IPO Analysis: Dr Lal PathLabs

Dr Lal PathLabs is the second-largest medical diagnostics services chain in the country that has initiated the process of raising nearly 630 crore through an initial public offer (IPO). It will hit the capital market on 8th of December with its initial public offer (IPO) and close on 10th December 2015. The price band at which the company is offering its share is Rs 540-550 per equity share and aims to raise Rs 630 crore at upper price band by issuing a 1.16 crore equity share of Rs 10 each through offer for sale by promoters and existing shareholders. The offering consists of 14.04 per cent of the paid up capital of the company and will give the company a valuation of around Rs 4,500 crore. Dr Lal would be offering an additional discount of Rs 15 to retail investors investing up to Rs 2 lakh. Minimum application is to be made for 20 shares and in multiples thereafter.

Currently, the company has its own one central reference lab in Delhi and 171 satellite labs across the country. Besides, over 1,500 service centres and 7,000 pick-up points for collection of samples. In FY15, and H1FY16, the company has collected nearly 21.8 million and 13.4 million samples from about 9.9 million and 6.2 million patients, respectively. As per the company’s management, the diagnostic business market size in country is at Rs 37,000 crore and is growing at 16-17 per cent annually, which is faster than overall health care sector. While 85 per cent of the diagnostic business market share is held by unorganised-single centre, lab chains control only 15 per cent of the share.

The promoter group is offloading 5 per cent stake and private equity investors are selling 9 per cent stake in the company. Post the stake sale, private equity investors (WestBridge Capital and TA Associates) will be left with 23 per cent stake in Dr Lal PathLabs.

Dr Lal PathLabs is a debt free company. The company believes that its internal accruals are sufficient to support future expansion. Asset-light model and continuous network expansion has helped the company maintain its growth. The company has maintained a strong growth track record in the past, with revenue growing at a compound annual growth rate (CAGR) of 20.7 per cent in the last two years as compared to the industry's growth rate of 16-17 per cent. In FY15, its consolidated revenue from operations was Rs 660 crore compared with Rs 558 crore in the previous year. Although the firm is 4/5th  the size of its bigger rival SRL, it has the same EBITDA or operating profit last year of around Rs 158 crore, which grew 13 per cent on yearly basis. Dr Lal PathLabs' net profit rose to Rs 95 crore in FY15 from Rs 80 crore for the year ended March 31, 2014. For the first half of current year it has reported net profit of Rs. 54 crore after adjusting exceptional items of Rs 16.63 crore on a turnover of Rs. 407.71 crore.

Coming to the valuation at higher price band the company is available at around P/E of 42x as we annualized H1FY16 earning of Rs 6.6 per share. Even at a Price to NAV at around 8 times makes this offer expensive. There is no listed peer under consumer healthcare diagnosis services sector, so it may enjoy the benefit of first mover of the sector and might enjoy the premium. Looking at the company’s fundamentals and valuation we believe the subscriber should avoid this IPO due to its higher valuation and go for any other IPO from the healthcare sector, which will also hit the capital market during the same period.