth of 28% y-o-y while covid-related revenue fell 47% during the same period.  The company’s normalised profit registered a fall of 12%. But the actual profit was hit by acquisition costs of Suburban Diagnostics Pvt ltd during the same period. Many experts anticipate that the acquisition could aid in the long-term growth of the company. 

According to the management, the company is likely to continue its expansion plans and digital investments. 

Metropolis

The company is one of the leading players in the industry with a dominant presence in western India. It is rapidly expanding to other regions as well through acquisitions and new centres. According to the company’s statement, the company offers specialised, comprehensive test menus. The company had derived nearly 57% of its revenue in the past two years from the B2B segment, due to its focused efforts to increase its business in B2C segments as well, it (B2C) contributes to 50% of revenue. It has an asset-light model too.

Explore Metropolis Stock Historical Price

Since January this year, the stock has corrected 43%.

• Q3FY22 update:

The company reported revenue growth of 7% y-o-y to Rs 293 crore during the December quarter of FY22. Metropolis too reported a fall in the covid and allied revenue while the non-covid reported an increase. The absence of Government contracts and increased employee costs have impacted the margins. Additionally, an increase in depreciation costs has impacted the profits too. The profit during the same period fell nearly 30% y-o-y. The company too is on expansion mode to open new centres, across different cities. 

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Research Analyst: Bavadharini KS