The Indian diagnostics industry witnessed healthy revenue growth in FY2021 with Covid-19 related tests contributing to 20-25% revenues, in turn supporting profit margins. During H1 FY2022, ICRA’s sample set witnessed volume growth of 74% aided by a low base and spike in Covid-19 and allied tests in the second wave. This was in line with the active cases in India that touched an all-time high in May 2021, peaking at more than 4x the first wave peak. Despite regulated pricing on Covid-19 tests, better volume mix led to improved realization in H1 FY2022. Overall, the revenues of the sample set grew by 55% Y-o-Y in H1 FY2022; this is expected to moderate in H2 FY2022 on account of festive season and relatively lower pent-up demand. 

According to  Mythri Macherla, Assistant Vice President and Sector Head, ICRA, “We expect revenue growth of its sample set to be 20-25% in FY2022.  In line with sequential improvement expected in non-Covid revenues and consolidation of regional chains, revenue growth is estimated at 8-10% in FY2023. Recent trends such as focus on digital brand building, improved offerings in bundled medical packages, changing consumer mindset towards organized players is likely to support demand traction for national diagnostic chains going forward.”

The operating profitability margins (OPM) of the sample set improved to 32% in H1 FY2022 (as compared to 23% in H1 FY2021 and 30% in Q4 FY2021) given a lower base, operating leverage benefits from increased realisations and stabilized raw material prices. ICRA expects the OPM levels to improve sharply to 30-32% in FY2022 (as against 27.2% in FY2021). The same are expected to stabilize in the range of ~29-30% during FY2023 due to sector’s focus on volume growth against the prevailing pricing pressures.

As most industry players follow an asset-light model, capex requirements have remained minimal, limiting the long-term debt quantum. Net debt position for ICRA’s sample set is expected to remain negative in the near-term on the back of sizeable cash balances and healthy accruals. Most diagnostic chains have invested in moderate level of organic expansions and focused on consolidation with regional chains to tap the under-penetrated market.

Adds Macherla,  “With pricing pressures weighing in on the organized players, realization and EBIDTA levels are expected to stabilize going forward. That said, shift of customer demand from unorganized to organized chains and increasing trend of home collections shall positively impact the volume mix and support realizations. Geographical diversification by way of acquisition of regional and smaller diagnostic chains shall result in consolidation and generate synergy benefits in the medium term. Expansion of lab and collection centers network via franchisee model will aid asset-light growth prospects. With news around the Omicron variant, testing is expected to increase in December 2021 due to travel norms in certain states. That said, increasing pace of vaccinations could mitigate the spread of the new variant and reduce the level of Covid-19 related tests in the medium term.”