Thyrocare Technologies Primary Offer: Test it out

The Mumbai-based Thyrocare Technologies, a healthcare diagnostic service provider, offers a range of pathology and imaging services, targeting early detection and management of disorder and diseases.

The company’s product suite, focus on the fast growing segment of wellness and preventive healthcare and hub and spoke model driving volumes and economies of scale, are positives. However, the company operates in an industry that is highly competitive and fragmented. Its growth prospects, thus, hinge on its ability to expand the network of authorised service providers that collect samples as well as set up additional regional processing laboratories (RPLs).

Another key risk that investors need to watch out for is the possible drag on profitability, owing to its wholly-owned subsidiary, Nueclear Healthcare Limited (NHL), that operates a network of molecular imaging centres, focussing on early and effective cancer monitoring.

The business is highly capital-intensive and has turned profitable at the EBITDA level only in the nine months ended December 2015. However, the business has immense potential in India and is likely to turn profitable in the long run, according to the management.

On its core diagnostic testing business, however, Thyrocare, continues to be on a strong wicket. A healthy revenue growth of 23 per cent annually over the last four years and robust operating margin in the 40-45 per cent range are key positives.

The current IPO is an offer for sale that seeks to raise ₹451-479 crore. While the price band for the issue is between ₹420 and ₹446 per share, the offer price discounts the annualised 2015-16 earnings by 40 to 42 times which is at a discount to its closest peer, Dr Lal Pathlabs. Investors with a moderate risk appetite can subscribe to the offer with a two-three year perspective.

Thyrocare Technologies’ fully automated central processing lab (CPL) is based in Navi Mumbai. In exchange for minimum purchase commitments of reagents and consumables, testing equipment and automation system used at CPL are sourced from vendors at nil or low costs. This minimises the capital cost.

In 2015, the company commenced operations of four automated RPLs located in New Delhi, Kolkata, Hyderabad and Coimbatore, that process samples sourced from nearby regions. The addition of the RPLs has led to a notable jump in the volume growth of tests. In early 2016, the company started a regional lab in Bhopal.

In the next 24 months, it intends to add 20 RPLs, each at a cost of around ₹3 crore. Much of this funding is expected to be generated through internal accruals. Unlike Dr Lal Pathlabs, Thyrocare is essentially B2B. As of February 2016, the company had a network of 1,041 authorised service providers who collect samples from local hospitals, laboratories, diagnostic centres and others.

The revenue share of the wellness segment, a high margin business, has increased over the last few years. In fiscal 2015, around 51 per cent was generated from wellness offerings, up from about 41 per cent two years back. According to a CRISIL report, while the Indian diagnostic industry will grow at a CAGR of about 16-18 per cent over the next three years, wellness and preventive segment will grow at 23-25 per cent.

According to the management, the wellness offering has a margin of around 60 per cent and the company will continue to focus on this segment.

The NHL business that became a wholly-owned subsidiary in December 2015, owns and operates the molecular imaging business. Significant capital expenditure is required to set up imaging centres,purchase and maintain PET-CT scanners and cyclotrons employed by NHL. It currently has three imaging centres operating five PET-CT scanners.

Given the large potential, the company has been able to increase the number of scans significantly in the last one-and-a-half years or so. But the business has just turned profitable at the operating level.

According to the management, this business requires large capex and has a payback of about 40 months. It will be critical to see how fast this business grows and generates profits, going ahead.

Also important will be to watch the quantum of fresh investments that will flow into this business over the next two to three years; this can affect the overall profitability.

While on a standalone basis, Thyrocare has an ROCE of 61 per cent, on a consolidated basis, including NHL, the ROCE dips to 37-39 per cent.