Thyrocare Technologies is one of the leading diagnostic chains in India with
market share of ~3% amongst organised players. The core business of the
company is diagnostic testing (~97.1% of sales as on 9MFY2016) while the
company through its wholly owned subsidiary also operates imaging centres.
A differentiated model enables higher margins: Unlike other organized players,
which operate more on a B2C model, Thyrocare is more of a B2B player with
~85% of its revenues coming through the channel (as against 30-40% for its
peers). This enables the company to keep its other expenditure lower vis-a-vis its
peers, which spend higher on promotional expenses. In terms of services, the
company is more focused on the preventive & wellness, and the non-preventive
segments, while its peers follow a portfolio model of providing a full range of tests
and services, which entail higher manpower costs. The company’s operations are
relatively more automated in nature, thereby requiring less manpower
intervention, unlike its peers which need to employ qualified manpower like Phds
and doctors. As a result, employee costs for Thyrocare account for 10% of sales
V/s 20% of sales for its peers. This contributes towards the company enjoying
better margins compared to the industry (~41% for Thyrocare’s diagnostic
business V/s ~26% for Dr Lal Pathlabs). We believe, over the medium term the
company would be able to sustain its margins and also scale up its business,
given the opportunities in the industry. This coupled with the low capex
requirement for the diagnostic segment makes its diagnostic business a high
ROIC business.
Outlook and Valuation: The company is valued at a P/E multiple of 42.3-44.9x its
FY2016E annualised EPS at the lower and upper end of the issue price band. This
compares with a P/E multiple of 61.9x FY2016E EPS for Dr Lal Pathlabs. Although
the issue seems to be priced at a discount to Dr Lal Pathlabs, we believe that
Thyocare’s consolidated ROIC will come under pressure in the near term as it has
entered the molecular imaging space by acquiring Nuclear Healthcare Ltd (NHL).
According to the company, this business will take 3-4 years to attain peak
profitability while it accounts for almost 40% of its fixed assets of the company (as
on 9MFY2016). Thus, though Thyrocare could potentially provide listing gains, the
pressure on its ROIC in the near term and the not-so cheap valuation demanded by
it will keep the upside in the stock limited. We are Neutral on the issue.
