Revenue of diagnostics cos to fall 5-7% on fewer Covid-19 tests: Crisil

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Coronavirus on scientific background

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, said Crisil in a statement.

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

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 nearly 28%, the rating agency said.

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.

Anuj Sethi, Senior Director, CRISIL Ratings said, “From 18-20% 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 limit revenue growth from Covid-19 lab tests in the remainder of this fiscal. This shortfall will 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 tests typically do not involve doctor prescription/ referrals.

The 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.