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 FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	183.00	241.00	302.00	387.00
NET PROFIT (₹ Cr)	47.00	52.00	75.00	101.00
EPS (₹)	9.20	9.70	14.00	18.80
PE (x)	59.80	55.50	39.80	29.30
P/BV (x)	9.50	8.10	7.40	6.50
EV/EBITDA (x)	41.30	31.50	24.80	19.20
ROE (%)	17.60	15.40	19.40	23.30
ROCE (%)	21.10	21.70	25.70	30.50

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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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