Thyrocare

By Geetanjali Kedia

Thyrocare Technologies is entering primary market on Wednesday, 27^th April 2016, with an offer for sale of upto 1.07 crore equity shares of Rs. 10 each, in the price band of Rs. 420 to Rs. 446 per share. Offer for sale by promoters comprises 5% of the issue, while balance 95% is being offered by PE investor CX Partners. Representing 20% of the post issue paid-up capital of the company, the issue will raise Rs. 451 crore and Rs. 479 crore at the lower and upper price band respectively and will close on Friday, 29^th April, 2016.

Thyrocare Technologies is a Mumbai-based preventive healthcare and diagnostic chain, with a central processing laboratory at Navi Mumbai and 5 regional processing laboratories, offering 198 tests and 59 profiles of tests, having presence in 466 cities through 1,041 service providers. It’s wholly owned subsidiary Nueclear Healthcare Limited (NHL) operates molecular imaging centers in New Delhi, Navi Mumbai and Hyderabad.

For FY15, standalone revenue from operations grew 19% YoY to Rs. 187 crore, with total samples processed rising 30% YoY to 91 lakh. However, EBITDA only rose 6.5% YoY, to Rs. 80.25 crore (42.9% EBITDA margin vis-à-vis 48.1% in FY14), due to a whopping 43% YoY rise in employee cost to Rs.17 crore. Thus, net profit growth contracted to just 5% annually, with net profit coming in at Rs. 48.45 crores, to yield an EPS of Rs. 9.60 for FY15. Since subsidiary NHL is loss making, consolidated PAT for FY15 came in at Rs. 44.44 crores, with EPS of Rs. 8.80. 

For 9 months ending 31-12-15, standalone total income is placed at Rs. 175 crores, with EBITDA at Rs. 74.50 crores, resulting in a margin of 42.7%, almost stagnant from FY15, rather a drop of 22 basis points! PAT for 9M FY16 was Rs. 43.60 crores, translating in an annualized EPS of Rs.11 for FY16. As of 31-12-15, company has no debt on its books, while cash and equivalents are Rs. 62 crores.

While its revenue has grown at a CAGR of 16% from Rs. 140 crores in FY13 to Rs. 187 crores in FY15, sadly, EBITDA CAGR has been much lower at 8%, with EBITDA rising from Rs. 69 crores to just Rs. 80 crores during FY13-15, while PAT has actually fallen from Rs. 56.80 crores in FY13 to Rs. 48.45 crores in FY15. Higher personnel cost and depreciation are the culprits for this de-growth in bottom line.

At the upper end of price band of Rs. 446 per share, market cap of the company will be Rs. 2,396 crores and enterprise value (EV) Rs. 2,330 crores. EV/EBITDA multiple based on estimated FY16 EBITDA of Rs. 105 crores, given that Q4 is seasonally stronger for the company, is at 22 times.  For FY16, company is likely to report an EPS of closer to Rs. 11 per share, resulting in PE ratio of 40 times, based on FY16 earnings.

Dr. Lal Pathlabs, with 172 labs, 1,554 centres and 7,000+ pick-up points, is currently ruling at PE multiple of over 55x and EV/EBITDA multiple closer to 39x, despite 9MFY16 EBITDA margin of only 26.2%, much lower than Thyrocare’s 40%+. This implies that the latter is valued at a discount to its listed peer, may be due to its lower size, as compared to Dr. Lal.

Although Thyrocare has comparatively lower network strength vis-à-vis Dr. Lal PathLabs, its superior margins coupled with double digit growth are seen positive. Thanks to focus on preventive and wellness health segments by diagnostic chains rather than focus on disease, backed by increasing awareness of the younger generation, preventive diagnostic services segment is poised to grow steadily, which is beneficial for the sector as a whole and this company, in particular. 

Historically, diagnostic stocks are ruling at abysmally high PE multiples, which is unsustainable over a longer term, as new players get listed on the bourses, leading to a fairer price discovery. But, as of now, we have to live with expensive valuations for such stocks (partly due to the sector growth rates and partly due to scarcity premium being accorded to them) or be left out in the process to invest.

While the pricing of Thyrocare issue is not cheap, one can apply for listing gains, as also, with a MT view, as an investor.

Disclosure: No interest