Goldman Sachs downgrades diagnostics companies on rising competition

Goldman Sachs on Wednesday downgraded Indian diagnostic companies on account of rising competition and stretched valuations. The global investment bank took a ‘negative’ stance on the sector and said it was turning bearish on B2C (business-to-consumer) incumbents in the space.

The investment bank downgraded the country’s two leading diagnostic firms—Dr Lal PathLabs Ltd and Metropolis Healthcare Ltd—and revised its ratings on the stocks to ‘sell’.

Goldman Sachs said that there is a rise in credible competition in the industry, but the market is underestimating the competitive dynamics.

On Dr Lal PathLabs, the investment banking firm said that the company was witnessing a structural decline in volume growth. The ramp-up at the sub-urban level is slow, it noted.

Goldman Sachs added that the valuation of Dr Lal PathLabs is stretched at 54 times the FY25 estimated price-earnings ratio.

It gave a price target of ₹2,100 on Dr Lal PathLabs shares, indicating a downside of more than 16 percent from the stock’s previous close of ₹2,503.55 on BSE on Wednesday.

Consequently, the Dr Lal PathLabs stock fell as much as 4.5 percent on BSE on Thursday to hit an intra-day low of ₹2,391.95 per share.

Goldman Sachs also downgraded Metropolis Healthcare to ‘sell’ with a target price of ₹1,285 per share. This was also 16 percent lower than the stock’s previous close of ₹1,528.30 apiece on BSE on Wednesday.

The global financial services firm noted that rising competition in the Western region poses a threat to the company’s volume growth. Valuations are high, too, relative to fundamentals at 43 times the estimated FY25 price-earnings ratio.

After the downgrade, Metropolis Healthcare shares lost as much as 4 percent on Thursday to hit an intra-day low of ₹1,467.65 on BSE on Thursday.

In a post-earnings chat with CNBC-TV18, Ameera Shah, Promoter and MD of Metropolis Healthcare said, "Metropolis has established its success on the foundation of top doctors, reputable hospitals, and sound scientific practices, not merely on offering the lowest prices," adding, focussing only on prices can make competition burdensome.

Despite the focus on other aspects, Metropolis maintains strong growth rates, she noted. “We are expecting a very robust growth this year and going forward as well.”