Dr Lal PathLabs IPO hits markets today: All you need to know

The initial public offering (IPO) of Dr Lal PathLabs, the second-largest player in the domestic diagnostic industry, hit the primary market on Tuesday. The issue has been launched in the price band of Rs 540-550 per equity share and aims to garner Rs 626- 638 crore from capital markets. Subscription will close on Thursday.

The IPO is an offer for sale, wherein promoters and existing shareholders of the company will only participate as the sellers in the process, and will collectively sell 1.16 crore shares, amounting to 14.1 per cent stake.

The proceeds would be remitted to the respective promoters and other investors and therefore the company will not receive any funds from the offer.

Kotak Mahindra Capital and Citigroup Global Markets India are the book running lead managers for the IPO.

Here are top five things to know about the IPO:

1)  Company background: Dr Lal PathLabs, incorporated in 1995 and headquartered in Delhi is India's first diagnostic service provider to get listed on Indian equity bourses. It offers access to diagnostic healthcare services in India through nationwide network of 172 clinical laboratories, 1544 patient service centres and 7059 pickup points.

2) Business model: The business is a combination of 1) hub and spoke model and 2) an instrument leasing model.
 
Under hub and spoke model, several investment vehicles, while each remaining individually managed, pool their assets together by contributing to one central investment vehicle. This model is scalable for future growth and also ensures better profitability with increase in size of the business activities.
 
Dr Lal PathLabs performs test and services on equipment and instruments which generally are leased under a "reagent rental". It benefits company by lowering capital expenditures for diagnostic equipment. Thus, given the opportunity and low capital intensive nature of the business model, the company is a good free cash flow generating one in the healthcare space.

3) Strong financials: The company has strong business fundamentals, which are reflected in the financials of the company.
 
"It has exhibited a strong 20.7% CAGR on the sales front, predominately led by volumes and with some pricing power. On the profitability front, the company has maintained healthy and steady margins in the range of 22-25%," said Angel Broking in a research note to investors.

4)Key risks: Brokerage Motilal Oswal listed following four risk factors that may weigh on company's profitability:

• Intense competition: India's diagnostics industry is highly competitive with standalone centers having close to a 48% market share, compared to around 37% for hospital-based diagnostic centers. This increases competition for organized diagnostic chains in terms of volumes of patients' samples and aggressive pricing of diagnostic tests.
• Geographical concentration: Many small diagnostic chains operating three or  four labs in a particular location or region are susceptible to the supply and demand dynamics of that specific location.
• Shortage of manpower: Key area of concern is the training and retention of critical staff such as lab technicians, who are employed at labs and collections centers and are responsible for the collection and preservation of patient samples.
• Vulnerable to technological advancements: To stay ahead of the competition, diagnostics centers have to constantly upgrade their technology. However, these upgrades not only involve significant capital investments but also increase maintenance costs.

5) What brokerages recommend: The brokerage MOSL said that at the upper end of the price band, the company would trade at EV/ Ebitda of 27 times its FY15 earnings and 24 times its H1FY16.

 

"The valuation multiples are in line with the recent Metropolis transaction (approximately 27x trailing EV/ Ebitda). Premium valuations are on account of superior margins (greater than 300bps more than SRL Logistics in FY15), strong brand franchise, robust growth, net cash balance sheet and cash flow generation," said MOSL.

The brokerage rendered 'favourable' outlook on the issue, while Angel Broking recommended an 'avoid' on the issue, as it believed valuations are not compelling.  

"Investors could consider waiting for a possible correction in the stock price post the listing of the IPO," said Angel Broking.