Here’s what to expect from diagnostics companies this year

Diagnostic companies, which were rolling in with a surge in demand for testing, especially for Covid-19 RTPCR tests as also rapid tests during the last two years, are now bracing for a slowdown.

A sharp fall in Covid-19 and allied 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 rating and research agency CRISIL.

This is in contrast to a stellar 30% growth last fiscal driven by a severe second Covid wave and pent-up demand for regular tests.

At the same time, the 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.

Last fiscal, higher realization from Covid 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.

CRISIL that looked at the numbers of nearly a dozen diagnostics players (including five pan-India players) that had aggregate revenue of over Rs 6,500 crore last fiscal indicates as much.

From about a fifth of the total 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 restrict revenue growth from Covid-19 lab tests in the remainder of this fiscal.

This shortfall is expected to 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.

Another trend being observed is increasing competition from online pharmacy players offering tests mainly in the wellness segment of regular tests. These 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. Additionally, they have increased marketing and advertisement spend to reinforce brand recall and awareness on quality. This is expected to shrink the opportunity for higher margins in the near term.