A sharp fall in Covid-19 tests as the pandemic intensity wanes, coupled with growing preference for self-test kits, will lead to a 5-7% de-growth in revenue of diagnostics players this fiscal, according to a report by CRISIL Ratings.
This is contrary to a stellar 30% growth last fiscal driven by a severe second Covid-19 wave and pent-up demand for regular tests.
Decline in revenue along with higher operating expenses, largely marketing and advertisement related, will lead to moderation in operating margins to pre-pandemic levels of 24-25%, which is still healthy, the ratings agency says.
Last fiscal, higher realisation from Covid-19 allied tests and better operating leverage resulted in operating profitability reaching a decadal high of around 28%.
However, good cash generation, prudent capital spends (mainly on diagnostic equipment) and low debt levels will keep balance sheets at healthy levels, resulting in ‘stable’ credit profiles for diagnostic players, the ratings agency says.
“From 18-20% last fiscal, the revenue share of Covid-19 tests has fallen to low-to-mid single-digit in the first half of this fiscal. Increasing preference for at-home tests will limit revenue growth from Covid-19 lab tests in the remainder of this fiscal. This shortfall will be partly compensated by 12-14% increase in revenue contribution from regular tests in both existing geographies and from expansion into tier-2 and 3 cities,” says Anuj Sethi, senior director, CRISIL Ratings.
CRISIL also cautioned on the increasing competition from online pharmacy players offering tests mainly in the wellness segment of regular tests. These tests typically do not involve doctor prescription. The online pharmacy players, without investing in physical infrastructure of their own, have tied up with regional labs for conducting such tests.
To counter this competition, established diagnostic players, who generate 10-12% of revenues from wellness tests, have stepped up investments in digital infrastructure and home-collection services.
“Higher marketing and advertisement spends, along with drop in the share of revenue from Covid-19 and allied tests, is estimated to have impacted operating profitability by 300-400 basis points in the first half of this fiscal. However, various cost-optimisation measures undertaken and a moderate increase in realisation from regular tests will ensure operating margin still remains healthy at 24-25% for fiscal 2023,” says Shounak Chakravarty, associate director, CRISIL Ratings.
Yet, good cash generation along with strong liquidity will be sufficient to meet capital expenditure requirements of diagnostic players.
“The need for capex as such is not high, as investment will majorly be towards laboratory equipment. Hence, debt levels are expected to remain low, ensuring continuation of healthy balance sheets and ‘stable’ credit profiles, for CRISIL Ratings rated diagnostic players,” it says.
