Covid-19: Analysts dump diagnostic firms for multiplexes on solid outlook

Experts believe the current news cycle may keep the stock prices of related players volatile in the near term, but any fundamental or direct impact, in the long run, remains improbable.

Shares of multiplex and diagnostic companies were abuzz on Monday, albeit for opposite reasons, as India saw a surprise spike in Covid-19 cases. India reported 4,518 cases on the day, with Maharashtra reporting 1,494 fresh cases, the highest since February 19.

With precautionary measures like mandatory masks in public being reinforced, shares of Dr Lal Path Labs, and Thyrocare gained up to 5.6 per cent, while those of Inox Leisure and PVR dropped up to 5 per cent. In comparison, the benchmark S&P BSE Sensex ended 0.17 per cent down.

The recent uptick in cases and expectations of more precautionary measures in the coming days made investors book profits in the two film exhibitors.

However, the current market action is a knee-jerk reaction, analysts said.

“The sentiment that an uptick in Covid-19 cases could lead to increased testing, and therefore result in positive earnings, is driving the stock prices of diagnostic companies. In case any restrictions are imposed on multiplexes, it will negatively impact those players,” said Gaurang Shah, head investment strategist at Geojit Financial Services.

Experts believe the current news cycle may keep the stock prices of related players volatile in the near term, but in the long run any fundamental or direct impact remains improbable since the restrictions, so far, are only precautionary in nature.

In fact, multiplexes are likely looking at healthy demand supported by a robust content pipeline.

“After two years of largely staying away from cinemas, consumers are flocking back in large numbers. With a strong content pipeline spanning well into FY23, we expect the trend to sustain,” said Edelweiss Securities in a recent note.
 

Notwithstanding weak advertisement revenues, the brokerage expects the calendar year 2022 (CY22) to be the best ever for exhibitors in terms of box office collections.

From a long-term perspective, Amit Kumar Gupta, founder and CIO, FinTrekk Capital, prefers multiplexes over diagnostic companies as the movies line-up over the next few months, coupled with vacations, will benefit the former.

In terms of valuation, shares of diagnostic companies that had been overvalued until recently seem to be crawling back to their mean, while those of beaten down multiplexes are reverting to their usual prices, Gupta added.

“Diagnostic companies have corrected 30-40 per cent from their respective highs since these players had made extraordinary profits during the pandemic. However, this is not sustainable in any case. A lot of pricing competition and consolidation is happening in this sector, which is weighing on them,” Gupta added.

Diagnostic chains reported weak operational performance in the March quarter of financial year 2021-22 (Q4FY22) amid intense competition and consolidation overhangs. 

Besides, the companies endured a tough Q4 as the rise of the Omicron variant in January-February led to suppressed footfall, resulting in a decline in non-Covid business, according to YES Securities.

“Additional competition from new entrants coupled with disruptive pricing can lead to one-two quarters of margin and volume anxiety,” the brokerage said in a recent report.

This comes in the backdrop of Tata group-owned Tata 1MG reportedly offering popular laboratory tests for as low as Rs 100, as it recently announced its pilot launch in Bengaluru. The move is widely expected to disrupt the diagnostic space, by way of severe price pressures.