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Published on: Aug. 29, 2020, 6:13 p.m.
Dr Lal Path Labs on a healthy growth path
  • Dr Lal Path Lab is all poised to continue its growth trajectory

By Arbind Gupta. Assistant Editor, Business India

Dr Lal Path Labs (DLPL), the largest and the fastest growing diagnostics company in the domestic diagnostics space, is also one of the oldest in the business. And, the Gurugram-based diagnostics chain has continued to strengthen its position in the fragmented Indian market, which has shown a distinct transition towards an organised structure in the last decade. From being a regional player dependent on Delhi-NCR few years ago, the company has become a pan-India player. Currently, contribution from rest of India is higher at 57 per cent, with a growth rate of over 16 per cent. In fact, the company has also moved to a few overseas destinations, such as Bangladesh, Sri Lanka and Nepal.

Backed by a 4,190-strong manpower, the diagnostics chain has diversified its presence with a strong network infrastructure. The first of its kind to get listed on the stock exchanges in 2015, it’s pursuing a proven hub-and-spoke model (where one central lab acts as a hub and small collection points and service centres as spokes) and has about 200 clinical labs, 2,569 patient service centres (PSCs) and 6,426 pick-up points (PUPs) today. Its strong network as well as prompt services enables it to be more efficient and accessible to its customers, even as its processes and facilities have got accreditation from cap, NABL and ISO.

Sophisticated lab

 Apart from a significant change in geographical and channel mix, the company’s products mix is also changing, as it now boasts of a wide range of pathology, radiology and cardiology tests, comprising an extensive catalogue of 459 test panels, 2,489 pathology tests and 1,946 radiology and cardiology tests. Today, DLPL is an established consumer healthcare brand in diagnostic services space, trusted by over 17.6 million customers (41.8 million of samples processed), including individual patients (primary focus on b2c) as also corporates, institutions, healthcare providers, as well as hospital and clinical labs (lab management).

In accordance to its growth strategy, the company has commissioned in January 2018 a Reference Laboratory in Kolkata. The reference lab, the second after DLPL’s National Reference Laboratory set up in 2010 in Delhi, will help the company reach out to physicians and consultants to educate and highlight the profile and variety of testing being made available. This highly sophisticated lab (55,000 sq ft, project cost: about Rs70 crore) is all set to cater not only to patients from Kolkata and West Bengal but also offer specialised tests to patients in all the north eastern states (which has been underserved), as also Bangladesh. With all these efforts in place, the company, engaged in diagnostics activities for about 70 years now (it commenced the business of providing pathology services and maintaining a blood bank in 1949), has established a robust business model and ensured an impressive track record of growth. The company has grown at a 16 per cent CAGR to Rs1,203 crore in 2018-19.

Most importantly, this growth has been achieved without compromising on margins and returns. DLPL, a zero debt entity, has seen its pat growing at a CAGR of 20 per cent to R200 crore in 2018-19. The company has also put up a healthy balance sheet and has maintained high return ratios, in an industry that is effectively flat or loss-making because of its fragmented nature. DLPL’s business model and performance has also been generating enough interest among investors. PE fund WestBridge took a 16 per cent stake in the company way back in 2005, when the company’s revenue just Rs40 crore. Reposing immense faith, the fund is still holding 7 per cent stake in the company, even as its revenue has surpassed Rs1,200 crore. During its association of about 14 years with the company, WestBridge had gradually increased its stake to as high as 32 per cent by 2010 (DLPL revenue: Rs170 crore), when it diluted 16 per cent of its stake and sold the same to US-based private equity investor TA Associates.

 

In 2015, the company (revenue: Rs660 crore) came out with an IPO, with WestBridge and TA Associates diluting 2 per cent and 7 per cent of stakes respectively. By 2017, ta Associates exited fully from the company, while WestBridge divested half of its holding last year, while holding 7 per cent stock in the company even now. Both TA Associates and WestBridge have made attractive returns (IRR: 30-35 per cent) in all the exits they made. “DLPL has continued to leverage its expertise to demonstrate sustainable and profitable growth,” says Arvind Lal, 70, chairman & managing director, DLPL. “Our hub and spoke model, in combination with our franchise system, fits well in the industry, which is shifting gradually but surely from the unorganised to the organised sector. Our strategies, led by our unflinching motto of delivering high quality testing, are well in place to take full advantage of the evolving landscape of the industry”.

An honorary brigadier in the Armed Forces Medical Services and a recipient of the Padmashri award, Lal has bachelor’s degree in medicine and surgery from the University of Poona, and a diploma in clinical pathology from the Armed Forces Medical College, Pune. He has over 44 years of experience in the field of pathology. Prior to joining the company, he was associated with Central Clinical Laboratory (a partnership firm and a group entity) as a partner.

 “In 2018-19, we crossed a milestone of Rs1,200 crore in revenue with robust volume growth and profitability,” says Om Prakash Manchanda, 54, CEO & whole-time director, DLPL. “This growth momentum is the outcome of a cohesive drive in strengthening our existing markets, while also expanding into newer ones. We expect this drive to continue, going forward, which will also increase the number of patient walk-ins and uptake of services”.

Manchanda, who has about 29 years of experience in the field of marketing and general management, holds a bachelor’s degree in veterinary science and animal husbandry and a post-graduate diploma in management (agriculture) from the Indian Institute of Management, Ahmedabad. He started his career with Hindustan Unilever, where he held positions such as area manager; innovation manager, beverages; business manager, loose tea, Brookfields; and senior product manager.

Healthy balance sheet

Prior to joining DLPL in October 2005, Manchanda had worked with Monsanto India Ltd as national marketing manager and later as national sales manager. In January 2003, he joined Ranbaxy Laboratory in its global consumer healthcare division, where he worked initially as general manager, marketing, consumer healthcare (India) and then as general manager, international & innovation. “DLPL is a well-established consumer healthcare brand having pan-India coverage. The company has an exhaustive catalogue (of tests), that it keeps adding and updating to become more effective. Importantly, DLPL has a healthy balance sheet and has maintained high return ratios in an industry that is largely fragmented,” says a report by Anand Rathi Research. The diagnostics chain is pursuing a robust growth strategy, where it is deepening its presence in its existing and core markets, while also expanding to newer geographies. Its hub-and-spoke model, backed by centralised diagnostic testing facilities as also PSCs and pups, provides greater economies of scale and facilitate faster penetration within region and expand reach.

In the last one year, the company has also gone for inorganic expansion. It has selectively acquired three entities in order to increase its presence in the western and central regions. In April 2019, DLPL acquired Bawankar Pathology, a sole-proprietorship firm based out of Bhandara in Maharashtra, for Rs5.2 crore. This acquisition was carried out through its 100 per cent subsidiary, Pathlabs Unifiers Private Ltd. This was followed by acquisition (70 per cent stake) of Central Lab, Indore, in June for a cash consideration not exceeding Rs50 crore. In October 2019, the company acquired a 70 per cent stake in Vododara-based Amins Pathology Referral Laboratory to strengthen its presence in Gujarat.

DLPL is also looking for inorganic opportunities in Bengaluru and Pune. Even as the company is on an expansion mode, in south and west India, it is going for target expansion (focussed city approach). In the north, it is looking to deepen its presence through developing additional reference labs. In the last few years, its dependence on Delhi-NCR market has come down significantly. It plans to scale up its presence in east India by developing network via Kolkata Reference Lab. The company is also focussing on the hospital-based clinical labs space, where it is looking to tie-up with hospitals to gain access to new customers as also start operations in new geographies. 

New tests

 Backed by these efforts, DLPL has witnessed marked gains in patient and sample volumes. In the last couple of years, volume of patients has gone up at a CAGR of 15 per cent to 17 million in 2018-19 while, for Q2 2019-20, it saw a 12 per cent growth to 5.3 million. At the same time, the volume of samples processed grew by over 19 per cent to about 42 million in 2018- 19, and to 13 million in Q2 2019-20 (growth: 17.5 per cent).

“The emphasis remains on building our volume momentum sustainably and enhancing engagement with our patient community,” says Manchanda. “We are leveraging opportunities in key existing regions through deeper targeting, test bundling and online outreach. Our bundled tests packages such as `SwasthFit’ and ‘Sugar and Me’ have also bolstered the volumes. These packages are gaining momentum as they provide better value to our patients, leading to higher samples per patient”. While the company is generating sustained growth through increasing volumes, it has continuously been improving and upgrading its test-mix, which has also helped it improve its bottomline. It offers a specialised and super-specialised menu of tests, which are mainly from high-end molecular diagnostics and biochemistry departments.

Last year, in the oncology segment, the diagnostics chain launched nine new tests and panels for diagnosis of both solid tumours and haematological malignancies. Another major test, the Thalassemia mutational analysis, too was launched at the same time, along with BRCA tests for preventive screening of breast cancer. In neuro-genetics segment, it launched 23 tests targeting diagnosis of rare diseases as well as specific diseases like myotonic dystrophy, cerebral ataxia and many more.  “We are constantly looking to bring new tests to the market, especially in the field of neurology and oncology, to help clinicians provide an accurate diagnosis to their patients,” states the CEO. “Overall, last year, we launched 35 new tests in the high-end segment”. The company is consistently managing its costs and efficiencies and optimising its productivity, he adds. It is also looking at process automation in a big way.

 “We believe in building scale while keeping costs under check through our disciplined approach,” informs Manchanda. “We see a lot of scope for growth in this industry and are confident that our model will help us expand our scale at the desired pace and fulfil our strategic vision of being able to bring our brand uniformly to patients across the country”. Commenting on the company’s Q2 2019-20 results, which saw its revenue going up 15 per cent to about Rs366 crore and pat up over 41 per cent to Rs81 crore, Lal says, “We have once again reported consistent performance during the quarter under review, further strengthening our premier position as a branded national diagnostics player in the country. We continue to believe that there are enough opportunities available for a national player like DLPL, with a proven track record and decades of deep experience in diagnostics. We will continue to gain market share through focus on accurate and affordable diagnostics services, with more efforts on expanding the test menu and geographical reach.”

Over the years, DLPL has emerged as an established brand in the domestic diagnostics services market which is highly fragmented and dominated by unorganised players. However, things are changing rapidly as customers are shifting their preference to reliable players. According to experts, diagnostics influence about 70 per cent of healthcare decisions but only 3-5 per cent of healthcare spending goes towards diagnostics tests, highlighting the significance of reliable and accurate diagnostics for the healthcare industry. Moreover, the Clinical Establishment Act, which requires labs to obtain licence, will accelerate shift from unorganised to organised sector.

 Looking up

As per one estimate, the $9.5-billion diagnostics testing industry in India is expected to grow at a cagr of 13-15 per cent over the next five years, as there is a demand for lifestyle diseases- related services to grow and an increase in evidence-based treatments. Moreover, there is also focus on preventive diseases and wellness.

Experts are of the view that the domestic diagnostic lab chain segment is well-positioned to grow market share as the industry offers mid to high teen earnings growth potential over the next few years as penetration further improves. Big chains are also expected to benefit from scale advantage supported by the industry’s natural inclination towards building scale and its process intensive nature. Moreover, this low regional penetration in the Indian market provides ample scope for growth for large organised players like DLPL, as also Thyrocare and Metropolis.

 “At present, DLPL is well-positioned to outperform competition, underpinned by a strong brand, quality focussed testing and expansion to new geographies,” reveals a recent Edelweiss Securities report. “The company has witnessed strong growth in patient and test volumes. The competitive intensity has established as compared to the peak in the past two years. DLPL has been ahead of the curve in derisking from the highly competitive Delhi-NCR by focussing on non-core regions in East and Central India”.

With all these developments in place, DLPL has positioned itself quite strongly in the market. The diagnostics chain has emerged from its position as a regional player a few years ago, to be an established brand with pan India footprint. Most importantly, while expanding its reach, the company has not compromised on its profitability and grown consistently with positive return ratios. DLPL’s growth strategy has been quite meticulously formulated, as it has adopted versatile expansion approach. While in the north and east, it has gone for organic route, in the central and western regions, it has also gone for selective acquisitions.

Within the organic space, it has preferred an asset light hub and spoke model. All this has helped it scale up the network not only quickly but also at lower costs. At the same time, the company has not shied away from investing in its processes, adopting automation and newer technologies. The Kolkata Reference Lab is an apt testimony of its approach. Moreover, the company has also added significant value (test menu) to its offering by adding new tests and processes.

With all this, DLPL seems to be quite ready to commence its next growth phase in a market which is quite favourably placed at present. With growing economic indicators and changing lifestyle, the domestic healthcare market in general and diagnostics market in particular, is all poised to continue its growth trajectory, having grown in a rapid manner in the last decade or so. As the market shifts towards a more organised set-up, players like DLPL stand to gain significantly, going ahead.

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