BACK TO THE LAB
Business Today India|October 30, 2022
PLUMMETING MARGINS POST THE PANDEMIC AND RISING COMPETITION FROM NEW ENTRANTS HAVE FORCED ORGANISED DIAGNOSTIC PLAYERS TO GO BACK TO THE DRAWING BOARD IN THEIR SEARCH FOR GROWTH
NEETU CHANDRA SHARMA
BACK TO THE LAB

AT THE PEAK of the Covid-19 pandemic, the one thing that had become ubiquitous was the RT-PCR test. Scenes of swabs being thrust into the nose and throat had practically become part of regular life. What that also did was provide a fillip to the financials of diagnostic companies that were doing the tests. The possibility of a new revenue and profit stream also encouraged a herd of other entities to jump into the diagnostics fray. But now, as the pandemic wanes and RT-PCR testing peters to a trickle, the past few quarters have seen profits dip for leading diagnostic players. For example, market leader Dr Lal PathLabs, headquartered in New Delhi, recorded a 26.5 per cent dip in consolidated net profit to ₹61.3 crore in Q4FY22 from ₹83.4 crore in Q4FY21. Likewise, Mumbai-headquartered Metropolis Healthcare reported a 34.8 per cent decline in consolidated net profit at ₹39.99 crore in Q4FY22 compared to ₹61.35 crore in Q4FY21.

According to a report by Antique Stock Broking, margins reported during FY21 at the peak of Covid-19 will not be repeated anytime soon, plus there is other impact, too. “We expect negative operating leverage and return ratios such as return on capital employed (ROCE) to remain under check at 2526 per cent for both [Dr Lal and Metropolis], a decline in comparison to the pre-pandemic range of around 33 per cent,” says the report released in September. Another report from Credit Suisse, penned by research analysts Sayantan Maji and Anubhav Aggarwal, says that high competitive intensity could halve industry ROCE. The report says: “We expect ROCE to settle down to around 20-25 per cent by FY27E, implying Ebitda margin of around 20 per cent. Ebitda margin of Dr Lal and Metropolis has already declined by 300 bps (vs pre-Covid-19) to 23 per cent, but we expect it to steadily contract by a further 300-400 bps.”

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