In the past week, stocks of testing companies Thyrocare Technologies Ltd, Dr. Lal PathLabs Ltd, and Metropolis Healthcare Ltd fell around 6.2 percent, 11.6 percent, and 4.7 percent, respective investors are worried that increased Healthcare competition due to the entry of Reliance Life Sciences Pvt. Ltd into the diagnostics space. This could reduce margins and reduce return on equity with increase healthcare competition.
According to some experts, concerns that a deep-pocketed competitor could threaten the business model in diagnostic space may be overdone. Entry barriers in the B2B system are high. Scaling is a step-by-step process. In order to reach a level, one can not literally attack the market with free trials. Disruption of markets has already arisen. Lower pricing may therefore not play a major role, as a misdiagnosis may also be a matter of life and death, and it’s not about what’s cheaper, an analyst said on condition of anonymity. In any case, margins can be hit if there is an increase healthcare competition. For example, Dr. Lal PathLabs and Metropolis’. Ebitda margins (earnings before interest, tax, depreciation, and amortization) are in the range of 24-26 percent, while Thyrocare’s margins are about 38 percent, a CLSA Ltd report said.
For some diagnostic firms, therefore, there might be a risk of valuation. Dr. Lal PathLabs quotes a company-like valuation of about 41 times a year’s forward earnings per share in consumer products. Diagnostics, though, is a fractured and widely underpenetrated market. Nevertheless, the trend of volume growth will begin. “Growth over the past few years has been driven largely by volumes, as realizations have been under stress due to tight B2B inventory prices and lower-level market penetration. Listed players ‘ PE valuations have improved with the goal of maintaining current volume growth as product favorable moves to standardized products,” said the CLSA report.