When Dr. Arvind Lal, chairman and managing director of diagnostic pathology services provider Dr Lal PathLabs, was trying to set up a new lab in Delhi in 1995, he faced an unexpected hurdle. He approached a bank he’d been banking with for years for a Rs 1 crore loan and didn’t expect any problems because his credit history and relationship with the bank were good. Also, business was going well at Dr Lal PathLabs, which had then become the first private laboratory to start HIV/AIDS testing in India.

But, surprisingly, the bank sat on the loan request for almost nine months. It finally approved the application after it learnt that Dr Lal had approached another bank. “Things happen and you have to take them in the right spirit. You take one step forward, half a step backward, but that’s life,” says 68-year-old Dr Lal.

It’s this spirit of patience that has helped him turn Dr Lal PathLabs into one of the biggest diagnostic firms in India. Today, the country’s first listed pathology services chain, which counts former Prime Minister Manmohan Singh and parliamentarian Shashi Tharoor among its customers, is a favourite of investors, employees, and creditors because of the value it has created for them. On May 14, the firm announced it had crossed the Rs 1,000 crore mark in annual revenues—the first diagnostic services firm to do so.

Investors were delighted at the news of the company’s financial health. The stock price of Dr Lal PathLabs rose over 9% in the two weeks following the announcement. The share price rise capped years of sustained growth in both the company’s revenue and profit in a competitive market. Since FY16 (it listed in December 2015), its revenues have grown over 60%, while the market cap is up more than 55% to over Rs 7,100 crore.

The company, whose ranking rose to 325 from 403 in this year’s Fortune India Next 500 list, posted revenues of Rs 1,056.9 crore in FY18, while its profit jumped 28% to Rs 171.8 crore. Revenues stood at Rs 937.51 crore in FY17.

From 10 labs in 2005 with Rs 45 crore in revenues, Dr Lal PathLabs has become the largest diagnostic chain in north India with 193 clinical labs. It has 2,153 patient service centres and 5,624 pick-up points across the country, equipped to conduct not just everyday blood tests but also complex clinical tests such as gene sequencing and molecular diagnostics.

I would rate myself successful the day I can get into all the rural areas of India, test every individual there,and pick up the samples.”
Dr Arvind Lal, chairman and managing director, Dr Lal Pathlabs

The question is, can Dr Lal PathLabs sustain its growth momentum? It certainly hopes so: The company is looking to grow 15-20% year-on-year. Om Manchanda, chief executive officer of Dr Lal PathLabs, believes there is more room for growth as 70% of medical decisions are made on lab results not just in India but globally. In FY18, Dr Lal PathLabs collected samples from 15.2 million patients and processed nearly 34.7 million tests. And the management seems in no mood to let up. “I am on a treadmill; I have to grow,” 52-year-old Manchanda tells Fortune India, sitting in his office in Gurugram adorned with wildlife photographs. A vet with an MBA from IIM Ahmedabad, Manchanda joined the firm in 2005 from Ranbaxy. The company—launched in 1949 by Dr Lal’s father, Dr S.K. Lal—began expanding only in 2005 after it roped in its first institutional investor: WestBridge Capital, which invested through its fund, WestBridge Ventures I. Media reports say WestBridge Capital invested nearly Rs 42 crore in 2005 for a 26% stake and invested again in 2007. In 2010, private equity firm TA Associates bought a nearly 16% stake for $35 million (Rs 221 crore) from Sequoia Capital India, which had acquired WestBridge Capital in 2006. In 2013, WestBridge Crossover Fund (the new fund launched by the original team of WestBridge Capital after they parted ways with Sequoia Capital) and TA Associates jointly invested $44 million in the firm, valuing it at around Rs 1,750 crore.

When it listed in 2015, Dr Lal PathLabs debuted 50% higher on the National Stock Exchange at Rs 825 compared with its issue price of Rs 550 per share. Its backers made handsome returns with partial exits in the initial public offering and full exits later on. Industry estimates say its PE backers saw an internal rate of return (IRR) of 30-40%. PE firms typically expect an IRR of 20-30%.

The business has seen strong growth inpatient volumes in the past few quarters
The business has seen strong growth inpatient volumes in the past few quarters

More than 10 years down the road, Dr Lal PathLabs is one of the biggest names in diagnostics services, the market size of which credit ratings agency CRISIL pegged at Rs 60,000 crore at FY18-end. Unorganised players account for a huge chunk of this while organised players such as Dr Lal PathLabs, SRL Diagnostics, and Metropolis Healthcare comprise 15% of the market. Experts say organised players are well positioned to take a greater share of the pie.

“With consumer spending rising in India, a lot more ventures in the healthcare services will transition from the unorganised sector to the more organised and branded sector,” says Niten Malhan, former managing director and co-head for India at private equity firm Warburg Pincus and founder of New Mark Capital. He points out that medical treatment in India is increasingly based on pathological findings than merely treating symptoms using antibiotics. “A healthcare provider that can offer a good customer proposition, with scale, will have a good runway for growth in this market.”

At present, Dr Lal PathLabs operates two major business lines: A diagnostic chain for walk-in patients and a business-to-business model that caters to hospitals, who refer patients to it for tests. The business has seen strong growth in patient volumes in the past few quarters. But competition is rising, says Manchanda, from the likes of Metropolis and SRL Diagnostics, and new regional players such as Kolkatabased Suraksha Diagnostics and Hyderabad-based Vijaya Diagnostic, backed by deep pocketed investors. Increasing competition, obviously, has led to pricing pressures, but Dr Lal PathLabs has been able to hold its own. “Our last price increase was in 2016 and we are not even thinking about it right now. We will be competitive on pricing and the value we offer to customers,” says Manchanda. “There is a brand, quality, and service. It is not that people are shifting brands just because somebody is giving a lower price.”

Partnership and acquisitions have been a key driver of the chain’s growth. After years of growing in north India where it has labs or collection centres in more than 350 cities and towns, it is looking to expand to places such as Kolkata in the east and Bengaluru in the south. With Rs 550 crore of cash on its balance sheet, it has set its sights on mergers and acquisitions in large and midsize labs with an annual turnover of at least Rs 5 crore. Recently, it set up a reference lab in Kolkata with an investment of close to Rs 60 crore to cater to the eastern market. “For us, organically, the next big bet is Kolkata. The formal launch is not done yet, but we believe that the lab in Kolkata should break even in two-three years,” says Manchanda. “In our business, scale brings advantage. We will look at strategic consolidation in south and west India and have identified cities such as Bengaluru and Pune, where we want to be in.”

On Dr Lal PathLabs’ plans to expand in the eastern and southern markets, Edelweiss analysts Deepak Malik, Ankit Hatalkar, and Videesha Mehta wrote in a research note that due to low capex requirements, “strong free cash flow generation phase will continue, sustaining high valuations in the medium term”.

While some industry observers caution that near-term upfront investments could suppress margins if infrastructure costs continue to rise, Manchanda is not worried as he believes the time now is to create infrastructure to cater to what will potentially be a huge market both in India and abroad. The chain has overseas operations in Nepal, Saudi Arabia, the UAE, Nigeria, and Sri Lanka, and has also acquired a lab in Bangladesh.

With growing competition, Dr Lal PathLabs is always thinking of new ways of staying ahead in the game. As part of its efforts to grab more customers, it is promoting bundled tests. For instance, vitamin-D and vitamin-B12 levels are done together, but patients would pay for each separately earlier. Now, the diagnostic chain clubs them together for a much lower price. Bundled tests contribute about 10- 15% to the business. “We are seeing a perceptible shift in the patients’ attitude, and maybe it has got something to do with more deaths or problems reported due to NCD (non-communicable diseases) in India, diabetes, high blood pressure, cardiac, and cancer, but the shift is definitely there,” explains Dr Lal.

All businesses, including healthcare, have their share of challenges. Regulations, for instance, can have a severe impact on the industry. Dr Lal PathLabs is no exception: GST-related costs eroded the company’s net profit by Rs 10 crore in FY18, which is nearly 1% of its margins. Also, the government is considering capping prices of essential diagnostic tests to cut the cost of disease detection, something which could impact the entire industry.

But analysts are of the view that cost-efficient organised players such as Dr Lal PathLabs should be able to pull through. “They may even benefit from increased B2B volumes as standalone labs may be compelled to convert into collection centres and/or increase outsourcing to remain profitable,” said JM Financial analysts Anmol Ganjoo and Agraj Shah in a report.

Meanwhile, Dr Lal PathLabs is increasingly looking at technological advances such as predictive analytics, which involves making sense of data monitored by wearables. It isn’t alone in leveraging technology in the healthcare business. Ameera Shah, managing director of Metropolis, a key competitor, also believes that analytics will play a big role in the diagnostics business. “The consumer-facing part of the business will have much more analytics built into it,” she says.

It’s a long way for Dr Lal, who calls himself an accidental entrepreneur. Born in 1949, the year his father opened Central Clinical Laboratory (Dr Lal would rename it Dr Lal PathLabs) in Delhi, Dr Lal’s childhood dream was to become a naval pilot. More than a dozen miniature naval aircraft arranged on a shelf in his Gurugram office bear out his love for flying. He had to abandon that dream after he was diagnosed with myopia. He then decided to pursue a career in pathology.

Time would prove it was the right decision. Lal took a postgraduate degree from the Armed Forces Medical College in Pune, and joined there as a lecturer at the department of pathology. When his father passed away in 1977, Dr Lal took over the reins of the family business—which comprised just one lab at the time.

As he spearheaded the growth of the company to more than 190 labs, Dr Lal won a string of honours such as honourary physician to the President in 2001 and a Padma Shri in 2009. In the same year, he became the first civilian doctor to be made an honorary brigadier by the army.

“Dreams change. Destiny opens or closes doors; it’s up to you to walk through them,” he writes in his recently released book, Corporate Yogi: My Journey as a Spiritual Seeker and an Accidental Entrepreneur. For an accidental entrepreneur, Dr Lal has had quite a run. But he believes Dr Lal PathLabs has far more ground to cover. “I would rate myself successful the day I can get into all the rural areas of India, test every individual there, and pick up the samples,” says Dr Lal.

(This was originally published in the June 15 - September 14 special issue)

Additional reporting by Aveek Datta.

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