Thyrocare: Strong base, multiple new triggers

Volume focus , asset-light model help generate strong cash flows, profitability

Diagnostics chain Thyrocare Technologies will be the second entity to seek listing barely four months after bigger peer Dr Lal PathLabs got listed, amidst strong demand from investors who are warming up to this high growth sector. Thyrocare is looking to raise upwards of Rs 451 crore in an offer for sale with the proceeds going to private equity investor CX Partners and a small part to promoters. The company is self-sufficient on the financial front with negligible debt and generates strong cash flows and would be funding its expansions through internal cash flows. Given the past record and future prospects, the offer is worth considering.

The company’s business model is akin to the other top diagnostic chains. Thyrocare has a central processing laboratory in Navi Mumbai and five regional processing laboratories, fed by 1,000-odd authorised service centres located in 500 centres across India. The centres source the samples from local hospitals, laboratories, diagnostic centres, nursing homes, clinics and doctors and walk-in customers.

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Prior to 2014, the company had a single central laboratory and has experienced a jump in volumes after the opening up of the regional processing laboratories. Diagnostic test volumes grew 38 per cent over FY13-15, while positron emission tomography (PET) and computed tomography (CT) scans were up threefold. Given the focus on volumes, the company is looking to expand its regional presence and increase the number of processing centres by another 20-25 in 2-3 years.

The company offers around 200 tests and 59 profiles through its brands Aarogyam (preventive, wellness) and Thyrocare (Thyroid). The company has also set up three molecular imaging centres that offer advanced PET and CT scans through a subsidiary, Nueclear Healthcare. This is expected to be expanded further to three more cities across the country. While the thyroid business generates the highest volumes, over half the revenues and operating profits for the company comes from the Aarogyam brand and it is little wonder that the firm is focusing on preventive and wellness offerings. The company also has a water-testing brand called Whaters, which though small is expected to generate 10-20 per cent of revenues going ahead.

While both Dr Lal and Thyrocare are in the diagnostics space, Thyrocare focuses more on preventive and wellness care, where it is the market leader. This segment constitutes about five per cent of organised Indian diagnostics space. While the overall diagnostics market is pegged at Rs 37,700 crore, the organised space is a third of this. The sector is expected to see a 16-18 per cent growth annually in the FY15-18 period to reach Rs 60,000 crore.

Like its peer Dr Lal, the company’s revenues and operating profit over the past few years have grown 20-25 per cent annually. What differentiates Thyrocare is its 40 per cent margins compared with Dr Lal and SRL’s 25-30 per cent margin. The business segment (biochemistry), business-to-business model vs business-to-consumer of competitors and scale efficiencies (volumes, competitive pricing), which have led to lower procurement costs and lastly, sweating of assets have helped the company maintain higher profitability.

Analysts peg the valuations at four to five times enterprise value to sales for FY17 and FY18, which is lower than that of Dr Lal PathLabs, which is quoting at 7-8.5 times of the next two financial years. Given the track record, strong cash flows, high growth areas that Thyrocare Technologies has entered into and the valuations, investors can consider the issue from a two-to-three-year perspective.