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Wednesday, November 23, 2016

ZEE ENTERTAINMENT ENTERPRISE LTD: AROUND THE GLOBE !!!

Scrip Code: 505537 ZEEL
CMP:  Rs. 449.50; Market Cap: Rs. 43,172.16 Cr; 52 Week High/Low: Rs. 589.90 / Rs. 350.10.
Total Shares: 96,04,48,720 shares; Promoters : 41,36,70,212 shares – 43.07 %; Total Public holding : 54,67,78,508 shares – 56.93 %; Book Value: Rs. 43.88; Face Value: Rs. 1.00; EPS: Rs. 10.32; Dividend: 225.00 %; P/E: 43.55 times; Ind. P/E: 35.52; EV/EBITDA: 23.69 times. Total Debt: Rs. 1.90 Cr; Enterprise Value: Rs. 42,200.76 Cr.

ZEE ENTERTAINMENT ENTERPRISES LTD: Zee Entertainment Ltd was founded in the year 1982, based in Mumbai. Company was formerly known as Zee Telefilms Limited and changed its name to Zee Entertainment Enterprises Limited in January 2007. The Company came out with an IPO in 1993 offering 90,00,000 equity shares of Rs. 10 each for Rs. 20 per share raising Rs. 18.00 Cr. ZEEL announced split in its face value from Rs. 10 to Rs.1 on September 1999, later in September 2010 it announced bonus in ratio of 1:1 and on completion of 20 years of broadcasting business in May 2013, the Company announced the distribution of about Rs. 2,015 Crs by way of Bonus issue of 6 % Non-Convertible Redeemable Preference Shares of Face value of Re. 1 each. This bonus issue was in ratio of 21 non-convertible redeemable preference shares with tenure of eight years of Re. 1 each for every 1 Equity share of Re. 1 held in a company. The bonus issue was with one-fifth of the amount i.e. around Rs. 400 Cr redeemable from fourth year onwards in five equal instalments till eight year, this was issued on March 4, 2014. ZEEL, together with its subsidiaries, operates as a vertically integrated media and entertainment company in India. It operates in three segments: Broadcasting and Content, Education, and Film Production. The Broadcasting and Content segment develops, produces, and procures television programming and film content, and delivers through satellites, cable, and Internet. It broadcasts channels, such as Hindi general entertainment channels and regional language general entertainment channels, Bollywood channels, sports channels, English entertainment channels, alternate lifestyle channels. The company broadcasts Hindi entertainment channels - Zee TV, Zee Smile, and 9X; Hindi movies channels - Zee Cinema, Zee Premier, Zee Action, and Zee Classic; English entertainment, movies, and life style channels - Zee Studio, Zee Café, and Zee Trendz; and Sports channels - TEN Cricket, TEN Action, TEN Sports, and TEN Golf. It also broadcasts Regional language entertainment channels, including Zee Marathi, Zee Bangla, Zee Talkies, Zee Telegu, Zee Kannada, ETC Punjabi, and Zee Tamil; religious and alternate lifestyle channels comprising Zee Jagran and Zee Salaam; music channels, such as Zing and ETC Music; niche and special interest channels comprising Zee Khana Khazana; and HD channels, including Zee TV HD, Zee Cinema HD, Zee Studio HD, and TEN HD. Company earns revenues by the way of advertisement and subscription revenues and syndication. The Education segment engages in distribution of software learning products; and provides education and training in information technology. Zee Entertainment Enterprises Ltd has approximately 959 million viewers in 169 countries worldwide. The Film Production segment produces and distributes films. The company has a library housing approximately 2,10,678 hours of television content and about 3,500 hours of movie titles. Effective March 29, 2010, Zee News Ltd. demerged its Regional General Entertainment channel business undertaking and transferred its operation to Zee Entertainment Enterprises Limited. It has operations in India, the United States, Canada, Europe, Africa, the Middle East, Southeast Asia, Australia, and New Zealand. ZEEL can be locally be compared with Balaji Telefilms Ltd, New Delhi Television Ltd, Sri Adhikari Bros Tele Network, Sun TV Network Ltd, Network 18 Media & Investment Ltd and TV18 Broadcasts Limited, Raj Television Networks Ltd, and Globally with UTV Media PLC of UK, CBS Corporation of USA, British Sky Broadcasting Group of UK, Viacom Inc of USA, Comcast Corp of USA, Direct TV USA, Discovery Communications of USA, Dish Network of USA, Dreamworks Animations SKG of USA, Time Warner Cable Inc of USA, TV Tokyo Holdings Corporation of Japan, Chubu-Nippon Broadcasting Co., Ltd of Japan, Wowow Incorporated of Japan, Twenty First Century Fox of USA, Walt Disney company of USA, News Corp of USA, NBC Universal of USA.

Investment Rationale:
Zee Entertainment Enterprises Limited is one of India’s leading television, media and Entertainment Company. It is amongst the largest producers and aggregators of Hindi programming in the world, with extensive library housing over 2,10,678 hours of television content. ZEE has rights to more than 3,500 movie titles from foremost studios and of iconic film stars; Zee houses the world's largest Hindi film library. Through its strong presence worldwide, Zee entertains over 67 Cr+ viewers across 169 countries. The Zee stable owns an integrated range of businesses. All of these in singularity adhere to the content to consumer value chain model of media and entertainment business. Zee is a pioneer in every aspect of content aggregation and distribution through traditional media like satellite and cable and new media like the internet, in India. Zee Entertainment Enterprise is the first listed media company in India and first to launch a Hindi General Entertainment Channel as Zee TV. The Indian Media and Entertainment (M&E) industry is a sunrise sector for the economy and is making high growth strides. Proving its resilience to the world, the Indian M&E industry is on the cusp of a strong phase of growth, backed by rising consumer demand and improving advertising revenues. The industry has been largely driven by increasing digitisation and higher internet usage over the last decade. Internet has almost become a mainstream media for entertainment for most of the people. The Indian media & entertainment sector is expected to grow at a Compound Annual Growth Rate (CAGR) of 13.9 % year-on-year to reach Rs 1,96,400 Cr (US$ 28.82 billion) by 2019. In 2015, the overall Media and Entertainment industry grew 11.7 % over 2014. The largest segment, India’s television industry, is expected to maintain its strong growth momentum led by subscription revenues, representing a year-on-year growth of about 13.2 % to reach Rs 60,000 Cr (US$ 8.8 billion) in 2017. Significantly, with the increased penetration of smartphones and expansion of 3G/4G network in India, the country is likely to see around 900 Cr mobile application (apps) downloads during 2017, which is five times more than 156 Cr in 2012. This uptick in app-downloads is also expected to increase the revenue from paid apps to an estimated over US$ 241.16 million as against US$ 144.7 million in 2014. Internet access has surpassed the print segment as the second-largest segment contributing to the overall pie of M&E industry revenues. Television and print are expected to remain the largest contributors to the advertising pie in 2018 as well. Internet advertising will emerge as the third-largest segment, with a share of about 16 % in the total M&E advertising pie. The film segment which contributed Rs 12,640 Cr (US$ 1.90 billion) in 2014 is projected to grow steadily at a CAGR of 10 % on the back of higher domestic and overseas box-office collections as well as cable and satellite rights. Digital advertising is expected to lead the CAGR with 30.2 %, followed by radio with 18.1 %. Animation and VFX, and television are expected to register a CAGR of 16.3 % and 15.5 % respectively, followed by growth rates of music at 14.0 %, films at 10 % and OOH with 9.8 % expected CAGR. Within TV, subscription revenues are expected to be three times more than advertising revenues, by 2018. Growth in the regional reach of print and radio shall provide opportunities to further improve the advertisement revenue. Recently the government of India announced Demonetization of its Rs. 500 and Rs. 1000 currency notes; this move is likely to impact multiplexes more rather than the content players and broadcast players like ZEE Entertainment Enterprises Ltd. The content interruption is unlikely as only small payments happen in cash. Print companies could see some impact while the broadcast companies will be least impacted. Ad revenue forms a major part for these companies and almost most of the payments are made in cheques so demonetization would not hurt ZEE. Zee Entertainment is likely to see a sharp increase in earnings going forward to the extent of 25 % plus over two or three years due to successful launches of new channels and is expected to do even better going ahead with increasing its market share in regional space. Also, Goods & Services Bill will be a great positive for the company. Recently, Sony Pictures Networks India (SPN) announced that it will acquire Ten Sports for Rs. 2,600 crore ($385 million) from Zee Entertainment Enterprises. The deal will raise SPN's sports profile and put it on equal footing with Rupert Murdoch's 21st Century Fox-owned Star India. The price reflects a control premium as well as a four-year, non-compete pledge. ZEE had paid $107 million (Rs. 500 crore) in instalments during 2006-11 to acquire Ten Sports from Dubai-based Abdul Rahman Bukhatir's Taj Group. Its accumulated losses from the sports business which were are pegged at Rs. 600 Rs. 640 crore. The transaction is expected to be completed in four-five months by FEB 2017. ZEE ran the sports business for close to 10 years and has got it near breakeven. However, they believe that their energies and resources should be deployed in other high-margin and profitable businesses. The valuation for TEN was very good as they got an IRR (internal rate of return) of over 15 %. Zee reported ad revenue growth of 13.7 % YoY in the quarter aided by strong growth in regional channels. This was higher than industry ad growth of 13-15% during the quarter. Zee has a leadership position in Marathi and Bengal and is in the top 3 positions in Telugu and Kannada space. During Q2FY17, Zee Tamil witnessed a marked improvement in viewership, and was the second ranked channel in August and September in the Tamil market. The company expects to continue its industry leading growth, going ahead. The company, however, sounded cautionary on moderation in FMCG and e-commerce spends, which may have some impact on industry growth in the coming quarters. As per the company, FMCG which forms 55-60 % of the TV ad spend, would thus impact ad growth by 1 % for every 2 % impact on spends. However, the company remained upbeat on telcos ad spends owing to 4G launches coupled with GST rollouts wherein potential savings in tax outgo by companies may be reinvested for ad spend. International ad growth is expected at low double to high single digits. Though the programming hours were on the lower side with 25 hours in the quarter, the management has guided at increasing ad inventory through increase in programming hours.  Higher penetration of DTH and the digitisation process augur well for faster growth in subscription revenue over the long term. And with the rapid growth in mobile usage and internet connections and looking at the content hours and quality of ZEE, the company can retain its leadership in media space and command higher premium in valuations and is well poised to benefit from this favourable environment.

Outlook and Valuation:
Zee Entertainment Enterprises Ltd (ZEEL) is one of India’s leading television, media & entertainment companies. In a reflection of India's growing influence, domestic television channels are increasing their networks internationally. Zee Entertainment is a leading provider of entertainment content across genres in the Hindi, English & regional languages. With leading channels like Zee Marathi, Zee Bangla, Zee Telugu, Zee Kannada, Zee Tamizh and ETC Channel Punjabi within its fold, Zee Entertainment would now have an unparalleled reach across the country in the fast growing regional markets. Bollywood - The Indian Film industry is acclaimed as one of the largest film industries of the world. ZEE's Hindi movie channels, Zee Cinema, Zee Premier, Zee Action and Zee Classic maintain its objective in delivering the best of programming in the Hindi Movies Genre. Zee has restructured its business into five verticals, each of which is expected to become a significant piece of the overall pie over the medium to long term Horizons. The five verticals are Broadcasting, International business, Movies & Music, Digital, Live entertainment. Broadcasting segment is currently the major portion of the business; this vertical is likely to remain the key part with focus on regional segment and improving the ratings of flagship & other GEC through new launches and improved selection of shows. Its International business segment along with broadcasting (domestic) would form the lion’s share of the business in medium term. The company would continue to address the international market for Indian content in Hindi/Regional/dubbed language. ZEE’s Movies & Music segment continues to focus on movies production both in Hindi and regional space. Zee Music Company, its music label, has built significant market share, with 60 % incremental share in acquisition of music rights of new Hindi movies, during the quarter. Zee’s Digital segment is currently in nascent stage and the company has yet to discover the market opportunity. During Q2FY17, Ditto TV, its pay over-the-top (OTT) platform, reduced its subscription price to Rs. 20 a month vs. the platform clocking 200 million video views in Q2. Its Live entertainment segment is also in nascent stage segment. The company expects huge opportunities from domestic as well as international events. During Q2FY17, Zee’s LiveEvents business rolled out its first event, ‘Wicked Weekends’ across the country. Zee acknowledged that a fall in ratings in its flagship Zee TV was owing to wrong selection of shows. A new business head has joined four to five months ago. The company has lined up a pipeline of new shows, which would be launched in H2FY17 and thus boost ratings. The company launched three new channels in domestic market - Zee Anmol Cinema - a Hindi movie channel for FTA audience; Zee Yuva, a youth focused Marathi GEC to add on to its present offerings in Marathi market; and Zee Cinemalu, a movie channel in Telugu language. In October, it also refreshed the content of Zindagi, its other Hindi GEC. The company is also in the process of launching HD versions of its regional channels. ZEE has lined up its International channel launches, two new channels in the international market in Q2FY17 – Zee One – targeted at Spanish speaking Hispanic population in US and Zee Mundo – a Bollywood movie channel in Germany, which airs movies dubbed in German. Post the launch of the above mentioned channels, its international channels bouquet is at 40 with channels dedicated to native audience at 12. ZEE’s & TV witnessed 12 % QoQ improvement in viewership. The company indicated that while it is still away from the breakeven point – i.e., 9 % to 10 % viewership market share, it is on track to meet its target to achieve breakeven within the 3 years of launch. In the Tamil market, Zee Tamil witnessed a marked improvement and was the second ranked channel in August and September. In the Telugu market, where it is third, it indicated that Gemini TV leads owing to huge movie content and Zee Telugu is superior in the fictional segment. In the Kannada market, where the company is number two, the leader (Colours Kannada) has higher content hours and high cost non fiction shows like Bigg Boss, which lends them the leadership. The Free to air (FTA) channels advertisement market size is Rs. 1500 crore including Doordarshan. As per the company, 80 % of the market size is held by 8-10 channels. Zee’s key strategic objectives are to be a multimedia entertainment conglomerate, to attain global consumption leadership, and consistently enhance shareholder value. Zee’s first priority is to attain leadership position in key genres, wherein it enjoys leadership in genres of regional markets such as Telugu, Marathi, Kannada, Odisha (Sarthak) and Bengali and has maintained top two positions. It also emphasised its leadership in Hindi movies cluster where it increased its viewership share to 34 %. Zee wants to continue its expansion in new markets and verticals like its expansion in movie production, theatres, live events and music. In FY16, Zee created a new entertainment vertical – Zee Theatre to make unique theatre content across platforms. The company has also expanded in the international market and invested in new distribution deals across the Caribbean, African and APAC markets. The company identified its focus on digital segment by creating multiple digital offering like OZee and Ditto TV and creating content which is customised for such platform. Zee also wants to attain sustainable profitable growth through efficient capital allocation and prudent cost model. Interestingly, the sale of sports business finally in Q2FY17, mirrored the management’s intention to shift focus from loss making segment to profitable segment, and they sold off loss making sports properties which improves its Operating cash flow which will remain robust at Rs. 730 crore despite acquisition of Sarthak Entertainment in FY16. Company’s FCF, however, was impacted by higher investments in building production studios and Sarthak Entertainment acquisition, while sale of air plane generated inflow of Rs. 36.7 crore. Going ahead, with most of capex cycle over in terms of any major channel launches the FCF generation should improve going ahead. Acquisition of Reliance Broadcasting Network will provide Zee an altogether new geography like Bihar, through the #1 channel over there Big Ganga and entry into the Radio channel Big FM. However, as it is subject to regulatory approvals and uncertainty over finalization of the deal time line but post the inclusion, a good bump up in the ad revenues and overall financials can be seen. On Financial side, Zee posted strong performance in Q2 as the numbers were lifted by subscription revenues which grew at 22 % yoy on the back of 24.6 % yoy growth in the domestic arm on the back of catch up revenues of the previous quarter and early closures of content deals as compared to previous year. Advertising revenues witnessed some moderation at 16 % as FMCG and e-commerce verticals lowered their ad spending a bit. The company in the Hindi GEC had a market share of 24 % with & TV combined, whereas it remained strong in the Marathi space with 55 % market share. The highlight of the quarter was the Tamil channel of Zee which climbed up to second spot while in the Telugu and Kannada markets Zee remained at 3rd and 2nd spots respectively. In Oriya market, Sarthak TV continued its dominance. Other sales and services which included syndication of sports business, Zee Music Company, Ditto TV etc grew by 16.4 % yoy. On the margin front, EBITDA margins have been continuously inching higher quarter by quarter. In Q2, they came in at 28.9 % higher 2.90 % yoy as sports losses reduced and subscription revenues moved up. Programming costs as a % of sales moved up to 45.3 % up by 1.50 % yoy and 3.50 % qoq on higher cost involved with movie production and India cricket series. Other expenses as a % of sales moved down to 16.8 % 3.00 % qoq and 4.80 % yoy on account of cost control and low carriage fees. Despite higher depreciation and lower other income, PAT adjusted for exceptional losses came in at Rs. 327 Cr which was 17.3 % higher yoy. Higher market share gains are on the cards as Zee Anmol, regional channels, newly launched channels and the movies basket are expected to continue their excellence. Even internationally, the revenues are growing at a hefty pace on new content. This will enable the ad revenues to grow at a rate of 18 % to 20 % in the coming years higher than the industry average. Subscription revenues will continue to get trigger from finalization of content deals, digitization albeit with a delay and the long term positives to be seen from the new tariff regulations. Hiving off of the sports business will offer a good riddance from a business which was dragging down the profitability. This will lift up the margins from FY18E. The company hopes that Digital will be a key part of its Growth in the future and hence the company geared for expansion on that front as well.   At the current market price of Rs. 449.50, the stock is trading at a PE of 33.79 x FY17E and 26.13 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 13.30 in FY17E and Rs. 17.20 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALSFY16FY17EFY18EFY19E
SALES ( Crs) 5,851.506,832.807,880.809,042.70
NET PROFIT (₹ Cr)1,060.201,277.201,652.201,926.80
EPS () 10.7013.3017.2020.10
PE (x)48.1038.6029.9025.60
P/BV (x)7.906.705.705.00
EV/EBITDA (x)32.3026.1021.3018.00
ROE (%) 18.00 18.8020.7020.80
ROCE (%)15.9017.9017.8017.90

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*As the author of this blog I disclose that I  hold ZEE ENTERTAINMENT LTD in my investment portfolio.

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 


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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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Sunday, November 13, 2016

THYROCARE TECHNOLOGIES LTD: A MUST STOCK IN PORTFOLIO !!!

Scrip Code: 539871 THYROCARE
CMP:  Rs. 616.75; Market Cap: Rs. 3,313.39 Cr; 52 Week High/Low: Rs. 684.80 / Rs. 446.00
Total Shares: 5,37,23,533 shares; Promoters : 3,43,61,745 shares – 63.96 %; Total Public holding : 1,92,27,188 shares – 35.79 %; Book Value: Rs. 69.87; Face Value: Rs. 10.00; EPS: Rs. 12.32; Dividend: 95.55 %; P/E: 50.06 times; Ind. P/E: 57.05; EV/EBITDA: 29.28x
Total Debt: NIL; Enterprise Value: Rs. 3,305.79 Cr.

THYROCARE TECHNOLOGIES LIMITED: The Company was incorporated in 2000. Thyrocare Technologies Ltd is one of the leading pan-India diagnostic chains and conducts an array of medical diagnostic tests and profiles of tests that helps in early detection and management of disorders and diseases. They are India's first fully automated diagnostic laboratory having its strong presence in more than 2000 cities and towns in India and internationally. The company came out with an IPO on April 27, 2016 offering 1,07,44,708 equity shares of Rs. 10 each for Rs. 446 per share raising Rs. 479.21 Cr. The shares of the company got listed on May 9, 2016 at Rs. 662 making a high of Rs. 665.40 and low of Rs. 606.00 on listing day. The object of offer for sale was to achieve the benefits of listing and to provide liquidity to selling shareholders. The company has issued three bonuses prior IPO in the span of 16 years so far in the ratio of 1 for 1 in November 2003, 5 for 2 in March 2006 and 3 for 1 in September 2014. Between the years 2003 to 2006 it issued shares at a price of Rs. 200 per share. It also issued few shares in March 2013 at a price of Rs. 75 per share. Thyrocare is among the leading diagnostic chains. It conducts an array of medical diagnostic tests that centre on early detection and management of disorders and diseases. The company operates its testing services through a fully-automated central processing laboratory (CPL) in Navi Mumbai, which acts as a hub to branches. The company has recently expanded its operations to include a network of five regional processing laboratories (RPLs). Out of these, four RPLs were set up in 2015 one each in New Delhi, Coimbatore, Hyderabad, and Kolkata while it set up one in Bhopal in 2016. The company as of February 29, 2016, had a network of 1,041 authorized service providers (ASPs), comprising of 687 Thyrocare Aggregators (TAGs) and 354 Thyrocare Service Providers (TSPs) spread across 466 cities, 24 states and one union territory. These ASPs operate under a franchise agreement with the company and deliver samples directly to one of the RPLs or to one of the 22 hub locations if the sample is to be processed at the CPL. As of February 29, 2016, it offered 198 tests and 59 profiles of tests to detect a number of disorders. Its profiles of tests include 16 tests administered under its “Aarogyam” brand, which offers patients a suite of wellness and preventive health care tests. Their laboratory processes over 30,000 samples and above 1 lakh investigations every day. Their profiles of tests include 17 profiles of tests administered under their 'Aarogyam' brand. Through wholly owned subsidiary, NHL, they operate a network of molecular imaging centres in New Delhi, Navi Mumbai and Hyderabad, which focuses on early and effective cancer monitoring. Thyrocare Technologies Ltd is locally compared to Dr. Lal Pathlabs Ltd ADS Diagnostic Ltd, Sharon Bio-Medicine Ltd, Secunderabad Health Care Ltd, Keral Ayurveda Ltd, Looks Health Services, Kovai Medical Center, Healthcare Global, SRL Diagnosticcs, Metropolis, Oncquest Laboratories Ltd, Suburban Diagnostics, Medall HealthCare Pvt Ltd, Hitech Diagnostic Centre, Vijaya Diagnostic Centre, Lucid Medical Diagnostics.   

Investment Rationale:

Thyrocare Technologies Ltd is a pan-India diagnostics chain with focus on preventive and wellness health offerings under the Aarogyam brand. The company has a pan India presence with 1,122 authorised service providers (ASPs), comprised of 878 Thyrocare Aggregators (TAGs) and 244 Thyrocare Service Providers (TSPs) spread across 483 cities and 27 states and 1 union territory. The company follows a hub and spoke business model with a fully automated central processing lab (CPL) in Navi Mumbai and 5 regional processing labs (RPL) across India.  In terms of revenue, Wellness & Preventive Healthcare tests account for 50 % of the revenue of which thyroid tests account for 20 % and the balance 30 % are accounted by non-thyroid tests. The Indian Diagnostic Industry is a mega industry, which comprises of equipment manufacturers and pathology labs. In India’s healthcare industry, diagnostic services play the role of an information intermediary, providing useful information disease diagnosis. From FY12 to FY16, the industry grew at a CAGR of 16 % to Rs. 37,700 Cr. For the next three fiscal years, it is estimated that the Indian diagnostic industry will grow at a CAGR of 16 % to 18 % to reach Rs. 58,500 Cr to 61,600 Cr in FY18. The diagnostic industry in India can be classified into pathology testing services and imaging diagnostic services. Pathology testing or in-vitro diagnosis involves the collection of samples, in the form of blood, urine, stool, etc., and analysing them using laboratory equipment and technology to arrive at useful clinical information, to assist in treatment of diseases. It also includes testing of biochemistry, immunology haematology, urine analysis, molecular diagnosis and microbiology. Imaging diagnosis or radiology involves imaging procedures such as X-rays and ultrasounds, which help mark anatomical or physiological changes inside a patient’s body, to assist doctors to diagnose patient’s disease. The imaging diagnostic segment also includes more complex tests, such as CT scans and MRIs and highly specialised tests, such as PET-CT scans. Pathology testing is often preferred as a first line of diagnosis for a majority of diseases and, thus, it contributes to a major portion of the diagnostic industry. Given the high volumes of pathology testing conducted in India, pathology testing still accounts for more than half of the revenue of the Indian diagnostic industry, although the cost of imaging diagnostic services is often more expensive compared to pathology testing. The pathology business is highly scalable as blood samples can be shipped to a remote, centralised location to achieve economies of scale. In contrast, imaging business operators have to install diagnostic equipment close to the patient. Imaging services cannot be centralised and, as a result, are difficult to scale up. Diagnostic centres in India can be classified as hospital‐based, diagnostic chains and standalone centres. Standalone centres form the majority share of 48 % followed by hospital based 37 % centres, while diagnostic chains account for the balance 15 %. The absence of stringent regulations and low entry barriers has led to the evolution of standalone centres, while hospitals tend to have their own pathology labs. Within diagnostic chains, large pan‐India chains form 35 % to 40 % and regional chains form 60 % to 65 %. Specialized tests require expensive infrastructure, which has led to the formation of diagnostic chains in India. These follow the hub and spoke model and enables economies of scale. However, the fragmented nature of the industry indicates low pricing power for service providers in the near term. The key drivers for the industry are increase in evidence based treatments, huge demand-supply gap, increase in health insurance coverage, need for greater health coverage as population and life expectancy increase, rising income levels making quality healthcare services affordable, and growing demand for lifestyle related diseases & healthcare services. This growth is likely to be supported by rising awareness towards wellness and a higher tendency among the population to take preventive actions against diseases. Changing lifestyle is perpetuating higher chronic diseases and with rising income levels, demand for diagnostic testing in India is on the rise. Further, the health insurance penetration level in India is currently low with 17 % of the population availing to it. Moreover, 86 % of the healthcare related expenses are borne directly by consumers in case of private healthcare services. Increase in penetration levels of health insurance is expected to indirectly increase demand for diagnostic services. Of the diagnostic market large pan-India chains account for 35 % to 40 % and regional chains cover the balance 60 % to 65 %. Also, they can eat into unorganised sectors market share which stands at 48 %. This leaves a lot of room for organised players like Dr Lal Pathlabs, Thyocare and SRL amongst others to grow faster than the industry. Thyrocare is one of the leading pan‐India diagnostic chains and offers 192 tests and 54 profiles of tests to detect health disorders such as thyroid, growth, metabolism, auto‐immunity, diabetes, anaemia, cardiovascular, infertility, and various infectious diseases. It offers various diagnostic tests under brand names Thyrocare, Aarogyam, Neuclear. It processes more than 10mn blood samples and conducts more than 53mn test annually. Thyrocare started its diagnostic services with low‐value thyroid tests in the year 2000, it is now the fastest growing and has the highest value‐added service offering in the segment of wellness and preventive care, which accounts for 51 % of its diagnostic revenues. Thyrocare is the industry leader in terms of revenue share from wellness and preventive care tests. Incidentally, CRISIL estimates this segment to deliver 25 % CAGR over FY15‐18, higher than the overall diagnostic industry CAGR of 17 %. With the setting up of regional processing laboratories (RPLs) in 2014 as against its only central processing lab in Navi Mumbai, Thyrocare delivered 27 % CAGR in its diagnostic test volume over FY14‐16. Recently, it has set up two RPLs in Kolkata and Bhopal and plans to set‐up 20‐25 RPLs at a capex of Rs. 75 Cr over next two years; this, is supported by a conducive industry scenario will drive growth. Additionally, the visible ramp‐up in its PET‐CT scan services in cancer diagnosis will provide meaningful incremental earnings growth. Thyroid profile is one of the key test offerings of the company and includes total Triiodothyronine, total Thyroxine and thyroid stimulating hormone tests which are collectively referred to as thyroid tests. Thyroid tests comprised 28 % of the total samples that the company processed in FY15 and generated revenue of Rs. 27.2 crore, which constituted 15 % of its total standalone revenue for FY15. They charge Rs. 780 per test Dr lal charges 650. Despite facing disruptive pricing strategy by its rival, Thyrocare is a leader of the domestic diagnostic industry in terms of profitability with an EBITDA margin of 40.7 % in 9MFY16. It is expected that it will maintain its margin leadership with continuous focus on wellness and preventive health‐care tests. Considering strong growth momentum and margin leadership, Thyrocare can post revenue CAGR of 25 % and PAT CAGR of 29 % over FY15‐18. Thyocare has posted a CAGR of 23.0 % over FY2011-2015. Going forward, given the cash rich balance sheet of the company, it can easily grow at 30 % over the medium term.
  
Outlook and Valuation:
Thyrocare Technologies Limited is an India-based diagnostic chain company. The Company offers a range of medical diagnostic tests and profiles of tests that center on early detection and management of disorders and diseases. The Company's business segments include diagnostic testing services activity, manufacturing of radiopharmaceuticals activity and imaging services activity. The diagnostic testing services activity segment includes the provision of laboratory testing services. The manufacturing of radiopharmaceuticals activity segment includes the manufacture and sale of radioactive pharmaceuticals to its customers. The imaging services segment represents positron emission tomography-computerized tomography (PET-CT) scan and sale of radio pharmaceuticals used in imaging services. It offers various profiles of tests under Aarogyam brand that are used to detect a range of patient disorders, including growth disorders, metabolism disorders, autoimmune disorders, diabetes and anemia. Thyrocare’s business model differs from that of its competitors in a couple of ways. One of the striking differences is that unlike other organized players, which mostly follow a B2C model, Thyrocare is more of a B2B player with 85 % of its revenues coming through the channel as against 30 % to 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 as against 20 % of sales for its peers. This contributes towards the company enjoying better margins compared to the industry margin of 41 % for Thyrocare’s diagnostic business as against 26 % for Dr Lal Pathlabs. 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 it a high ROIC business. The company’s volumes and strong ties with its vendors have enabled it to develop an equipment leasing model for the CPL that has resulted in minimal capex for its otherwise expensive diagnostic equipment’s. The model entails leasing of equipment’s and instruments for the CPL in exchange for a commitment to purchase reagents and consumables from these vendors for a specified period of time. The RPLs conduct routine tests which do not require complex equipment’s; hence, the capex required for equipment’s is minimal and the same are purchased outright by the company. Additionally, the premises required to set up these RPLs are leased, thus resulting in lower capital outlay to set up these RPLs which requires around Rs. 2 Cr to 3 Cr for set up. As a result, the company has been able to expand its operations without relying on debt. The company as of 9MFY2016 has no debt on its books. Low capex requirements and high asset turnover along with high margins enable the company to generate high ROIC on the core diagnostic business, which is around 40 %. This will enable the company to fund its growth with ease and warrant it to make a high dividend pay-out. In fact it has cash and bank and investments of Rs. 91 Cr as of FY2015 on a consolidated basis. The net cash flow from operating activities is around Rs. 40 Cr to 45 Cr per year and will be used to fund the next phase of growth. Thyrocare's test volumes and strong relationships with vendors have allowed them to develop an equipment leasing model for the CPL that results in minimal capital expenditure for diagnostic equipment. Through this model, the equipments and instruments used in the CPL are generally leased from vendors in exchange for a commitment to purchase reagents and consumables from these vendors for a specified period of time. These reagent and consumable costs are then expensed as costs of materials consumed. Hence, the company benefits financially from this model as it minimises the capital costs typically associated with diagnostic equipment as they are not required to expend capital immediately to procure the necessary instruments and equipments. As the RPLs conduct relatively routine tests, they do not require complex equipments that employ a variety of technologies. The capital outlay to purchase the equipment is therefore minimal in comparison to that required to purchase the equipment in the CPL, and as such, Thyrocare has purchased the necessary equipments outright. Company has demonstrated attractive financial performance over last four years. For FY2011-15, its compounded annual growth rate (CAGR) for sales is 23 %, where the sales grew from Rs. 78 crore to Rs. 180 crore in FY2015. The company's operating profit grew at CAGR of 20 %, from Rs. 35.6 crore to Rs. 73 crore in FY2015. Its profit CAGR has been 18 % from Rs. 25 crore to Rs. 48.5 crore in FY2015. The company has no debt on books. In fact it has cash and bank and investments of Rs. 91 crore as of FY2015 on consolidated basis. The net cash flow from operating activities is around Rs. 40-45 crore per year and will be used to fund the next phase of growth. Thyrocare enjoys premium and its Peers like Dr Lal Pathlabs has Ebitda margin of 28 %, Metropolis Healthcare has Ebitda margin of 29 %, SRL Diagnostics has Ebitda margin of 18 %, and Thyrocare Technologies has Ebitda margin 47 %. At the current market price of Rs. 616.75, the stock is trading at a PE of 44.05 x FY17E and 32.80 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 14.00 in FY17E and Rs. 18.80 in FY18E. After listing, Thyrocare has been trading on premium due to its healthy return ratios and high free cash flows. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also .
  
KEY FINANCIALSFY15FY16FY17EFY18E
SALES ( Crs) 183.00241.00302.00387.00
NET PROFIT (₹ Cr)47.0052.0075.00101.00
EPS () 9.209.7014.0018.80
PE (x)59.8055.5039.8029.30
P/BV (x)9.508.107.406.50
EV/EBITDA (x)41.3031.5024.8019.20
ROE (%) 17.60 15.4019.4023.30
ROCE (%)21.1021.7025.7030.50

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*As the author of this blog I disclose that I do not hold THYROCARE TECHONOLOGIES LTD in my any of the portfolios.

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 


As a Disclosures I Confirm that : 
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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