According to a report by ratings agency CRISIL, diagnostic companies are expected to raise revenue by 10 to 11 percent in fiscal year 2025 as the number of patients increases and income per patient improves.

The predicted revenue increase follows an estimated 8% gain in fiscal year 2024.

“While established businesses' geographic growth into Tier-II and Tier-III cities will drive higher patient volumes, increased demand for comprehensive preventive health packages will result in higher realization per patient,” the agency added.

Speaking on the reasons for companies expanding into smaller cities, Poonam Upadhyay, Director, CRISIL Ratings, stated that existing diagnostic players are seeing stagnant growth opportunities for routine tests (which account for 55% of revenues) in metros and urban centers due to stiff competition from e-pharmacies and hospital chain labs.

"As a result, they want to expand into underserved Tier II, III, and IV cities and grow their customer base to drive volumes. "The increased number of collection centers at these locations will also result in better utilization of existing test labs," she said.

Crisil's forecast also implies that diagnostic firms would be able to maintain stable operating margins in fiscal year 2025, thanks to a rise in premium wellness packages that include preventive health checks.

Following the Covid-19 outbreak, companies increased their emphasis on health awareness, which boosted preventive health examinations.

Diagnostic firms have packaged multiple tests into personalized wellness packages targeted to different genders, age groups, and consumer profiles to make preventive health checks easier.

"This has allowed them to charge a premium, resulting in an increase in spend per patient. Notably, the share of this category is predicted to increase to between 22 and 23 percent in fiscal year 2025, up from 18 to 20 percent in fiscal year 2024," the agency noted.

Addressing the increased share of higher margin health packages, the agency stated that such packages are likely to contribute for approximately one-fourth of total revenues in this fiscal year, guaranteeing that operating margins stay stable at 24 to 25% despite ongoing brand promotional investment.

"With internal accruals sustaining at healthy levels and capital expenditure (capex) spend remaining modest, reliance on external debt will be low, ensuring that balance sheets remain strong and support credit profiles of diagnostic players," according to the report.

Crisil's analysis includes ten diagnostics companies in its sample set, five of which are pan-India players such as Dr Lal PathLabs, Metropolis Healthcare, Agilus Diagnostics, Thyrocare Technologies, and Vijaya Diagnostic Centre.