1 August 2020India Pharmaceuticals Rating DowngradeDr Lal Pathlabs HOLDCovid-led beat; medium-term growth drivers now priced inDr Lal’s better-than-expected 1QFY21 performance came on the back of a marginal beat innon-Covid volumes, Covid-led higher realizations and tight cost control. Revenue/EBITDA/PATof INR 2660 mn/ 483 mn/ 284 mn were -21%/-49%/-52% YoY and were 21%/ 40%/ 54% vs our estimates. Patient volume (including Covid volumes of c.0.2 mn)declined by 28% YoY to 3.5 mn (10% beat). Realization per patient improved by 11% YoYto INR 760 (10% beat) and was primarily aided by Covid testing (21% of revenue). While wewere building in patient footfall in line with pre-Covid levels from 2Q, the managementcommentary indicates a more subdued near-term outlook with a complete recovery in nonCovid volumes now unlikely before 3Q with Covid volumes, too, softening in July. Thefragmented nature of the diagnostics industry offers significant scope for consolidation.Scalable business model & cost efficiencies, quality assurance and branding initiatives bydiagnostic chains have hastened the transition from unorganized to organized players. Thecurrent disruption and the enhanced role of private laboratories in Covid-19 testing willaccelerate medium to long term shifts in the diagnostic market landscape in favour oforganized players. Given its strong cash position, Dr Lal remains best positioned in theindustry to tide over the current crisis and to exploit inorganic growth opportunities. Whilethe medium-term growth drivers remain in place and we continue to like Dr Lal for itsoperational excellence, at c.47x FY22E EPS (c.25% premium to historical trading range),valuations are now stretched with limited room for underperformance. We broadly maintainour FY21/22 EPS estimates despite the 1Q beat as we temper our near-term volumeexpectations. Downgrade to HOLD with a revised Mar’21 TP of INR 1790. Key operating details:-Complete recovery in non-Covid volumes expected to be delayed: Patient volume(including Covid volumes of c.0.2 mn) declined by 28% YoY to 3.5 mn (10% beat).Patient volume declined by 62% YoY and by 25% YoY in Apr (0.6 mn) and May (1.2 mn)respectively. Volumes grew by 3% YoY in June (1.7 mn) with the growth being aided bypent-up demand, market share gains from other organized & unorganized players and afavourable base. Non-Covid volumes in July stood at c.90% of base volumes with acomplete recovery in non-Covid volumes expected by the end of 2Q. Sample volumesdeclined by 34% YoY to 7.9 mn, in line with our estimates. Tests per patient declined by6% YoY to 2.27 (10% miss). Realization per patient improved by 11% YoY to INR 760(10% beat) and was primarily aided by Covid testing (Realization per patient of c. INR2836). Realization per patient for non-Covid tests declined by 7% YoY to INR 636 owingto the increase in contribution of ROI markets, a change in the channel mix in favour ofcollection centers and the decline in tests per patient.-Anmol [email protected] Tel: (91 22) 66303056Shashank [email protected] Tel: (91 22)62241878Recommendation and Price TargetCurrent Reco.Previous Reco.Current Price TargetUpside/(Downside)Previous Price TargetChangeHOLDBUY1,790-5.4%1,6607.8%Key Data – DLPL INCurrent Market PriceMarket cap (bn)Free FloatShares in issue (mn)Diluted share (mn)3-mon avg daily val (mn)52-week rangeSensex/NiftyINR/US INR1,892INR157.7/US 2.140%83.383.4INR246.5/US 3.32,030/1,05337,607/11,07374.8Price Performance%AbsoluteRelative** To the BSE Sensex1M19.914.96M6.913.412M77.875.5Covid testing boosts top line but remains margin dilutive: Revenue contribution of Covidtesting stood at 21%. Covid testing remained margin dilutive even as it helped to partiallyoffset the decline in top line resulting from lower non-Covid volumes and cover fixedcosts. Gross margin for Covid tests stood at c.55% (vs c.76% for non-Covid tests) owingFinancial SummaryY/E MarchNet SalesSales Growth (%)EBITDAEBITDA Margin (%)Adjusted Net ProfitDiluted EPS (INR)Diluted EPS Growth (%)ROIC (%)ROE (%)P/E (x)P/B (x)EV/EBITDA (x)Dividend Yield (%)(INR 55.623.079.016.751.30.3Source: Company data, JM Financial. Note: Valuations as of 31/Jul/2020JM Financial Institutional Securities ,38940.643.4118.426.346.511.228.90.6JM Financial Research is also available on:Bloomberg - JMFR GO ,Thomson Publisher & Reuters,S&P Capital IQ, FactSet and Visible AlphaPlease see Appendix I at the end of thisreport for Important Disclosures andDisclaimersandResearchAnalystCertification.

Dr Lal Pathlabs1 August 2020to higher reagent costs and the smaller scale of testing. While Dr Lal is currentlyconducting Covid testing in Delhi, Kolkata and Indore, the company is now looking toadd capacity in 3-4 focus cities. The public vs private (home collection hospitals) split forCovid revenue stood at 60%/40%.-High quality franchise but now fairly valued: The Kolkata Reference Lab is aiding volumegrowth in the East with the region growing faster than the overall business. Sustainedfocus on network expansion and a favourable collection center to lab ratio is expected tofurther drive scale in the East. While Dr Lal has a strong presence in the B2B segment inSouth and West India, it is now focusing on expanding its footprint in the B2C segmentvia the franchisee-led model. Dr Lal plans to build clusters around the cities of Bangalore& Pune and grow organically in contiguous markets. Dr Lal made 5 acquisitions in theWest in FY20 and continues to actively seek M&A opportunities outside its core DelhiNCR market. The company is focusing on improving turnaround time, enhancing servicelevels, leveraging technology to generate sales leads and on home collection to drivedifferentiation and to retain its premium positioning in the B2C segment. While themedium-term growth outlook remains robust, at c.47x FY22E EPS, the stock is nowtrading at c.25% premium to its historical trading range with limited room forunderperformance. Key Con-Call Takeaways:-Changes in patient behaviour and channel mix: Demand for home collection is increasing.Walk-ins to company-owned labs have decreased while walk-ins to collection centers andpick-up points have increased with patients avoiding labs which tend to be morecrowded.-On antibody testing as an opportunity: While antibody testing could help inserosurveillance, the jury is still out on its role given that it is not a diagnostic test.Antibody testing could be an opportunity once Covid cases plateau. The size of theopportunity depends on how the pandemic shapes up. However, larger labs do not enjoyany advantage in antibody testing over unorganized labs.-Increase in fees to collection centers: The business model is dependent on collectioncenters for scalability. The contribution of collection centers has increased with theincrease in contribution of ROI markets. The throughput per collection center in ROImarkets remains low. Moreover, Dr Lal does not offer door-step pick-up in ROI marketsunlike in NCR and, hence, offers higher fees to collection centers in those markets.-Swasthfit contribution stable: The contribution of the Swasthfit wellness portfolio torevenue has remained stable during the quarter indicating that preventive healthcare willcontinue to gain traction going forward. Key financials:Revenue/EBITDA/PAT of INR 2660 mn/ 483 mn/ 284 mn were -21%/-49%/-52% YoY andwere 21%/ 40%/ 54% vs our estimates. Gross Margin declined by 729 bps YoY (-467bps QoQ) to 71.5% (JMFe: 76.5%). EBITDA margin declined by 1021 bps YoY (-83 bpsQoQ) to 18.2% (JMFe: 15.7%) with the beat primarily being driven by lower otherexpenses (-556 bps vs JMFe, -206 bps YoY). Normalized EBITDA margin (preESPS/RSU/CSR) stood at 20.3%, declining by 920 bps YoY. Capex for the quarter stood atINR 125 mn. Cash, FDs and liquid investments at the end of June’20 stood at INR 7598mn as compared to INR 7443 mn at the end of Mar’20.JM Financial Institutional Securities LimitedPage 2

1 August 2020Dr Lal PathlabsExhibit 1. Dr Lal 1QFY21 Earnings Snapshot1Q20A1Q21A% YoY1Q21E% Delta vsJMFe1Q21E(cons)% Delta vscons4Q20A% 28.4%18.2%-1021 bps15.7%241 bps19.0%-83 bpsOther Income144114-21%151-24%120-5%Finance 5%25.2%28.2%3041588284-52%18417.5%10.7%-687 bps8.4%7.13.4-52%2.2Dr. Lal - Cost margins1Q20A1Q21A% YoY1Q21ECOGS/sales21.2%28.5%729 bpsStaff cost/sales17.4%22.4%498 bpsOther expenditure/sales33.0%30.9%-206 bpsDr. Lal - P&L (INR mn)Total RevenueCOGSGross ProfitStaff CostOther expensesEBITDAEBITDA margin (%)Exceptional ItemsTaxTax Rate (%)Minority InterestPAT (Reported)PAT margin (%)Diluted EPS 2854%136109%-24%325-13%10.8%-10 bps54%3.9-13%% Delta vsJMFe4Q20A% QoQ23.5%503 bps23.9%467 bps24.3%-189 bps20.7%165 bps36.5%-556 bps36.4%-549 bpsSource: Company, Bloomberg, JM FinancialExhibit 2. Estimate Changes(INR mn)FY21EOldNewFY22Egrowthchange %OldNewgrowthchange %Total operating oss profit10,3619,951-3.5%-4.0%1303412,87429.4%-1.2%% %319bps29.028.34.7%41.540.643.4%EBITDA% marginPAT% marginDiluted EPS (INR)-0.7%-2.1%-2.1%0.2%-2.1%-2.1%Source: Company, JM FinancialJM Financial Institutional Securities LimitedPage 3

1 August 2020Dr Lal PathlabsFinancial Tables (Consolidated)Income Statement(INR mn)Y/E MarchFY18AFY19AFY20AFY21EFY22ENet Sales10,56912,03413,30413,73316,611Sales Growth15.8%13.9%10.6%3.2%21.0%00000Other Operating IncomeTotal RevenueBalance SheetY/E MarchShareholders’ FundShare CapitalReserves & Surplus10,56912,03413,30413,73316,611Cost of Goods Sold/Op. Exp2,2602,6242,9873,7823,738Minority InterestPersonnel Cost1,8072,0832,4262,4822,758Total LoansOther Expenses3,8614,3914,4553,8685,066Def. Tax Liab. / Assets (-)EBITDA2,6402,9363,4363,6015,049EBITDA Margin25.0%24.4%25.8%26.2%30.4%EBITDA Growth11.2%11.2%17.0%4.8%40.2%Depn. & 6055055057488153161169PBT before Excep. & Forex2,6133,0063,1053,1894,572Excep. & Forex 2EBITOther IncomeFinance CostPBTTaxesPreference Share 521222524200000-215-228-228-228Total - Equity & Liab.7,7819,29510,31211,73714,070Net Fixed 3Current AssetsGross Fixed AssetsIntangible AssetsLess: Depn. & Amort.Capital 887124,572Sundry Debtors4125325146437771,166Cash & Bank Balances3,1354,9035,6917,66210,06900000Assoc. Profit/Min. Int.(-)1013171317Reported Net Profit1,7071,9932,2592,3643,389Current Liab. & Prov.Adjusted Net Profit1,7071,9932,2592,3643,389Current Liabilities16.2%16.6%17.0%17.2%20.4%Provisions & OthersDiluted Share Cap. (mn)83.483.483.483.483.4Diluted EPS (INR)20.523.927.128.340.6Diluted EPS GrowthFY19A-169Extraordinary Inc./Loss(-)Net Margin(INR mn)FY18A10.1%16.7%13.3%4.7%43.4%Total Dividend Tax3185521,5559531,074Dividend Per Share (INR)3.25.515.59.510.7Loans & t Current Assets4,1295,3264,4246,1508,840Total – Assets7,7819,29510,31211,73714,070Other Current AssetsSource: Company, JM FinancialSource: Company, JM FinancialCash Flow StatementY/E MarchProfit before TaxDepn. & Amort.Net Interest Exp. / Inc. (-)Inc (-) / Dec in WCap.OthersTaxes PaidOperating Cash FlowCapexFree Cash FlowInc (-) / Dec in InvestmentsOthers(INR FY22E17.2%20.4%Asset Turnover (x) Factor 21-318-552-1,55500-351-1-2Financing Cash Flow125Inc / Dec (-) in CashOpening Cash BalanceClosing Cash BalanceFY21E17.0%-935-261OthersFY20A16.6%89270Inc / Dec (-) in LoansFY19A16.2%-1,043-997Dividend Tax thereonFY18ANet Margin109197Inc / Dec (-) in CapitalY/E March-940-1,723Investing Cash FlowDupont AnalysisKey RatiosY/E MarchBV/Share (INR)24.6%23.0%22.8%21.4%Net Debt/Equity (x)-0.6-0.7-0.7-0.8-0.80P/E (x)92.379.069.766.646.5-953-1,074P/B (x)19.916.715.313.411.200EV/EBITDA (x)57.951.343.741.228.9-1-161-169EV/Sales 17173736356731,9712,408Inventory days991616162866591,2941,9673,937Creditor days30324454463,1354,9035,6917,66210,069Debtor daysSource: Company, JM FinancialSource: Company, JM FinancialJM Financial Institutional Securities LimitedPage 4

1 August 2020Dr Lal PathlabsHistory of Earnings Estimate and Target PriceDateRecommendation HistoryRecommendationTarget 29.219-May-20Buy1,660-5.1JM Financial Institutional Securities Limited% Chg.Page 5

1 August 2020Dr Lal PathlabsAPPENDIX IJM Financial Inst itut ional Secur ities Lim itedCorporate Identity Number: U67100MH2017PLC296081Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst – INH000000610Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.Board: 9122 6630 3030 Fax: 91 22 6630 3488 Email: [email protected] www.jmfl.comCompliance Officer: Mr. Sunny Shah Tel: 91 22 6630 3383 Email: [email protected] of ratingsRatingBuyHoldSellMeaningTotal expected returns of more than 15%. Total expected return includes dividend yields.Price expected to move in the range of 10% downside to 15% upside from the current market price.Price expected to move downwards by more than 10%Research Analyst(s) CertificationThe Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; andNo part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this researchreport.Important DisclosuresThis research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about thecompany(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the selectrecipient of this report. 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S&P Capital IQ, FactSet and Visible Alpha Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. Dr Lal’s better-than-expected 1QFY21 performance came on the back of a marginal beat in . -Covid testing boosts top line