Though the June quarter is considered a soft one for the diagnostics sector, listed majors delivered a strong performance in the quarter, with most players beating estimates. Riding on robust volume growth, diagnostics majors reported healthy aggregate top-line growth, while operating leverage helped them expand margins. After Q1, brokerages expect key players to maintain volume growth through FY27 as the sector steps into a seasonally strong quarter. In addition to volume growth, the key trigger for the stocks would be stable pricing, as that has helped the sector maintain and improve margins in the past. Led by Vijaya Diagnostics, the top listed majors have delivered average market-beating returns of over 30 per cent in the last six months. While the outlook remains strong, the rally in the stocks caps the upside from current levels. Kotak Research, which tracks Dr Lal PathLabs and Metropolis Healthcare, says sales growth of the two listed players was a healthy 18 per cent year-on-year (Y-o-Y) and 11 per cent on a sequential basis, on the back of robust volume growth, improved realisations and sustained traction in the business-to-consumer (B2C) channel. Cumulative test volumes for the diagnostics companies grew 11 per cent Y-o-Y and patient volumes grew 8 per cent Y-o-Y in Q1 FY27, indicating continued volume-led growth momentum. Operating profit grew 29 per cent Y-o-Y, while operating profit margin improved 240 basis points Y-o-Y to 28.7 per cent. Healthy organic growth, resilient B2C demand and improving realisations supported margin expansion. The brokerage is positive on Dr Lal as well as Metropolis. Its target price for Dr Lal is ₹2,030, while the fair value for Metropolis is ₹655. 360 One Research points out that the sector delivered healthy profitability in a seasonally dull quarter. This was on account of healthy operating leverage, which led to a 27.5 per cent jump in operating profit for companies under its coverage. Margins at the operating level saw an expansion of 180 basis points to 30.5 per cent, resulting in a 27 per cent jump in adjusted net profit. The focus, according to the brokerage, remains on specialised segments such as genomics, histopathology and high-end radiology. Companies do not expect a major impact from cost inflation due to the West Asia war, despite increases in reagent and solvent prices, and have not planned any price hikes in the near term. However, it remains an option to pass on the impact of raw material cost inflation. 360 One Research has a buy rating on Dr Lal, with a target price of ₹1,950, while its positive rating on Metropolis is accompanied by a target price of ₹700. A key monitorable for the sector would be pricing trends. The sector’s competitive environment remains stable, resulting in flattish prices and helping incumbents gain market share. If online diagnostics majors resort to pricing cuts, offline and multi-platform players could feel pressure on their margins. Incumbent diagnostic chains have largely maintained pricing year-to-date, ending August 26, and are thus well positioned to continue capturing market share. The September quarter, according to Emkay Research, is expected to be a seasonally strong quarter for the diagnostics industry, which may be moving past the aggressive pricing-led competitive environment seen in prior years. Anshul Agrawal and Vivek Sethia of the brokerage point out that with players prioritising volume growth, geographic expansion and profitable scale-up, while maintaining test quality and reporting standards as differentiators, incumbents stand to gain market share on the back of investments in specialised technology, aggressive network expansion and superior brand equity, as customers gravitate towards quality operators. Emkay Research remains positive on incumbents, given their well-established network, strong brand presence, expansion pipeline and focus on preventive testing. It reiterated a buy rating on Dr Lal PathLabs, with a target price of ₹2,000. It is also positive on Metropolis Healthcare and Vijaya Diagnostics, with target prices of ₹675 and ₹1,500, respectively. It, however, flags a key risk from hospital chains such as Apollo Hospitals and Max Healthcare venturing into retail diagnostics. This could be a headwind for incumbents, which have a strong presence in the health care ecosystem.

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