Ajitansh Kar, Gurgaon, 24th September 2022
If you had asked what was the best sector to invest in during the times of covid, many would have answered diagnostics. The reason for this response from people was that more covid tests would be a key driver for volume growth and, thus, lead to generation of greater revenue and higher profits.
The response turned out to be perfectly true, as companies were literally minting money by doing millions of covid tests all throughout 2021. The results can be seen as follows:
“Metropolis Healthcare Ltd.’s sales increased to Rs. 629 crore during the first half ended 30 September 2021 from Rs. 431 crore in the corresponding period of the preceding year, i.e., 30 September 2020. The company’s sales reached Rs. 998 crore for the full year. Its net profit jumped to Rs. 133 crore during the first half ended 30 September 2021 from Rs. 63 crore in September 2020. Its net profit amounted to Rs. 183 crore for the full year. The net profit grew by 111 per cent, according to Financial Results of the company.” (Source: Financial Express)
“Thyrocare Technologies Ltd.’s sales increased to Rs. 341 crore during the first half ended 30 September 2021 from Rs. 210 crore in the corresponding period of the preceding year, i e., 30 September 2020. For the full year, its sales went up to Rs. 495 crore. The net profit went up to Rs. 133 crore by 30 September 2021 from Rs. 43 crore in the corresponding period of the preceding year, i.e., 30 September 2020. For the full year ended March 2021, its net profit amounted to Rs 113 crore, according to Financial Results of the company.”
(Source: Financial Express)
But things have started looking wary with covid cases having declined, ease of lockdown restrictions, and the pricing war which has started in this sector with the launch of new start-ups such as Tata 1mg and Healthians which are offering deep discounts for high-volume routine medical test segments to gain traction in this highly competitive space. Tata 1mg launched an advertisement a few months back promising to offer popular tests at just Rs.100 whereas competitors charged Rs.500-Rs.1200 for the same. Many analysts believe that this cut throat competition in offering the best price to the consumers will lead to erosion of margins for all the players in this sector despite the opportunity for higher growth.
Recently, famous investment banking company Credit Suisse had also initiated its coverage on Dr Lal Pathlabs and Metropolis healthcare and expects margins to contract by 300-400 basis points by FY27. The brokerage has assigned a rating of “underperformer” for both the companies and is also uncertain about the sector’s future.
Credit Suisse believes that though the diagnostic industry is expected to grow at a CAGR of 10%, there are concerns over the profit margin of companies as they spend more on customer acquisition, network expansion, digitalisation, and rationalisation of prices of non-specialized tests. The brokerage also showed worry over the additional risk of higher payout structure to franchises and mentioned that it could be a cause of further depletion of margins.
Thus, while the diagnostic sector may not sink, it would perhaps fail to deliver adequate returns for investors in the near future.