Dr Lal Pathlabs Ltd Management Discussions

Economic Overview

Global Economy1

During the year, the global economy presented a resilient scenario despite navigating unpredictable headwinds. Challenges such as volatility in commodity prices triggered runaway inflation in both advanced and emerging economies of the world. Persistent geopolitical conflicts between Ukraine and Russia and other geopolitical crises, further exacerbated the situation, resulting in supply chain constraints. To address inflationary pressures, central banks in major economies implemented gradual interest rate increases, which, to some degree, impacted economic activity. However, emerging and developing economies has shown good growth and capital inflows from foreign institutional investors. Emerging markets and developing economies (EMDEs)arerecordinggrowthacrossmultiplesectors,driven by their respective governments emphasis on enhancing both their infrastructure and manufacturing sectors. Central banks worldwide responded to rising inflation by increasing interest rates, a measure that proved effective in stabilizing economies without triggering a global recession. Despite the potential for economic slowdown due to these policy adjustments, the global economy managed to maintain steady growth, supported by the effective monetary policies and adaptive financial markets.

Global growth (%)2

Indian Economy

Despite the global economic slowdown, the Indian economy has remained robust, emerging as one of the fastest-growing major economies. According to estimate of NSO, India is expected to register a GDP growth of 8.2% for the year FY24. The domestic economy is also being propelled by strong consumer demand and improving investment morale. Employment rates in the formal sector have improved, and the performance of the private sector remains optimistic. Further, the governments concerted attempts to raise capital investment have encouraged economic activity. It is projected to crowd in private investment and increase job opportunities and demand, which will help accelerate the economys growth. Looking ahead, the Indian economic growth is forecast to be strong in FY2023-24, with prudent fiscal policies expected to significantly reduce inflation. The Indian economy is likely to overcome the threats posed by a challenging macroeconomic environment owing to expanding domestic demand, lowering inflation, rising employment rates and robust monetary policies.3

1https://www.imf.org/en/Publications/WEO/Issues/2024/01/30/world-economic-outlook-update-january-2024 2https://www.imf.org/en/Publications/WEO/Issues/2024/01/30/world-economic-outlook-update-january-2024 3https://www2.deloitte.com/us/en/insights/economy/asia-pacific/india-economic-outlook.html 4https://pib.gov.in/PressReleseDetailm.aspx?PRID=2022323

5https://www.thehindubusinessline.com/economy/indian-diagnostics-industry-to-reach-25-bn-in-fy28-report/article68019114.ece

Industry Overview

Indian Diagnostic Sector

The Indian diagnostics industry has emerged as a preferred play within the expanding healthcare landscape, driven by attractive margins and significant growth potential. With a market size of ~USD 13 billion in FY23, the domestic diagnostics industry is projected to reach USD 25 billion by FY28, at a CAGR of ~14% over the next five years5. The industry has developed from being an investigation provider to a solution provider. It consists of three core components, clinical, retail and logistics.

The industry has developed to a great extent and it provides more than 4500 varieties of tests6 . The pandemic has forced the companies to cater to the exponentially rising demand for testing, which in turn produced faster results and precise diagnosis. Within the diagnostics market, pathology and radiology are the two main segments. The industry is highly fragmented, with unorganised standalone centres catering to approximately half of the market share, while hospital-based diagnostics centres hold a 37% share7. Pathology testing holds about 60% of the market share, with imaging tests making up the remainder. The radiology market is experiencing rapid growth due to rising demand for imaging services. On the other hand, pathology testing services market is also recording a surge in demand owing to more people undergoing preventive health check-ups. In summary, the diagnostic services industry in India is poised for growth in the years ahead.

The diagnostic services market share is divided among unorganised or local standalone labs, hospital-based labs and organized players. Doctor recommendations drive a significant portion of the diagnostic business. To ensure accurate prescriptions, doctors conduct diagnostic tests for most patients before prescribing medication.

The sector growth can be attributed to various factors, including an increasing spending by the geriatric population of the country, rising income levels, growing awareness of preventive testing, advancements in healthcare diagnostics, greater penetration of healthcare insurance and government initiatives in diagnostics.

Outlook

The Indian diagnostic sector has experienced steady double-digit growth, estimated at around 12-14%. This growth is fueled by factors such as rising awareness of preventive and diagnostic testing, alongside technological advancements and the growing geriatric population in India. The sector is witnessing a significant impact from technological advancements. The incorporation of AI and machine learning into diagnostic procedures is enhancing test accuracy and efficiency, while also facilitating the creation of tailored diagnostic solutions. Additionally, the implementation of telemedicine and digital health records is simplifying the diagnostic process, improving accessibility and efficiency for both patients and healthcare providers.

Government Initiatives

Tele-radiology: Apart from infrastructure, lack of specialist clinicians especially radiologists have been a major challenge which denies the poor patient of essential radio-diagnosis. To bridge this gap a viable and cost effective PPP model has been devised under which digitized X-Ray films are transmitted to service provider and reports are received within a stipulated time frame8 .

CT scan Services at District Hospital & Technology Support: Since CT is an expensive test and many districts in India do not have a single CT facility, this initiative is of great value – both in terms of health sector development in a given area as well as in reducing patient expenditure. Under NHM, States are being supported to setup CT Scan services at DH level (with population above 7.5 Lakhs) under PPP.9 In the allocation for 2024-25, the budget for the National Health Mission (NHM) stands at _38,183 crore, a notable increase from the revised allocation of _ 33,886 crore in 2023-24.10

Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB-PMJAY): This flagship program is the worlds largest publicly funded health insurance scheme. It provides coverage of up to _5 lakh per family per year for secondary and tertiary care hospitalization. As of December 2023, approximately 55 crore individuals are covered under AB-PMJAY.11

PM Ayushman Bharat Health Infrastructure Mission (ABHIM): Launched in 2020, ABHIM aims to strengthen primary healthcare infrastructure by establishing 1.5 lakh Health and Wellness Centers (HWCs) across India. The budget allocation for ABHIM in 2023-24 was _4,200 crore, a significant increase from previous years.12

A new mission to eliminate sickle cell anaemia by 2047 was announced in the 2023-24 budget. This initiative involves large-scale screening programs and could potentially require investment in diagnostic tools13.

Company Overview

Dr Lal PathLabs is a leading provider of the diagnostic services in India. The Company has a wide range of offerings, including blood tests, urine tests and other high end pathology tests. The Company enhances accessibility by expanding network with a large number of service centers and having partnerships with multiple hospitals. The Company also prioritises accurate and timely test results, using modern technology and strict protocols. Dr. Lal Pathlabs has maintained its image as a reputed brand across the country, by establishing itself as reliable diagnostic provider. The Company even provides additional benefits of home sample collection and online report access. The Company has developed a mobile application that allows customers to register from their home locations. Upon booking, they receive a confirmatory call and the phlebotomist visits their houses to collect the samples. This initiative has significantly streamlined operations and enhanced customer experience, reducing long queues for registration and phlebotomy.

Operational Highlights

The Company is leveraging e-commerce to further enhance its market presence. With collection centres facing issues with material management, the Company has developed a Material Requisition Form (MRF) to simplify the process. Whenever a centre requests for materials, a ticket is raised which notifies the ERP and packing and shipping processes commences.

The Company has efficiently digitalised its presence by facilitating digital technology within the operations. It has launched a new website with user friendly functions that has enriched user experience. Additionally, Dr. Lal Pathlabs has also developed a logistics app that enables tracking technicians, traffic patterns and schedules to generate optimal routes and enhance service delivery in various locations. The Company has recently integrated AI to offer personalised and pertinent tests for patients based on their health condition, demographic information and other factors. The Company has also added wallet feature and introduced a chatbot to make scheduling appointments easy.

Reaching Farther. Going Deeper.

The Company is focusing on volume led growth, with a primary focus is to increase the number of patient visits and the test per patient portfolio. The Company is enhancing its capabilities with introduction of newer tests. Lastly, the Company is looking forward to penetrate into tier 3 and tier 4 cities as only limited services are available. Moreover, the Company is actively pursuing any M&A opportunities that might come along the way. Some of the other highlights for the year were:

The Company achieved a significant milestone in the field of transplant medicine. They successfully completed 600 runs of a next-generation sequencing (NGS) test called HLA-NGS. This test analyses the Human Leukocyte Antigen (HLA) type in over 27,000 samples from patients across India, Africa, Bangladesh, and Nepal.

The Company continued to expand in Tier-3 and Tier-4 towns through organic mode.

The Company is focused to developed end to end D2C capabilities starting from digital marketing to lead generation to servicing the patients at home.

The integration of Dr. Lal PathLabs and Suburban Diagnostics shows continued promise in the Western market. This region has witnessed a growing market share for the combined entity.

Swasthfit program is contributing 22% of the revenue, medical Centers of Excellence, LACE and LCORD, continue to strengthen their position within the medical community and earn the trust of patients.

Opportunities

PCR Testing

Dr. Lal Pathlabs was the first to establish the RT-PCR testing network in 2020, fortifying the Companys position as a pioneer in diagnostics and innovation. This not only enhanced the Companys reputation but also instilled trust among patients. The patients have increasingly sought after Dr Lals reliable testing services, even extending beyond COVID-19 testing.

Focus on tier 3 and tier 4 cities

The Company is investing to steadily expand its geographic footprint in tier 3 and tier 4 cities. Utilising strategic marketing campaigns to build a strong brand image, the Company is also developing new lab towns to propel its reach.

Screening

With the growing awareness about proactive healthcare, screening proves to be a significant growth opportunity for the Company. The Company can explore the growing market of pre-emptive testing that has steadily gained popularity to detect potential health issues in the initial stages. Through offering comprehensive screening packages and promoting early detection, Dr. Lal Pathlabs can establish itself as a trusted provider of preventive healthcare services.

Genomics

The Company has established specialty verticals such as Genevolve that focuses on genomics and offers over 160 new tests. It is also aiming to introduce new segments such as Wellness Genomics and Pharmacogenomics. With a direct outreach to 3000+ doctors, the Company has a dedicated business development team for Genetic tests and takes pride in possessing state-of-the-art technologies in four reference labs.

High end testing

Increasing healthcare awareness and rising disposable incomes are bolstering the demand for advanced tests such as next-generation sequencing (NGS) and genetic panels. The Company can capitalise on the opportunity to expand its reach and propel its growth. As high-end tests yield higher profit margins than routine diagnostics, the Company can invest in advanced technology and develop expertise to outperform its peers. Through strengthening its capabilities, the Company can cater to the customer segment that seek specialised diagnostic services.

Health checkups

As people are becoming more health consciousness, the demand for regular checkups is gradually surging. The Company is poised to capitalise on this trend by offering personalised health checkup packages across various price points that appeal to a wider customer base. Dr. Lal Pathlabs facilitates early detection of potential health issues and improves patient outcomes. By advocating routine checkups and diagnostic tests, the Company fosters customer loyalty, establishes long-term relationships and creates a recurring revenue stream.

Threats

Increased Competition:

The Indian diagnostics market is witnessing a rise in the number of new entrants, including large hospital chains setting up their own labs and aggressive expansion by regional players.

Shifting Reimbursement Landscape

Government healthcare schemes and insurance companies are increasingly focusing on cost control measures. This could lead to reduced reimbursement rates for diagnostic tests, impacting the companys profitability.

Regulatory Scrutiny

Recent reports of alleged data breaches and concerns around data security in the healthcare sector could lead to stricter regulations from government bodies. Compliance with these regulations might increase operational costs for the company.

Rise of Automation and AI

Advancements in automation and artificial intelligence (AI) could disrupt the traditional diagnostic model. While the Company is investing in automation, they need to stay ahead of the curve to avoid being outpaced by competitors who adopt these technologies more rapidly.

Evolving Consumer Preferences

Growing health awareness among consumers might lead to a demand for more personalized and convenient diagnostic services. The Company needs to adapt its offerings to cater to these evolving preferences, and widen its services and strengthen customer feedback mechanism to sustain its market share.

Business Targets and Strategies

The Company aims to retain its pricing mix so as to maintain affordability, except for minor adjustments to adjust inflationary costs in specialty and super specialty tests. The Company focuses on catering to a wider patient base and sustain its market leadership as the leading diagnostic brand of India. Dr. Lal Pathlabs is willing to expand its presence in the underpenetrated regions of tier 3 and tier 4 cities, focusing on the higher potential markets of the west and south. Additionally, the Company is utilising its digital infrastructure and investing in AI, data analytics and ML to enhance overall patient experience, providing specific. Specifically in the western market, the Company is emerging as a competitive player, looking forward to achieve a rapid upscale by outpacing the industry growth through the its recent acquisition of Suburban Diagnostics. The Company has developed end-to-end D2C capabilities starting from digital marketing to lead generation and finally to serving patients at home. The growing acceptance of this model, will now be replicate in Tier-2 and Tier-3 cities as well. Building on strong brand equity, particularly in core markets such as North India including Delhi NCR, value-added opportunities will be offered to patients, following a cluster city approach to drive growth in key areas. Expansion efforts will include enhancing presence in Maharashtra, specifically Mumbai, through Suburban Diagnostics, alongside the launch of reference labs in Bengaluru and Mumbai. Additionally, there will be a focus on augmenting the high-end test portfolio, particularly in super-specialty and bundled tests, through the establishment of specialty verticals such as Genevolve for genomics, L-CoRD for reproductive diagnostics, and L-ACE for auto-immune disorders. The overarching aim remains centered around Swasthfit, providing comprehensive bundled solutions to patients.

The progress made by the Company is highlighted by its new marketing campaign "Bharat ka Vishwas", as the initiatives have not only earned them multiple awards but also helped them to gain trust and confidence of the people. The distinctive grasp of market dynamics and omni-channel presence gives Dr. Lal Pathlabs an upper edge when expanding into tier 3 and tier 4 cities. The Company has also developed and implemented a new custom built logistics solution that allows to cater to customers more efficiently.

Financial performance (Consolidated)

Revenue breakup – geography wise

Particulars	FY24	FY23
Delhi NCR	6,895	6,360
Rest of North India	7,005	6,100
East India	3,247	2,875
West	3,286	3,094
South	1,324	1,273
Others	508	467
Total	22,266	20,169

 

Year	Revenue Per Patient	Test Per Patient
	(in _)	(in no.)
FY24	806	2.83
FY23	750	2.69

Revenue

The Companys consolidated revenues totalled _ 22,266 Million for the financial year ending March 31, 2024 representing a growth of 10.4%.

Costs

Cost management stands as a primary area of emphasis for Dr. Lal Pathlabs. The companys operating expenses for the fiscal year ending March 31, 2024, remain consistent with the previous year. Key cost components for the company include expenses related to reagents and chemicals, personnel, fees associated with collection centers, logistics, information technology, and infrastructure, among others.

EBITDA

EBITDA stood at _ 6,092 Million during FY24, recording a margin of 27.4% .

PBT and PAT

PBT for FY24 was _ 5,055 Million and recorded a margin of 22.7%. PAT stood at _ 3,623 Million during FY24 and recorded 50.3% year-on-year growth rate. The PAT margin for FY24 stood at 16.3%

Cash and bank

Cash and Cash Equivalents as of March 31, 2024, is _ 9,603 million, cash balance after netting of borrowings is _ 8,769 million.

Key Financial Ratios*

Particulars	FY24	FY23	Consolidated % variance	Reason for variance
Debtors turnover	30.04	25.8	16.4%	-
Inventory turnover	12.7	10.4	22.6%	-
Interest coverage ratio	18.2	10.2	79.3%	Improvement on account of increase in earnings during the year and reduction of interest cost due to repayment of borrowings
Current ratio	2.4	2.1	16.9%	-
Debt equity ratio	0.1	0.2	-47%	Reduction on account of repayment of borrowings during the year
Operating profit Margin (%)**	20.9	16.8	24.2%	-
Net profit margin (%)	16	12	34.8%	Increased operational efficiencies resulted in improvement in net margin

*Figures of previous year have been reinstated on the basis of reported Operating Margins instead of Normalised Operating Margins. **Formula: (EBIT-Interest Income)/Revenue

Risks and concerns

Risks	Description	Mitigation
1. Int ense competition	Since the industry is not well organised, there are chances of newer players entering the market and offering services at competitive prices. In addition, these new players are capturing a significant portion of the market, which makes it difficult for the Company to get new customers.	The Company aims to mitigate these risks by focusing on itself as a large established player, having national presence and years of experience in the industry. The Companys continous investment in high quality standards and consistent performance is visible through its proficiency and test results. Additionally, the Company can focus on specialised tests which are not available elsewhere to generate value for its customers and increase market share.
2. Technology paradigm	As more players enter the industry, the diagnostic testing is becoming increasingly popular. Due to its affordability and convenience, testing is easily accessible to more people. This poses a threat to the Company. The industry has also developed online portals and integrated teleconsultation services with technology.	The Company maintains a competitive advantage by integrating technology with treatment. It can yield faster and better results. Proper infrastructure provides reliable testing reports. Additionally, the Company has a dedicated team of experts, who help in evaluating and giving advice. The Company should further invest in technological innovations and partnerships with hospitals to expand its services.
3. Human resource risks	A skilled workforce in this department is a must. The Companys main challenge is to retain a proficient workforce.	The Company has shifted its focus primarily into attracting and retaining qualified professionals through incentives and competitive benefits and salary structure, training programmes and promoting a positive work culture. The Company has fostered a culture of transparency, trust and respect for its employees, enabling the workforce to brainstorm and work together. Monthly business review meetings and cross functional projects nurture a cohesive work culture in the Company.
4. Maintaining accuracy and precision	These types of risks are the most common yet the most dangerous of all. It occurs due to improper maintenance, errors in the testing procedure, lack of handling methods and human errors.	The Company mitigates this risk by standardising its operating procedures and by maintaining the equipment. Additionally, the Company employs highly qualified staff to minimise errors during tests. It also uses modern machines integrated with latest technologies to reduce the risks.

Human Resource Management

The Company believes in the overall development of its human resources. Dr. Lal Pathlabs promotes skill development programmes to enhance the professional skillsets of its people, enabling them to excel in their respective roles. The Company maintains strong compliance policies to improve its operations and safeguard human rights simultaneously. Dr. Lal Pathlabs focuses on developing an inclusive work culture that promotes diversity, equal opportunities and respect for every individual. These initiatives cumulatively contribute to the overall success of the Company.

4099(on roll) Total number of employees in FY24.

Internal control systems and their adequacy

The Company has established a comprehensive internal controls framework, which includes thoroughly documented policies and procedures spanning financial and operational aspects. This framework guarantees the upkeep of precise accounting records and offers a reasonable level of confidence in the reliability of financial reporting. Additionally, it facilitates efficient monitoring of operations, protects assets from unauthorised use or loss and ensures compliance with relevant regulations.

Auditors

During the 28th Annual General Meeting held on June 30, 2022, the Members of the Company reaffirmed appointment of Deloitte Haskins & Sells as Statutory Auditors for a duration of five years. Deloitte Haskins

& Sells, is a firm registered with the Institute of Chartered Accountants of India under Registration No. 117366W/W-100018.

Data Privacy

The Company ensures protection of the data shared by its customers and clients. This is done by

Data loss prevention: The Company has enabled state-of-the-art data loss prevention technology to prevent disclosure of any information. Additionally, a data classification platform is used for information labelling and management. The Company also have a rights management system that enables continous data centric protection. Next-generation cyber technologies are deployed to prevent consistent cyberattacks.

Software security: Dr. Lal Pathlabs performs vulnerability assessment and penetration testing of IT apps to secure its cloud infrastructure. The Company also have periodic secure code and configuration reviews of mission-critical systems. The security operations constantly monitor cyber threats.

Threat intelligence: The Company has a threat intel platform to monitor the web for credential disclosures, data leaks and frauds. Dr. Lal PathLabs ensure proactive detection and mitigation strategies for vulnerabilities of publicly exposed systems.

ESG

Relentless initiatives to improve operational procedures are a testament of the Companys commitment to address its environmental footprint. The Company has significantly minimised plastics use, optimised waste management and reduced emissions of CO2. Additionally, the Company aims to solve the complex challenges pertaining to the development of the country. The Company believes in value creation for its stakeholders, contributing towards building capacities and creating resources for the underserved sections of society.

Cautionary Statement

The statement provided in this Management Discussion and Analysis acknowledges that the Companys objectives, projections, estimates, expectations, or predictions may be considered as ‘forward-looking statements under applicable securities laws and regulations. It cautions that actual results may differ significantly from those expressed or implied. Various important factors, such as global and Indian demand and supply conditions, prices of finished goods, availability and prices of input materials, cyclical demand and pricing in the Companys main markets, changes in government regulations and tax regimes, economic developments in India and other relevant countries, as well as factors like litigation and labour negotiations, can impact the Companys operations. The Company does not assume any responsibility to publicly amend, modify, or revise the forward-looking statements based on subsequent developments, information, events, or any other circumstances.