Why are analysts dumping diagnostics sector for multiplexes?

Maharashtra, on Sunday, reported nearly 1,500 fresh Covid-19 cases, the highest since February 19 and above the 1,000-mark for the fourth day. India’s tally rose by 4,519 cases on Monday, topping the 4,000-mark for a second day.

Following this, shares of Dr Lal Path Labs and Thyrocare gained up to 6 per cent, while those of Inox Leisure and PVR dropped 2 to 5 per cent.
Analysts said that these moves were only a knee-jerk reaction to the news and were sentimental in nature.

Speaking to Business Standard, Gaurang Shah, Head Investment Strategist, Geojit Financial Services says restrictions still unknown; stock moves driven by news. All related sectors to be volatile in short-to-medium term, he says. If restrictions come for multiplex, the shares will go down.

However, analysts believe the recent measures are unlikely to have any impact on related sectors in the long run.

Amit Kumar Gupta, Fund Manager of Adroit Financial says measures unlikely to have any direct impact. For multiplexes, good movie lineup, holiday season to be beneficial, he says.

Edelweiss Securities, too, expects the calendar year 2022 to be the best year ever for film exhibitors in terms of box office collections as, after two years of largely staying away from cinemas, consumers are flocking back in large numbers.
 
Quoting a report by GroupM and Ormax, the brokerage said, India’s box office revenue is expected to touch Rs 12,500 crore in 2022, well ahead of pre-pandemic collection of Rs 10,900 crore in 2019. The gross box office collection from January to April this year has already touched a record Rs 4,000 crore, in spite of cinema capacity at 82% of 2019.

 
In terms of valuations, experts believe the beaten-down share prices of multiplexes are now reverting to their usual levels. On the other hand, diagnostic companies are inching down to their mean valuations, after being overly valued for a long period of time.

Amit Kumar Gupta of Adroit Financial prefers multiplexes over diagnostic firms from long-term view. He eindicates diagnostic companies have corrected 30-40%. Extraordinary profits made during the pandemic not sustainable, he says adding that pricing competition, consolidation also negative for companies.

Diagnostic chains’ operational performance in the March quarter came subdued as Omicron led-wave weighed on non-Covid business, and intense competition and consolidation challenges continued to pain the sector.  

According to YES Securities, additional competition from new entrants coupled with disruptive pricing can lead to volume anxiety for diagnostic companies.

Fears of price disruption in the industry continue to grow after Tata group-owned Health technology platform Tata 1mg recently announced its pilot launch of crucial laboratory tests in Bengaluru, where it is offering tests at as low as Rs 100.

In a nutshell, the near-term outlook for both the sectors remains choppy as states battle the surge in Covid-19 cases. Healthy content pipeline and cheap valuations make multiplex stocks a preferred bet from a long-term perspective.

On Tuesday, investors will keep an eye on global cues, and prices of oil and related commodities. The markets may continue to exhibit volatility as participants await RBI's crucial monetary policy decision on Wednesday.