Antique begins coverage of Metropolis, Dr Lal with sell calls

Mumbai: Antique Stock Broking has initiated coverage on diagnostic chains Dr Lal PathLabs and Metropolis Healthcare with sell ratings. The brokerage has set a price target of ₹1,643 on Dr Lal which is over 30% below the stock's Monday closing price of ₹2,369.35. Its price target of ₹1,232 is about 10.5% below Metropolis' closing price of ₹1,377.05. Dr Lal shares fell 2.9% and Metropolis shares declined 2% on Monday. ET takes a look at why the brokerage is bearish on these stocks and the industry:

Why does Antique see further downside in their share prices?
The fresh competition will put the profitability of existing players under pressure. The brokerage said the industry's growth rate has accelerated post-pandemic but it has also resulted in a slew of new players entering the market - online aggregators, hospital chains expanding their diagnostic offering, pharma companies, and pharmacy chains. "With competition and Covid-19-led tailwinds now behind us, the industry stares at a scenario of lower CAGR for coming years," said Antique's analysts Monish Shah and Pranav Chawla in a client note.

How do the numbers stack up now against the pre-Covid period?
Antique said the profitability of these companies is under threat on account of the new competition. The brokerage expects return ratios such as return on capital employed (RoCE) to be under pressure at 20-25% for both companies as against the pre-pandemic level of over 33%. It said there is a case for de-rating in valuation for the entire sector.

How has the decline in Covid cases impacted business?
Covid-19 was a game changer for the industry with windfall profits. Antique said while the realisation per test for Covid has also fallen from ₹1,200 in FY21 to ₹500 in FY22 resulting in lower margins, companies are struggling for growth with base business growing at high single digits on the elevated base effect of FY21 revenue. "Aggressive pricing is hurting the large players in their most lucrative margins business i.e Wellness," said the brokerage's analysts.

"The elasticity of patient towards the brand is lowest and highest towards price. We are of the view that these price wars will only put further pressure on high margin wellness business."