Red flag goes up on diagnostic stock after Covid 2.0 lifted it 51% in 2 months, Health News, ET HealthWorld


Red flag goes up on diagnostic stock after Covid 2.0 lifted it 51% in 2 monthsNEW DELHI: From a market price of Rs 2,250 at the end of January to a record high of Rs 3,398.95 on Monday, shares of Dr Lal Pathlabs rallied 51 per cent in just two months. Following this strong rally, a host of brokerages have turned cautious on the stock, with some predicting that a big fall in the stock may be imminent.

The latest brokerage to give such a call is Nomura, which on Tuesday downgraded Dr Lal Pathlabs to ‘reduce’ rating with a price target of Rs 2,333, marking a 30 per cent downside. The stock fell almost 12 per cent for the day.

With Covid cases peaking every day, a rise in demand for shares of this diagnostic firm is a no brainer. But the valuation of the Dr Lal Pathlabs stock does not look convincing.

The stock has significantly outperformed its peers and the broader market since the start of the pandemic in mid-February last year.

“More recently with the start of the second wave, the stock has risen 38 per cent since mid-March against Nifty’s negative return of 4 per cent over the same period. As a result, the stock’s valuation has increased substantially to 79.5 times one-year forward earnings compared with 30-60 times in the pre-pandemic period,” Nomura said.

Before Nomura, HDFC Securities had initiated coverage on the diagnostic sector with a bull case price target of Rs 2,985 for Dr Lal Pathlabs and a base case target of Rs 2,893. At Monday’s high, the stock quoted a 14 per cent premium to HDFC Securities’ bullish target. The brokerage had projected the stock to reach that target in two quarters.

JM Financial sees the stock at Rs 2,175. The brokerage has a ‘hold’ rating on the stock. Kotak Securities has a ‘sell’ rating with a price target of Rs 1,520!

What is aiding the stock is the company’s strong contribution from Covid-19 testing at high profitability since September quarter.

Analysts said preliminary results of the peers suggest non-Covid revenue growth of 14-20 per cent YoY and 7-11 per cent CAGR over the March quarter. But, said analysts, the profitability of Covid-19 tests may come down, given the substantial drop in test prices from Rs 1,500 to Rs 700-800 per test now.

“We downgrade our rating to ‘reduce’. We maintain the fair value range at 40-50 times one-year-forward earnings. Our assessment of the valuation multiple assumes strong growth in volumes in diagnostic tests for Dr Lal Pathlabs in India, given the under-penetration and market share gain from unorganized players. However, we are likely to see limited upside in Ebitda margins due to competitive pressure from existing and new entrants,
including e-commerce players,” Nomura said.

Chakri Lokapriya, CIO & MD at TCG AMC, said shares of some of the diagnostic companies such as Metropolis, which have not run up as much as that of Dr Lal Path Labs in the healthcare space, are still looking good.

Angel Broking is advising investors to consider Metropolis. “Metropolis is a leading pathology centre in India and has an asset-light model with a strong balance sheet. It has one the largest pathology setup in India, which gives it economy of scale, compared with the smaller regional players. The rising scale of operations will help reduce the cost structure for national pathlab chains like Metropolis, thus forcing marginal players out of the market in the long run,” it said and suggested a price target of Rs 2,590 on the stock. This scrip, which has gained 17 per cent since January end, closed at Rs 2,387 on Tuesday.

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