Diagnostic chain Dr Lal PathLabs' stock is up around 60 percent on a year-to-date basis and it has gained around 4 percent in the past three months.
Remember, there were media reports about Reliance Industries Ltd (RIL) entering into the diagnostics space, which has resulted in a little bit of a come off. However, the drivers in terms of performance have definitely strong earnings growth, which is increasingly in a competitive environment.
For the first half, revenue is up 15 percent, profit up around 31 percent odd and the margins at around 29.1 percent against 26 percent. So, an improvement has taken place on a year-on-year basis.
Dr Lal PathLabs' Q2 realizations have risen to around Rs 687 against Rs 669 and overall this comes with a strong balance sheet for the company as the company has zero debt and their cash on books is at around Rs 781.7 crore.
Brokerages have been extremely optimistic about the company. For example, CLSA in their latest report has maintained a 'Buy' rating and raised the target price post Q2 to Rs 1,800. Also, they have raised the FY20-22 EPS estimates by 8-12 percent to reflect recent tax cuts and the benefit from that.
Citi has 'Buy' rating with target price raised to Rs 1,700 from Rs 1,475. They raised the FY20 EBITDA and EPS estimates by 1-3 percent and 13-20 percent respectively. So that too is a positive outlook coming in from Citi.
However, the valuations are expensive for all the diagnostic companies. For Dr Lal 50 times, Metropolis 50 times and Thyrocare a little lower at around 27 times. So it seems to be neck to neck in terms of valuations for both those companies and one of the things to keep in mind is a big boy such as RIL probably looking to enter diagnostics which has shaken up the market a little bit.