Why India’s Diagnostic Chains Are Losing Pricing Power
Even as Metropolis Healthcare Ltd. launched its initial public offering earlier this month, revenue growth of listed diagnostic companies is slowing amid stiff competition from their unorganised peers—comprising 85-90 percent of the market.
The challenge for listed players, according to A Velumani, the promoter and chief executive officer of Thyrocare Technologies Ltd., is the costs related to compliance and regulations, which unorganised players don’t incur. “The competition is intense in the diagnostic space.”
Agreed Rakesh Nayudu, pharma analyst at Haitong Securities. A pan-India diagnostic survey conducted by the brokerage reiterates Velumani’s views.
Listed players are advertising heavily to gain market share, and that’s affecting their pricing power. Dr Lal Pathlabs Ltd.—which was the first-such company to go public—said during an earnings call for the December-ended quarter that it didn’t hike prices in the last two-and-a-half years. The company indicated that business growth is driven by robust growth in patient numbers and sample volumes.
Dr Lal Pathlabs’ peers, too, have a similar strategy. The plan is to rely on volumes and not price hikes for growth, Ameera Shah, managing director of Mumbai-based Metropolis Healthcare, told BloombergQuint.
Organised players face stiff competition from the unorganised sector where quality standards aren’t equivalent, leading to pricing pressure, according to Bharat Celly, pharma analyst at Equirus Capital Pvt. Ltd. “The recent surge in the number of organised players has increased competitive intensity.”
That reflects in the pressured margins of the two listed pathology labs—Dr Lal Pathlabs and Thyrocare.
Om Manchanda, chief executive officer of Dr Lal Pathlabs, said in the earnings call that they were able to maintain margin due to cost optimisation and productivity enhancement in the absence of price hikes.
With limited pricing power and escalating costs of employees and pathologists, margins will remain under pressure. There is a shortage of pathologists in India, leading to an increase in employee costs, Equirus said in a recent report.
Organised players would need to ramp up their ad spends to match the growth rates of peers and enhance their visibility, Celly said. The high-margin wellness segment, too, requires higher advertising spends. That could pressure margins.
The Volume Game
The diagnostic business can be classified into:
- Business-to-consumer segment, which relies on customers visiting the centres for medical tests.
- Business-to-business or enterprise segment, where customers visit smaller labs, which send reports/samples to diagnostic centres for testing as they don’t have bandwidth for many tests. The segment also refers to tie-ups such centres can have with large companies, providing cover to its employees.
While both Shah and Velumani said that while the consumer business is stable, the Haitong report points out that pricing has been either steady or declined in the past 12–15 months.
Many diagnostic companies seem to be adopting the enterprise strategy, despite its lower margin, said Nayudu of Haitong Securities. The segment contributes nearly half of Dr Lal Pathlabs’ revenue. Thyrocare and Metropolis Healthcare, too, have said in recent interviews with BloombergQuint that they will focus on the division.
Competition is increasing in the routine and semi-specialised tests but not in the specialised and super-specialised tests, said Shah of Metropolis Healthcare.
Diagnostic companies, however, trade at rich valuations. Metropolis Healthcare at the upper band will be at a 16 percent discount to Dr Lal Pathlabs, while it will command a premium of 22 percent to Thyrocare Technologies on a price-to-earnings basis for FY19.
Here’s a look at how the companies have fared over the years.