By Geetanjali Kedia

Dr Lal Pathlabs is entering the primary market on Tuesday 8^th December 2015, with an offer for sale of upto 1.16 crore equity shares, of Rs. 10 each, in the price band of Rs. 540 to Rs. 550 per share, with a discount of Rs. 15 per share being offered to the retail investors. Offer for sale by promoters, comprising 35% of the issue, while balance 65% is being offered by 2 PE investors. Issue, representing 14.04% of the post issue paid-up capital, will raise Rs. 620 crore and Rs. 632 crore at the lower and upper price band respectively and will close on Thursday 10^th December.

Dr. Lal Pathlabs is a Delhi based healthcare diagnostic chain, with 172 labs, 1,554 patient centres and over 7,000 pick-up points, having served nearly 1 crore customers and collected 2.2 crore samples in FY15. Its presence is mainly in North and East India, both the geographies together accounting for ~85% of revenues.

For FY15, consolidated revenue from operations grew 18% YoY to Rs. 660 crore, with EBITDA rising 13% YoY to Rs. 159 crore (24.1% EBITDA margin). Net profit after minority interest, stood at Rs. 94 crore, resulting in an EPS of Rs. 11.48. For H1FY16, comprising monsoon months, which are seasonally considered a strong period for the business, revenue rose to Rs. 405 crore and EBITDA to Rs. 88 crore (21.8% EBITDA margin, lower on account of higher employee benefit expenses due to ESOP). Net profit for first six months was reported at Rs. 37 crore, with an EPS of Rs. 4.47. However, the net profit for first half will actually be Rs. 54 crore, due to reversal of an exceptional charge of Rs. 16.6 crore, related to ESOP, no longer required.

As of 30-9-15, equity stood at Rs. 63.13 crore, which rose subsequently to Rs. 82.64 crore, on account of conversion of preference shares (CCPS) and exercise of ESOPs. Net worth, as of 30-9-15, stood at Rs. 409 crore, of which, Rs. 235 is cash balance and liquid investments, while company remains debt-free. Promoter holding (Dr. Lal and family) currently stands at 63.67%, which will contract to 58.70%, post IPO. 2 PE investors (Westbridge and TA Associates) hold 32.23% acquired through secondary purchase in 2013, and their combined stake will be down to 23.17%, post IPO. Balance 1.91% is currently held by the employees.

Of Rs. 140 crore, profit before tax (PBT) of FY15, Rs. 11.8 crore was earned on account of treasury operations, while H1FY16 PBT of Rs. 81 crore had contribution of Rs. 8.2 crore from treasury. Thus, a significant 10% of company profits comprises of income from non-core activities. To put it differently, 7-8% return is being earned per annum by the company on cash and liquid investments. Since the business is asset light, company is likely to be in a cash surplus position going forward too. Hence, high returns to the tune of 10-12% pa, with better treasury management, is warranted. The idle cash is not being sweat enough, currently!

At upper end of price band of Rs. 550 per share, market cap of the company will be Rs. 4,545 crore and enterprise value (EV) at Rs. 4,310 crore. The EV/EBITDA multiple, based on H1FY16 annualised EBITDA of Rs. 178 crore, is 24 times. Cash and equivalents of Rs. 235 crore, as of 30-9-15, lead to cash per share of Rs. 28. Excluding retail discount of Rs. 15 per share and the cash on hand, effective price is Rs. 507 per share. For FY16, company is likely to report an EPS of over Rs. 13 per share, which gives a net of cash discounting of 38 times, based on the current year earnings.

Fortis Heathcare owned diagnostic chain SRL Limited, with 283 labs and FY15 net revenue of Rs. 722 crore, was valued at Rs. 3,400 crore in September 2015, when Fortis acquired 3.01% stake in the company, from existing PE investors for Rs. 105 crore, raising its holding to 57%. Despite similar size as Dr. Lal Pathlabs, EBITDA margins for SRL are lower, standing at 20.4% for FY15 and 17.9% for FY14. Also, being a subsidiary of the hospital chain, its valuation may not be well reflected, given the holding company discount coupled with lower multiples being attraction by the Fortis group.

Cash rich position, double digit growth rates, healthy margins, robust business fundamentals and strong management team are the key positives in the issue. As the medical fraternity is increasingly moving towards evidence based diagnosis, growth of the sector also provides healthy visibility, besides the business model being highly scalable, all of which are beneficial for this consumer healthcare company.

While the pricing is not the cheapest, once can still apply in the issue, given the above positives.

Disclosure: No interest.