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Amid buzz on Lupin foray, are diagnostics stocks a good place to be?

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Dr Lal PathLabs, Thyrocare Technologies and Metropolis Healthcare shares have rewarded investors with returns to the tune of 51-92 percent in in the past one year due to the Covid-triggered demand for diagnostic tests.

Amid buzz on Lupin foray, are diagnostics stocks a good place to be?
Shares of pure-play diagnostic labs Dr Lal PathLabs, Thyrocare Technologies and Metropolis Healthcare have rewarded investors with returns to the tune of 51-92 percent in in the past one year. A boost in demand for the industry -- among the few beneficiaries of the pandemic -- has rendered stock valuations expensive, say analysts.
Some say the sudden spike in profitability may not last long for such players as it is strictly due to the coronavirus situation.
Easing concerns about a third wave of Covid-19 are already rendering the diagnostics space less attractive, AK Prabhakar, Head of Research at IDBI Capital Markets, told CNBCTV18.com.
Though the absence of a third wave of infections may rid the country of a slowdown across sectors sooner, it may be bad news for an industry riding the increased demand for diagnostic tests.
Prabhakar warns of 50 percent correction in diagnostics shares if a third wave of the pandemic does not happen. "Currently, valuations are just too expensive," he said, referring to shares of diagnostics companies.
How diagnostics stocks have fared in the recent past:
StockOne-year return (%)Three-month return (%)
Apollo Hospitals114.227.7
Max Healthcare216.944.6
Dr Lal PathLabs91.815.9
Metropolis Healthcare51.4-0.9
Thyrocare Technologies61.2-5.8
Kovai Medical Center129.725.6
KMC Specialty242.7105.8
Vimta Labs142.3370.8
Surajit Pal, Pharma Analyst at Prabhudas Lilladher, also feels valuations in diagnostics are mostly due to the assumption that pandemic-related revenue will continue for some time. The valuations are "probably much ahead of growth expectations", he said in an interview to CNBC-TV18.
For now, things look hunky-dory for diagnostics players.
"Even if a patient recovers from COVID, multiple tests keep happening... Such is the demand for these services. Everything has run up too much," said Prabhakar.
On a trailing price-to-earnings basis, the valuation of Dr Lal PathLabs is at 80 times and that of Metropolis at 61 times, he said.
Much of the growth registered by these companies is concentrated in the past 18 months. If you take away the business of the last 18 months, there is not much left. In the past five years, growth has been at 15 percent," said Prabhakar.
To Pal, Metropolis Health and Dr Lal appear to have the ability to create assets given the cash on their books, a task that could take Pharmeasy and Thyrocare 1-3 years.
Drug maker Lupin is looking to enter the diagnostics business, sources told CNBC-TV18 last week. Describing the move as "baffling", Pal said the company might be looking to create an asset.
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