With higher fixed costs and lower revenues, a margin contraction is expected in the next few quarters Shares of Dr Lal PathLabs seem overoptimistically priced, considering that its trailing price-earnings multiple is hovering around 57 times earnings.
One, the lockdown is affecting its business and patient volumes. Second, valuations are lofty compared to other diagnostic firms like Metropolis Healthcare Ltd and Thyrocare Ltd, which are trading at 52 times and 31 times trailing earnings.
Investors are paying a high price eyeing cash flows and high return on capital for diagnostic firms. But with higher fixed costs and lower revenues due to the lockdown, a margin contraction is expected in the next few quarters.