Dr Lal PathLabs: Multibagger in past, Will it Continue to Compound?

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Dr Lal PathLabs is one of the leading formal diagnostic players & major market holder of the organised diagnostic services industry.

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• Major Events till 2019
• Shareholding Pattern of Dr Lal PathLabs
• Executive Management of Dr Lal PathLabs
• Principal Business Activities of Dr Lal PathLabs
• Business Model of Dr Lal PathLabs
• Revenue Segmentation
• Dr Lal PathLabs Network for services
• Significant Ratios of Dr Lal PathLabs
• Highlights from Management Discussion
• Major Facts of Indian Diagnostic Industry
• Opportunities for Dr Lal PathLabs & overall industry
• Risks/Concerns

(A) History & Major Events till 2019

1949:

Late Dr. Major S.K. Lal set up sole proprietorship M/s Central Clinical Laboratory and M/s Blood Bank Transfusion Centre. Thus he started the business of providing pathology services and maintaining a blood bank.

1975:

Then the company transformed into a partnership firm with Late Dr. Major S.K. Lal and his son Dr. Arvind Lal forming a partnership agreement. The firm was named 'Central Clinical Laboratory' which carried the pathology services. Secondly, the blood bank maintained under the name ‘Blood Transfusion Centre’.

1977:

Later in the year 1977, Late Dr. Major S.K. Lal passed away. So, his wife, Late Ms. Vimla Lal, took over the partnership with Dr. Arvind Lal.

1995:

On February 1995, the company incorporated as private limited company ' Dr. Lal PathLabs Pvt Ltd'. Thus, the company took over the business of the firm 'Central Clinical Laboratory'.

2000:

Three clinical labs of Dr. Lal PathLabs received NABL1 accreditation from National Accreditation Board for Testing & Calibration Laboratories (NABL).

2001:

Received ISO 9001:2008 certification for quality management system.

2001:

Received 'International Accreditation' from CAP2. CAP accredited ensures your test results are meeting and exceeding industry standards for clinical laboratory testing.

2005:

The company received its first capital infusion from venture capital firm, WestBridge Ventures. WestBridge Ventures-I invested $10 million in the company in two tranches during 2005-07. It exited a part of this in 2010 when another private equity fund - TA Associates acquired the stake. In conclusion, the company raised ~Rs. 45 crore till the year 2013.

2008:

In order to expand, the company acquired Paliwal Medicare Pvt. Ltd. and Paliwal Diagnostics Pvt. Ltd.

2010:

National Reference Lab set up in Delhi to centralize all the tests.
Secondly, during the year, TA Associates bought 16% stake from WestBridge Ventures-I in a secondary deal for $35 million (Rs. 163 crore).

2013:

Eventually, WestBridge Crossover Fund and TA Associates acquired the remaining stake of WestBridge Ventures I. WestBridge Crossover Fund invested $36 million in the transaction and $9 million invested by TA Associates.

2015:

The company issued its IPO which oversubscribed by 33.41 times. Issue price was 550 per share & the issue size Rs 638 crore.

2016:

Dr Lal PathLabs acquired 100% Delta Ria and Pathology Pvt Ltd. For past 3 years the entities were in revenue share agreement.

2017:

BOD of Dr Lal PathLabs approved amalgamation of Delta Rio and Pathology Pvt Ltd with the company in May 2017.
Further, in August 2017, the company resolved to acquired 70% stake in Dr Lal Path Labs Bangladesh Pvt. Ltd. (DLPLB) from existing shareholders.
In addition, Dr Lal PathLabs’ subsidiary Paliwal Diagnostics Pvt Ltd acquired a Kanpur based proprietary concern ‘Satya Pathology and Diagnostic Centre’ (SPDC).

2018:

Kolkata Reference Lab started testing of samples in early January. This Lab caters the demand from Northeast as well as Eastern regions of India.

2019:

In April 2019, Dr Lal PathLabs' wholly owned subsidiary Pathlabs Unifier Pvt. Ltd. approved the acquisition of proprietorship concern. 'M/s Bawankar Pathology'. Turnover of the acquired company is 1.5 crore in FY18.

Further, in June 2019, DLPL's wholly-owned subsidiary ‘Pathlabs Unifiers Pvt. Ltd.’ approved to acquire 70% stake in Centra Pathlabs Pvt. Ltd., which acquired the business of Central Lab, Indore (a partnership firm) and M/s. Vinita Kothari (a proprietorship concern). This acquisition is to improve position in Madhya Pradesh.

In addition, in October 2019, ‘Pathlabs Unifiers Pvt. Ltd.’ approved to acquire 70% equity stake in M/s Amins Pathology Referral Laboratory; a proprietorship concern of Dr. Ripal Padmani, engaged in pathology business in Gujarat. Estimated turnover of the acquired entity is Rs. 5 crore for FY19.

(B) Shareholding Pattern

As on 30th September 2019, the promoters hold 56.91% of the total shareholding. The institutional holding is 30.22% with foreign portfolio investors holding 20.12% and mutual funds holding 7.25%.

Shareholders Holding more than 1%

(C) Dr Lal PathLabs Executive Management

(i) (Hony) Brig. Dr. Arvind Lal: Chairman & Managing Director

Dr. Arvind is the son of founder, Late S.K. Lal.  Dr. Arvind. He is graduate and post graduate in medicine from the Armed Forces Medical College, Pune. After completing post-graduation, started his career there as a lecturer at the Department of Pathology. He joined the company in 1977. In 2009, Government of India awarded Padma Shri to him. His remuneration from DLPL is Rs. 2.24 crore for  FY19 with an increase of 5% from FY18.

(ii) Dr. Om Prakash Manchanda - Whole-time Director and CEO

Om Prakash Manchanda studied veterinary science and animal husbandry Haryana Agricultural University, Hisar. Further, completed a PG diploma in management (agriculture) from the Indian Institute of Management, Ahmedabad. He joined DLPL in 2005 as COO and promoted to CEO in 2008. He worked for nearly 15 years with big companies such as consumer goods giant Hindustan Unilever, drug maker Ranbaxy and seeds firm Monsanto. His remuneration is Rs. 3.52 crore for FY19, an increase of 5% over FY18.

(iii) Dr. Vandana Lal (Whole Time Director)

She is wife of Dr. Arvind Lal. She completed her Bachelor degree and Doctorate degree in Medicine from the University of Delhi. Her remuneration for FY19 increased by 5% to 1.78 crore.

(D) Principal Business Activities

1. Different Kinds of Tests

Dr Lal PathLabs offers ~4900 pathology and radiology tests.

a. Pathology Tests

Pathology is used for determining the cause and nature of diseases by examining and testing body tissues (from biopsies and pap smears) and bodily fluids (from samples including blood and urine). Full Blood Examination, Iron studies, Urinalysis, Histopathology, Cytopathology, Immunohistochemistry are the main tests provided by the DLPL. DLPL is providing 2425 pathology tests.

b. Radiology

Also called diagnostic imaging, different tests are undertaken by taking pictures or images of various parts of the body.  Many of these tests are important because they allow doctors to see inside the body. X-rays, ultrasound, bone mineral densitometry, fluoroscopy, mammography, nuclear medicine, PET scan, CT and MRI are the main radiology tests.

c. Cardiology

Cardiology test are undertaken for heart related diseases/problems. ECG, Echocardiogram, Cardiac catheterization and nuclear cardiology are the common tests in this category. DLPL has 1722 tests related to radiology and cardiology.

2. Sample Collection from home

DLPL is providing home facility to patients. DLPL has pickup points which collects the sample from the home of patient and tests are done at the clinical labs.

3. Online Reports

Reports of patients are stored on an online database which is easily accessible by the patient. He can download & share the report with his doctor

(E) Business Model

DLPL works on Hub and Spoke Model in which one part is connected to another part. There is one hub which acts as central part of the model.

1. Pick Up Points (PUPs): PUPs are used for collecting the data from the home of patient. PUP collects sample and send these to PSCs. DLPL has 6,426 PUP as on 31^st March 2019.
2. Patient Service Centres (PSC): PSCs make sure samples are stored safely and send it to the nearby lab for tests. Patient can also provide sample at these centers. Also, some basic tests can be processed at PSCs. As on 31^st March 2019 DLPL has 2569 PSCs. PSCs are the fastest means to expand for the company with lesser capital pressure.
3. Clinical Laboratories: At these laboratories tests are performed by the Lab Technicians. Majority of tests are provided by these Labs. DLPL has 200 Clinical Labs as on 31^st March 2019. Some specialized tests are not conducted at Clinical labs. Thus these are transferred to Reference Lab.
4. Reference Labs: Reference labs are central point of the entire model. Specialized test are provided by this. DLPL has two Reference labs. First is in Delhi NCR & other in Kolkata which recently became operational.

(F) Revenue from Operations

The company does not report separate revenue segments. The whole revenue is from the core business activity of the company i.e. running laboratories for carrying out various pathological investigations.

(i) Geographical Segments

1. India: 99% of the total revenue
2. Outside India: 1% of the total revenue

(ii) Region Wise Presence of Dr Lal PathLabs

DLPL classifies its presence into two main markets that are - Delhi NCR and Rest of India. With starting operations from Delhi, the company over the years expanded operations in other parts of the country. In Rest of India, main business comes from North to East region also known as Hindi Belt region. Out of the total presence of DLPL, Delhi NCR region alone contributes 42%.

The company aims to reduce its dependence more on Delhi NCR region in future & further increase presence in other regions.

(iii) Patient Volume

Patient Volume growth is an important factor to evaluate the revenue growth. The total revenue growth for FY19 was 13.86%. This is backed by patient volume growth of 15.79% and growth in no. of samples processed of 20.46%. Patient volume grew by 16% YoY for the quarter ending 30 June 2019.

(iv) Number of samples processed

Sample Processed means tests done by DLPL in a period of time. Samples processed grew by 20.46% in FY19 over FY18. Moreover, YoY growth for quarter ended 30 June 2019 is 19.8%.

(v) Average test Per Patient

ATP is calculated by dividing No. of Sample Processed with No. of Patients Served. This figure reveals the average rate of tests by a patient.

(G) Lal PathLabs' Network

(i) Dr Lal PathLabs has the following network of labs, collection centers & pickup points:

(ii) Revenue Mix:

(iii) Employee Count:

The current count given by management till June 2019 is 4,400 employees including full time consultants, pathologists, phlebotomist & radiologists.

(H) Important Ratios

(I) Highlights from Management Discussion

• During recent past periods, company's volumes increased due to its bundled test packages - 'Swasthfit' and 'Sugar Me'. These packages are gaining momentum as they provide better value to patients. Thus, leading to higher samples per patient.
• For the first quarter of FY20, 'Swasthfit' contributed 15% to the company's revenue.

Penetrating into other than NCR regions

• In first quarter of FY20, there is a slight dilution in revenue per patient of 1% YoY. This major impact is due to contribution of rest of India, which is growing & there, the realization per patient is not that high. Specially, the impact is from Eastern region.
• The growth of Eastern region's revenue is part of current expansion strategy of Dr Lal PathLabs. CAGR of Eastern region is ~21% FY17-19. And that of Norther region is 13-14%.
• Moreover, as a part of expansion strategy, Eastern region is now almost independent ecosystem with dependence on Rohini, Delhi Lab of just 5%. Further, the company intends to expand in the presence in East & Central India by opening additional smaller clinical laboratories and new complementary PSCs.

Strategic acquisitions & partnerships:

• Dr Lal PathLabs proposes to continue exploring expansion opportunities in India. Thus, it involves strategic acquisitions of regional diagnostic healthcare service providers who have brand recall among its existing patient base & healthcare providers.
• The company started such acquisitions & partnerships since FY08 & continue it further for expansion. As stated earlier, recent acquisition is by its wholly owned subsidiary in June & October 2019.
• With the current acquisition in Indore, the company is in line with its strategy of targeted expansion in South and West India (focused city approach).

Hospital Lab Management

• The company also has focus on scaling up the offshoot model. It involves undertaking management of laboratories which are functioning within a hospital. It is part of current strategy to increase existing tie-ups/contracts in hospital lab management. Thus, it will leverage scale & efficiency of network.

(J) Indian Diagnostic Industry - Important Facts

• India is expected to rank amongst the top three healthcare markets in terms of incremental growth by 2020.
• Due to Rising income levels, ageing population, growing health awareness and changing attitude towards preventive healthcare healthcare services' demand shall rise in future.
• The low cost of medical services has resulted in a rise in the country’s medical tourism, attracting patients from across the world.
• But, the diagnostic industry is highly fragmented & dealing with very high level of competitive intensity given the large share of unorganized players due to absence of stringent regulations and low entry barriers.

Size of the Diagnostic Industry

• The estimated size of Indian Diagnostics Industry is Rs. 59,610 crore for FY18. It forms ~6% of the overall Healthcare Segment.
• The organized large pan India diagnostic chains are working hard to counter competition by reaching to customers either online and sending the collection agent to their doorstep or by setting up more collection centres.
• They are also working on creating better brand image by focusing on increasing patient walk-ins through strategies such as organizing health camps and launching various packages.
• Expected size of the diagnostic services industry is Rs. 80,210 crore by FY20.

Out of the total diagnostic chains, large pan-India chains constitute 35-40% & regional chains constitute 60-65%.

(K) Opportunities & Risk/Concerns

Opportunities

1. Ageing Population:

India population is now shifting from young to ageing. the share of young population is slowly coming down while that of elderly population of more than 60 years of age is rising at a faster pace. The geriatric population (60 years & above) is more susceptible to various chronic diseases and requires a regular health checkup. Similarly, the awareness about new diseases and focus on preventive care and wellness amongst the young population is also rising. As a result, the demand for diagnostic services are likely to see a massive upsurge in coming times and opens up huge growth potential for the industry due to the country’s large population size and changing demographic trends.

2. Rising Income:

Per Capita Income of India has doubled from Rs 63,642 per year in 2011-12 to Rs 1.25 lakh in 2018-19. So within seven years it doubled. Now people can afford the high priced test for their health. Moreover, As the income levels are rising, the lifestyle of an individual is also undergoing a massive change, which in turn is resulting in a shift in the disease profile of the population from infectious diseases to chronic or lifestyle diseases, such as cardiovascular diseases, diabetes and cancers.

3. Preventive Testing:

The testing is not done for any disease or as a compulsion by Doctor, but as a precaution to see that the person does not have any disease. With health consciousness in people more & more people will go for preventive checkups in future.

4. Increasing Evidence Based Treatment:

Due to rapid technological advancements in the healthcare
industry, doctors increasingly prefer evidence based treatment. This
creates a sustained driver for the growth of diagnostics industry. For many years, doctors in India used traditional methods to identify the symptoms and treatment of medical illness of patients. This resulted into filling of multiple litigations against doctors & health institutions owing to unsuccessful treatments/outcomes. But now, ~70% of the medical decisions are now based on diagnostic results. This still excludes under penetrated hospital infrastructure in Tier II & III cities.

Risks/Concerns

1. Inevitable Pricing Pressure & Competition:

Unlike the hospital sector, where certain hospitals have the advantage of claiming premium prices based on superior doctors, the diagnostic sector especially for the basic tests, has an inherent limitation of having standardised services. With incremental competition expected in future, the diagnostic market will get commoditised and larger players will be forced to reduce prices.
The barriers to entry being low, there is also a constant entry of new players. When this happens in a market where the pricing already operates at the lower band, the established diagnostic chains have to fight for market share at the cost of margins.

2. Online Aggregators:

Diagnostic market is an unorganized one and it is full of small players. But with coming of online aggregators this is converting into an organized one. This is the main threat to DLPL which they may face in future. Online aggregators aggressively attract customers & are also expected to drive greater patient participation in using diagnostic offerings.

3. Company's Succession Plan:

Dr Lal PathLabs is built & grown under the vision of Dr Arvind Lal. His wife Dr Vandana Lal is also completely involved in managing the business & its future growth. The future generation of the family is not yet made part of the core business activities. Dr Arvind Lal has a daughter who is a pathologist & is married to an American, currently settled in USA. Meanwhile, his son, who is an acknowledged wild life photographer, is in charge of the veterinary pathology setup in Lal Pathlabs.
The management roles have not been decided yet for company's future strategic growth or it may lead as a professionally managed enterprise.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry's Publications.