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Revenues of diagnostic companies are expected to decline 5-7% in this fiscal as the pandemic intensity wanes due to fall in covid-19 cases along with consumers preferring self-test kits, according to a report by Crisil. This is in contrast with the strong growth of 30% last year due to severe Covid-19 wave and higher demand for regular tests.
The report said that operating margin of the diagnostic companies is expected to decrease to pre-pandemic levels of 24-25% due to lower revenue and higher operating expenses, mainly, marketing and advertisement spending. This is in contrary to higher realization last year from Covid-19 related tests and better operating leverage leading to higher operating profitability of about 28%.
Anuj Sethi, Senior Director, CRISIL Ratings, said, “The revenue share of Covid-19 tests has fallen to low-to-mid single-digit in the first half of this fiscal. This shortfall will be partly compensated by 12-14% increase in revenue contribution from regular tests in both existing geographies and from expansion into tier-2 and 3 cities.”
New Competition
The report noted that a new trend is emerging as there is increasing competition from online pharmacy players offering tests, mainly, in the wellness segment of regular tests. These tests by online pharmacy typically do not involve doctor prescription or referrals. The online pharmacy have tied up with regional labs for conducting such tests, thereby, reducing the cost of maintaining a physical infrastructure of their own.
To counter this competition, established diagnostic players, who generate 10-12% of revenues from wellness tests, have increased investments in digital infrastructure and home-collection services. In addition, the diagnostic players have also increased marketing and advertisement spending to reinforce its brand recall and awareness on quality.
Financial Health
Crisil opined that diagnostic players will have stable credit profiles helped by good cash generation, prudent capital spends and low debt levels. This is after the rating agency studied 11 diagnostics companies that had a total sales of Rs 6,500 crore in the last fiscal.
Moreover, strong liquidity and positive cash flow will be sufficient to meet the capital expenditure requirements of diagnostic players. The rating agency said that the capex requirement will not be high as major investments will be towards laboratory equipments. Therefore, debt levels of diagnostic players are expected to remain low, resulting in healthy balance sheets.
Stocks To Watch
Some of the stocks to watch out for in this space are as follows: Dr. Lal Pathlabs, Metropolis Healthcare, Vijaya Diagnostic Centre, Thyrocare Technologies, Krsnaa Diagnostics, Sastasundar Ventures (parent of Flipkart Health+), Vimta Labs, Jeevan Scientific Technology, Aspira Pathlab & Diagnostics, Choksi Laboratories, Medinova Diagnostic Services.