If you have lived in Delhi or the NCR, you can’t have missed Dr Lal PathLabs’ blue-and-yellow signboards. They are omnipresent. But, it wasn’t so three decades back. Dr Arvind Lal, chairman and son of the founder Dr S K Lal, likes to tell this story from the 1980s. “Every time an old client, Bhalla, would come to our lab at Hanuman Road near Connaught Place, his daughter-in-law had to take a day off from work. Bhalla asked me one day, ‘Bete why don’t you open a small centre near our place?’ That is when I thought of franchising Dr Lal PathLabs,” says Dr Lal. It would be the first time a diagnostics brand tried that in India.
Dr Lal PathLabs has expanded greatly since those early days. It has 193 clinical labs, 2,153 patient-service centres (lab-cum-store) and 5,624 pick-up points (see: Healthy growth). It has also expanded from its home city of Delhi to other parts of the country, with a larger presence in the northern market.
Business is booming. In the past five years, the diagnostics chain’s top line has nearly doubled — to Rs.10.56 billion in FY18, from Rs.5.57 billion in FY14, and bottom line to Rs.1.7 billion in FY18, from Rs.800 million in FY14. A total of 15.2 million patients gave 34.7 million samples to Dr Lal PathLabs in FY18; an improvement of two million patients over the previous year. Their labs across the country employ 147 pathology specialists, eight radiologists, 13 microbiologists, five biochemists and 11 specialists with doctorate degrees.
In India, the diagnostics or pathology space is highly fragmented but Dr Lal PathLabs counts itself as the largest player in the organised space. Its competi-tors include SRL Diagnostics (Rs.9.95 billion in revenue), Metropolis (Rs.5.5 billion) and Thyrocare (with Rs.3.55 billion). Dr Lal PathLabs’ clearly has a comfortable lead; its rapid growth has been thanks to its careful geographical expansion and cost optimisation.
New Frontiers
Dr Lal PathLabs remained confined to the comforts of Delhi-NCR till 2000, when they opened their first lab outside in Kanpur. The second was in 2004 in Agartala. The company was moving ahead but the momentum truly picked up in 2005.
Sitting in the company’s corporate headquarters in Gurugram, CEO, Dr Om Manchanda says, “Three important constituents came together in 2005 for Dr Lal PathLabs. Promoters, professionals and PE investors.” Manchanda, who had trained in veterinary science before enrolling for an MBA at IIM-Ahmedabad, worked with Hindustan Unilever’s marketing department for a decade before joining the diagnostics chain. “So, I could hire a lot of talent from the corporate world, people who had been part of building large companies,” he says. Investors came when they noticed a shift from unorganised to organised services in the pathology space; company raised Rs.230 million from WestBridge Capital that year. Later, TA Associates invested a total of Rs.2.12 billion over two rounds in 2010 and 2013.
With the first round, enterprise resource planning systems were put in place to automate the commercial side of the business to ready it for scaling up. According to Manchanda, the company’s orientation changed that year. Beyond lab tests, the service side of the business (which includes everything from patient registration to report delivery to customer relationship) was improved. “I came from a consumer product background, so the consumer (patient) was placed at the heart of the business,” he says.
“At that time, it was still an all day affair for patients. They would come in the morning to give samples and come back in the evening to get reports. We started marketing ourselves as being only as far as their drawing room (since there was home collection of samples) and we introduced online report downloading,” he says. In fact, the company has always been ahead of others in adopting technology. Dr Lal recalls they utilised very small aperture terminal, the satellite based internet communication technology, when they opened the first lab outside the NCR in 2000.
This was around the time when the management realised the importance of brand recall. The colour scheme of the logo was changed to the current blue and yellow from duller shades. The brand was made ready and then the promoters sat around to decide on their growth strategies. The first was to “carefully pick geographies to expand”.
Dr Lal PathLabs follows a hub and spoke model, wherein it sets up regional labs, and builds smaller labs and collection centres around it. In this highly fragmented industry, management had two options — to acquire labs or build their own network. “Many of our competitors, such as Piramal Diagnostic and Metropolis, followed acquisition strategy. But, our company went for the organic growth strategy,” says Manchanda. Today’s 90% of the reports are generated by the company-run labs, with the remaining 10% by partner labs.
This method of expansion also suited their model well — once the hub (lab) was set up, they just had to add more spokes (collection centres). The few acquisitions they did were to build brand equity and customer base.
While scouting for new markets, they decided on regions contiguous with Delhi. “It is very difficult for a service brand to grow into altogether new geographies, because you are dependent on relationships, whether it is in banking, CA practice or pathology,” says Manchanda. Unlike product brands, one has to take services personally to the customer and build a relationship.
Diagnostics is also an extremely fragmented market. There are familiar, neighbourhood labs in every locality, besides city-wide and state-wide lab chains. National players together have a market share in single digits — 5% to 6% according to Bharat Celly, analyst at Equirus Securities.
In the first phase, the company explored nearby markets such as Haryana, Punjab and Rajasthan, then travelled further to places such as Odisha and Bihar. They entered the southern and western regions only after 2010. Today, Dr Lal PathLabs is present in all states (through collection centres) but has labs only in 14 to 15 states. In 2005, 95% of Dr Lal PathLabs’ business was in Delhi, today it is down to 45%. North India still contributes 72.5% to its revenue, and next is eastern India contributing 12.8% to top line (see: Northern star).
Surajit Pal, AVP of Prabhudas Lilladher, says, “Dr Lal PathLabs has a great brand equity and recall in Delhi-NCR. Also, there is mobility of people between NCR and states such as UP, Bihar and Rajasthan. The company wanted to capture that first and then move further East.” In 2018, another reference lab was set up in Kolkata with an investment of Rs.600 million by the cash-rich company. This will be a hub for its eastern operations, a region where it will compete with Suraksha Diagnostic, amongst others, already a well-known brand with 10 labs in West Bengal. “The turnaround time in the East is low now,” says Manchanda.
He adds, “The lab has been built to stimulate demand in the East. It was not that we were not able to service the East from Delhi. The local touch and feel helps us build relationship with doctor fraternity and the patients,” he says.
Pricing it right
While labs can build a client base on reputation and relationships, pricing is crucial in India’s pathology market. “They have to keep prices reduced, because you will not get top line growth if you don’t decrease prices,” says Pal.
While Dr Lal PathLabs can afford to charge a premium of 20% in a familiar region such as Delhi, they can’t do that in the South and the West (from where they earn only 6.7% and 6.8% of their revenues as of FY18). “We have not been able to take a price rise anywhere in the past two years,” shares Ved Prakash Goel, CFO of the diagnostics chain. This is true for others such as Thyrocare, SRL Diagnostics and Metropolis too.
The management has to continually chase volumes to leverage economies of scale to keep top line ticking. The average number of tests per patient has gone up from 2.28 to 2.38 in the past one year. The number of tests has gone up from 26 million to 34 million samples between FY16 and FY18 (see: Size matters).
To generate volumes, Dr Lal PathLabs has been aggressively marketing health packages under Swasthfit. One of its comprehensive health tests with 43 components costs Rs.2,500. “Now 13% of our business comes from Swasthfit,” informs Goel. To keep volume ticking further, they also have to move to new places. “Delhi-NCR can only deliver so much,” says Manchanda.
To expand their reach into Tier-III and Tier-IV towns, Dr Lal says that they will have to fine tune their solutions. “In these towns, price is a major factor. We have to come up with cost-effective solutions for them,” he says. One way is to reduce overheads. As of now, the cost per sample is Rs.216 (a nine-month average).
Pal says, “In the recent past, Dr Lal PathLabs has learnt from their competitors such as Thyrocare, for who bundled tests/preventive healthcare tests are bread and butter.” These bundled tests also give cost savings to the patients, who would be paying around 40% more if the tests are done individually.
Goel adds that this is cost saving for the company too. “A 30 to 40% of our cost is on overheads. If I have to see the same patient again for multiple tests, my costs go up.” With bundled offers, the cost comes down to a third (for example, the same test sample is used for multiple investigations, thus saving on collection and manpower costs). In general, costs are optimised at various levels — the reagent cost (22% of the total), revenue share with channel partners (12%) and overheads which include manpower and infra (40%). “In our system, we can do 100 or 500 tests with the same kit,” says Goel.
Celly of Equirus Securities says, “Only 10-12% (of revenue) is contributed by such preventive healthcare tests for organised sector companies, but the ticket size is good compared to regular tests. That takes care of realisations. Whether you do 10 or 2,000 tests, incremental cost of doing more tests is very low. That leads to better asset utilisation,” he says.
To save on expenses, Goel shares that they are trying to automate retail operations. “For example, we have placed automated kiosks for information in our centres. Manpower and real estate are 50% of our overheads,” he says. Dr Lal PathLabs is running it as a pilot project. At the kiosk, a visitor can register and pay. The sample collection is done by the staffer. Then, the reports can be collected as print-outs at automated machines, much like ATMS. The registration and payment hands can be replaced with these machines. If there were five persons in a small collection centre, a kiosk can do the job with three. Pal says, “Manpower is their largest overhead (40% of revenue). They have 193 regional labs and I don’t see them adding more in next two to three years. They are increasingly rationalising their manpower costs by cross utilising/transferring manpower across their labs.”
But how long can Dr Lal PathLabs not take a price rise? In real terms, the rates in pathology have actually gone down in the past ten years in India – the rates have increased only by 1-2% but the inflation has been much higher. Manchanda says that they don’t want to be the lowest price player but to be seen as a value player. “Value in our business is, firstly, a correct report and, secondly, delivery on time. Our effort always will be to run our business efficiently,” he says, adding that a good price helps a company gain market share in this “very large, under penetrated and underserved” segment.
Manchanda sees promise in integration with the unorganised players. There are two parts to this service — sample collection and testing. With smaller players, sample collection is fragmented and this is how it should be, according to him. “Closer to the customer,” he says. But, testing is a different ballgame. “Inefficiency in our space is coming from testing being so fragmented. There are so many machines that are used for only one hour a day. There is a lot of under-utilised capacity in the system,” he says.
Aggregation is the future, he believes, just like it has happened in other industries such as transportation. “In our case it can still happen, without a formal merger and acquisition. All these unorganised players can become my collection partners. The moment operational hassles outweigh benefits, the labs will take that call,” says Manchanda. Dr Lal PathLabs already works with 5,000 pick-up points (hospitals, labs and doctor clinics) as external collection partners.
He says it will take another 15-20 years for the industry to consolidate. “There are some headwinds. The smaller lab owner doesn’t want to be seen as someone who is only doing collection, doesn’t want to let go of control to you. The tailwind for us is that regulations are becoming a little more strict now. There are more licences to be taken,” he says. Of 100,000 labs in India, only 1,000 are accredited by the National Accreditation Board for Testing and Calibration Laboratories (NABL). In the future, the government could come up with quality accreditation. In some states, it is mandatory to take permission from the chief medical officer to run a lab. Then there are rules to dispose biomedical waste, which are not implemented properly by smaller players. But the government could push for stricter implementation.
“Globally, the companies in this space have become larger by mergers and acquisitions (M&A). We have to continuously keep on searching for opportunities on that front,” says Manchanda. Analysts agree that it is a good path to take. “It takes 10-15 years to build credibility in this business, so acquisition of existing labs is a good strategy for growth. Capacity is not a problem for them, they gain brand equity with acquisitions,” says Pal.
Dr Lal feels this is specifically needed in western and southern India, where they are still finding their feet. The availability of Rs.6.5 billion in cash with the company gives him confidence to pursue M&A wherever need be.
Dr Lal’s vision is to have an outlet every 50 km from a patient’s house, across the country. “We have come very far. It was a Rs.300,000 top line lab in 1977 when I joined. It is going to be a Rs.12 billion company this year. Today we serve 70,000 patients a day, in 10 years from now, I would like to serve 250,000 patients per day,” he says. For that to happen, Dr Lal PathLabs has to repeat its performance, over the next decade.
