Investment in securities market are subject to market risks. Read all the related documents carefully before investing

An Emerging Opportunity for Investors
India's Lithium Megatrend

**Important: We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
**By submitting your email address, you also sign up for Profit Hunter, a daily newsletter from Equitymaster
covering exciting investing ideas and opportunities in India.


The Curious Case of Dr Lal Pathlabs & its Premium Valuations

Jul 31, 2023

The Curious Case of Dr Lal Pathlabs & its Premium Valuations

Here's a small investment quiz for you.

Consider two companies, Company D and Company I. They are both nearly debt free.

Between FY18 and FY23 Company D grew its bottomline 40%. This was on the back of a 100% growth in topline.

Company I on the other hand, grew its bottomline almost 70% in the same period. This was on the back of a 63% growth in topline.

What about return ratios?

Company D averaged 24% Return on equity (RoE) over the last ten years and 22% over the last five years. Company I, on the other hand, has done a shade better. It averaged 25% RoE over both ten as well as five years.

Company I has paid 84% of its profits as dividends over the last five years. Company D has paid 40% of its profits as dividends. So Company I has a much better dividend payout ratio.

From this, it's clear from that Company I seems to be better. Its profits have grown faster. Its return ratios are a little better. It has also rewarded shareholders more handsomely in the form of dividends.

However, Mr Market doesn't think so. It has rewarded the shareholders of Company D with much bigger gains than Company I. Company D has multiplied investor wealth by 2.6x over the last five years. Investors in Company I have seen their wealth go up by just 1.7x.

That's a significant difference especially when you consider the superior financial performance of company I.

Now here's something that's even more shocking.

It wasn't as if company D was trading at a cheap valuation compared to Company I five years ago. In fact, it was trading at a significant premium. Company D's PE ratio five years ago was 50x whereas Company I's PE ratio was a much more reasonable 30x.

Isn't this perplexing?

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Are these EV stocks potential multibaggers in the making?

Our senior research analysts have identified two EV stocks.

These two stocks riding India's emerging EV trend very smartly.

If you're looking to buy some high-potential stocks in the current market environment, then we strongly suggest you check out these two EV stocks.

Click Here to Know More
Details of our SEBI Research Analyst registration are mentioned on our website -

Company I, despite a lower valuation and superior financial performance, has been a significant underperformer to Company D.

Now, this reminds me of a famous Warren Buffett quote that if history is all there is to the game of investing, then the richest investors would be librarians.

What does this mean? There are two options here.

Mr Market feels that the future of company D is much brighter than Company I. This is why it has outperformed so much.

It could also be the other way round.

The market might be taking a negative view of Company I's future. The stock could have underperformed for this reason.

Company D is none other than Dr Lal Pathlabs and Company I is none other than ITC.

You might think it's ridiculous to compare the two. ITC is a cigarettes to hotel conglomerate. Dr Lal Pathlabs is a leading consumer healthcare brand in diagnostic services.

However, this exercise was deliberate.

I wanted you to focus only on the financial performance and the starting valuations. This way, you wouldn't get influenced by their sectors.

When viewed from this vantage point, it does appear that between the two of them, Dr Lal Pathlabs has been a bigger favourite of Mr Market.

To be fair though, Dr Lal Pathlabs has certainly crashed a huge 40% from its all-time highs of September 2021. And ITC has more than doubled during the same period.

--- This is Third Party Advertisement ---
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

[MEGA] Webinar Invitation -

Navigating markets in 2024 - Fund Managers' Year End Perspective.

Date: Dec 6th Time: 6pm Venue: Your Computer

What's Next for equity, debt & gold asset classes?

Join Chirag Mehta, CIO and Fund Managers of Quantum AMC as they discuss asset class outlook & what one should expect from the markets in the new-year.

Register Free for this Exclusive Webinar

But still, Dr Lal Pathlabs trades at a PE ratio of almost 75x versus the 30x PE of ITC.

Is such a huge valuation gap justified, especially when ITC has put in a superior performance over the last five years?

To be honest, I don't have a clear answer to this. There are a couple of ways in which Dr Lal Pathlabs can justify this high valuation.

First, it will have to grow at a much faster rate than in the past and that growth better start reflecting in the financials...or its valuations can quickly come crashing down.

The other is that it's an extremely well-managed company with top class corporate governance practices. Investors are willing to pay premium to such companies provided they continue to maintain high standards of governance.

But can this premium be so high so as to allow it to command a PE of 75x?

I have my doubts.

A good quality management certainly helps but to be honest, a lot of the management quality is already reflected in the financial performance of the company.

Therefore, a premium of 20-25% tops is what you should be willing to pay over a regular company.

This is why the onus of maintaining this high PE ratio falls on the growth prospects of the company. I agree that the diagnostics industry in India has a lot of growth potential and there is a big shift happening from the unorganised to the organised sector.

Equitymaster Conference 2024: View Your Invitation

However, the company needs to have some kind of a competitive advantage that will allow it to increase market share by leaps and bounds. This could be in the form of superior quality of its testing or a cost advantage.

Think what Page Industries did with Jockey or Titan with gold retailing.

Is its brand so strong that people will pay a premium to get themselves tested at a lab run by Dr Lal Pathlabs in the same way they pay a premium for wearing Jockey?

Or is the trust factor so high, as in the case of Titan, that they are scared of going to other diagnostic players for fear of being cheated?

Well, Dr Lal Pathlabs does have state-of-the-art labs and test centres. But I'm not sure if I can answer yes to both these questions.

I think there a question mark over Dr Lal Pathlabs growing its revenue and profits fast enough to justify its current high valuations.

I could be wrong though. Perhaps you have done a deep dive into the company's business model. Perhaps it has convinced you that such valuations are indeed justified.

And if that's the case, then you could consider holding on to the stock at these levels or even consider buying more.

But I'm more of a value conscious guy who prefers buying stocks with huge margin of safety. I don't want to pay a big premium for future growth and management quality.

And when viewed through this prism, the risk reward in Dr Lal Pathlabs doesn't look all that exciting to me despite the 40% fall from the top.

Happy investing.

Warm regards,

Rahul Shah
Editor and Research Analyst, Profit Hunter

Recent Articles

The US$4 Trillion Milestone: Is it Time to Become Cautious in the Indian Stock Market? December 1, 2023
Indian equity market hits US$4 trillion marketcap. Here's how to navigate the risks.
Investing in Smallcap Stocks? Use this Rule November 30, 2023
A 5-point checklist for Smallcaps.
Why 29 November 2023 is Crucial for India's Best Lithium Stocks November 29, 2023
The day could change the course of India's energy transition and electric mobility.
Avoid the Smart Money When You're Investing in Smallcaps November 28, 2023
Here is the right way to find great smallcaps.

Equitymaster requests your view! Post a comment on "The Curious Case of Dr Lal Pathlabs & its Premium Valuations". Click here!

2 Responses to "The Curious Case of Dr Lal Pathlabs & its Premium Valuations"


Jul 31, 2023

I think I agree completely with Rahul's assessment about both Dr.Lal Path Labs & ITC share prices and the future which holds for both these shares.I have been holding ITC Shares since 2015 building my position in all these years and finally was rewarded by its superb growth last year. Looking at the Future, I felt ITC is more likely to grow and even though whatever you said was a mere analysis and not a recommendation I also carry the same opinion and therefore would like to implement on it.


Aditya Ahuja

Jul 31, 2023

I personally agree with you on your analysis.

Forget why the present valuation is higher for Dr. Lal Path Laboratories.

Hereafter, I believe, IRC's performance should be better for ITC compared to Dr. Lal Path Laboratories.

Equitymaster requests your view! Post a comment on "The Curious Case of Dr Lal Pathlabs & its Premium Valuations". Click here!