Dr Lal PathLabs shares dive 8% after Q2 results. Should you hold, sell, or buy?

Shares of medical diagnostics firm Dr Lal PathLabs plunged around 8 per cent in Wednesday's trade after the company's September quarter results missed estimates on account of higher expenses. The stock cracked 7.98 per cent to trade at Rs 2,416.20 in afternoon deals against its previous close of Rs 2,625.60. It hit an intraday low of Rs 2,395.35 on BSE today.

Considering the previous closing, New Delhi-based Dr Lal PathLabs traded more than 45 per cent higher from its May low of Rs 1,805.10 and 33 per cent lower from its 52-week high of Rs 3,943.95, touched in November last year.

Brokerages remained 'positive' on the stock but with a 'limited' upside potential, given the recent run-up in the stock price. Diagnostic firms made windfall gains from the Covid-19 pandemic, but the competition in the space intensified with a slew of new brand launches.

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ICICI Securities said the medical diagnostics firm's second quarter performance was a mixed bag with slower-than-expected growth in non-Covid patient volumes, but healthy improvement in margins.

"While intensified competition is likely to weigh on growth in the near term, we believe changing revenue mix, strong brand equity, focus on geographical expansion and strong return ratios will provide support. Hence, we remain positive on Dr Lal, but the recent run-up in the stock price (around 22 per cent in last 3 months) has limited the upside," the brokerage added.

It downgraded the stock to 'Add' from 'Buy' with a target price of Rs 2,911 per share.

Nuvama Research, in its report, said, "Dr Lal's Q2 FY23 revenue/PAT (profit after tax) missed estimate by 3 per cent/8 per cent. Core business (excluding suburban) grew merely 6 per cent YoY (9 per cent CAGR -- Compounded annual growth rate -- since Q2 FY20).

However, the brokerage mentioned that the "EBITDA (Earnings before interest, taxes, depreciation, and amortization) margin is impressive at 26.9 per cent (up 350 basis points QoQ) led by a better test mix and lower employee cost."

In addition, JM Financial Institutional Securities said Dr Lal PathLabs reported 15 per cent year-on-year (YoY) growth in non-Covid revenues aided by seasonality and improving realisation.

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"The management remained confident of volume growth and sustaining pre-Covid margins. While Q3 (quarter ending December 31, 2022) is likely to be soft for the industry due to festivities, Q4 (March 31, 2023) is expected to be better, particularly on a low base. The company has sufficient headroom to grow inorganically with Rs 420 crore net cash," the brokerage added.

It maintained a 'Buy' call on the stock with a target price of Rs 2,900.

Meanwhile, Dr Lal PathLabs reported a 25 per cent drop in September quarter profit as a sustained decline in revenue and volume from its Covid-19-related business and higher expenses weighed. Consolidated profit for the quarter that ended September 30 came in at Rs 71.7 crore, compared with Rs 95 crore a year ago.

Total expenses rose 15.1 per cent to Rs 440 crore, while quarterly revenue from operations rose 7.1 per cent to Rs 534 crore.