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Dr Lal PathLabs (DLP) Initial Public Offering (IPO)

Dr Lal PathLabs (DLP) is coming out with an initial public offering (IPO) to raise Rs626-638 crore from the equity market at a price band of Rs540-550 per equity share. Since the offer is being made through offer for sale, the proceeds from the offer will be remitted to the respective shareholders and investors. The company will not receive any proceeds from the offer.

At the price band of Rs540-550, the issue is priced at 46-47x price earnings (PE) ratio for FY2015 and 28x EV/EBIDTA for FY2015 (25x on H1FY2016 annualized EBIDTA). Though the valuations appear stretched on absolute basis, the stock could command premium due to its strong brand image, extensive distribution and a proven track record in a niche and fast growing segment.

Moreover, the valuations are at a discount to related (though not strictly comparative) hospital/healthcare companies (Apollo Hospitals at 25x EV/EBITDA and Fortis Healthcare at 58x EV/EBITDA) that have a relatively more capital intensive model. On the other hand, DLP is a cash rich company with strong free cash flows and all its organic expansions can be funded through internal accruals.

Verdict : Buy the stock for listing gains.

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