Dr Lal PathLabs chases deals in ‘tough-to-crack’ south India

The 75-year-old firm is looking to acquire small (less than ₹50 crore annual turnover) and mid-sized ( ₹50-100 crore annual turnover) diagnostic companies mainly in Tamil Nadu, Karnataka and Andhra Pradesh, according to Ved Goel, the chief financial officer at Dr Lal PathLabs. Later, it will also look to acquire firms in Gujarat, he said.

“Small, big, medium—we can do all, but large deals are unlikely in the South as hardly any large assets are available," Goel said. “Hopefully, something will finalize this year only."

Dr Lal PathLabs, with a nearly ₹1,000 crore surplus cash, is focusing on a combination of acquisitions and organic growth. The firm plans to set up 20 new labs across key cities like Bengaluru, Hyderabad, Pune and Goa in FY25 and is aiming to build hub labs in smaller towns in the northern and eastern regions.

Also read | The Big Data Centre rush: Adani fast-tracks $4 bn investment, others follow suit

The company’s strategy is to expand into tier-II and smaller cities in the core regions of the North and the East, said Shankha Banerjee, the chief executive of the company. In the West and South, it will focus on tier-I and II cities—Mumbai, Pune, Bangalore, Hyderabad and Chennai, he said.

The expansion in Mumbai, Pune and Goa will be led by wholly owned subsidiary, Suburban Diagnostics India Pvt. Ltd.

The company’s plan to consider acquisitions in the South and Gujarat comes after a four-year pause. In the South, the firm last bought ChanRe Diagnostic Services (CDSPL) in Bengaluru, Karnataka, for ₹17.5 crore in 2020. The same year, its subsidiary, PathLabs Unifiers Pvt. Ltd, bought a 70% stake in Bindish Diagnostic Laboratory LLP (BDL) in Jamnagar, Gujarat for ₹4 crore.

In FY24, the company’s Southern labs contributed 6% to the total revenue, lower than 6.3% in FY23. The western region contributed 14.8%, down from 15.3% in FY23.

“Southern India is the most competitive territory within India for the diagnostics industry, so it's not going to be easy," said Aditya Khemka, fund manager at InCred Asset Management and Alternative Investments. “There are a lot of exclusively South dominant players in the market."

Consolidation in the sector

Diagnostics firms are now in an expansion mode. Metropolis Healthcare is planning to go pan-India to increase its presence to 1,000 towns in the next two years through a blend of organic and inorganic expansion, particularly in the country’s northern and eastern markets, Mint had reported earlier.

Mumbai-based Metropolis has a strong presence in the southern and western parts of the country and plans to expand its foothold in the North and East. With a corpus of ₹70 crore, it is looking to start with two-three bolt-on acquisitions in FY25, with a deeper penetration through organic growth.

Vijaya Diagnostic Centre Ltd, the south-based diagnostic chain with centres in over 23 cities, also acquired a 100% in PH Diagnostics and forayed into Pune in December 2023, according to their exchange filings.

The Indian diagnostics industry is projected to nearly double to $25 billion by FY28, up from $13 billion in FY23, according to a Praxis Global Alliance report. The industry is going through a phase of consolidation after the pandemic-driven surge in demand.

In fact, according to Khemka, Dr Lal PathLabs acquired Suburban at the wrong time, when valuations were at a peak.

“During the pandemic, a lot of small independent diagnostics firms came up across the country because of the high demand of expensive covid-tests," Khemka said. “Today these companies are bleeding as the covid windfall is gone. They have to either shut down or the owner is looking to sell them off. There are multiple consolidations happening in the business right now."

Larger companies are now finding it easy to buy these companies, as they can be acquired for cheap, Khemka said. “Strategy-wise, it makes a lot of sense to acquire now."

Volume over pricing

Dr Lal PathLabs targets 6-7% growth in patient volumes in FY25 as against a muted 2.6% rise in the previous year. The company catered to 27.6 million people in FY24 compared with 26.9 million in FY23.

“If you look at Q1 FY25, our patient volume has already grown to about 5.5%," Banerjee said. “We want to achieve slightly better overall revenue growth than what we did last year without having to take a price increase. About 6-7% growth will then come through patient volumes."

The company does not plan to raise prices as it enters more tier-III and IV towns.

Also read | China’s real estate stimulus to aid Indian steelmakers but oversupply persists

One of the key things is to convert from unorganized competition," Banerjee said. “To a certain extent, we are up against, you know, it's not really a level playing field."

International footprint

On 19 September, Dr Lal PathLabs dissolved its Kenya arm, which had been non-operational for the past three years. The company now operates in 24 countries in Asia, Africa and the Middle East.

“It didn’t work in Kenya’s market and our learnings were also a bit different, so we had to shut that subsidiary," Banerjee said.

Dr Lal PathLabs Kenya Pvt. Limited was incorporated on 6 August 2019 as a wholly owned subsidiary of the company.