THYROCARE TECHNOLOGIES Performance dented by increased competition
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1 RESULT UPDATE THYROCARE TECHNOLOGIES Performance dented by increased competition India Equity Research Healthcare Thyrocare Technologies (Thyrocare) Q2FY18 earnings came in weaker than expected as revenue and EBITDA grew 13% and 18% YoY, respectively. This compares with the 25% run-rate in the previous 5 quarters, fuelled mainly by PE-backed players who used Thyrocare s lowcost model as their back-end. Current quarter witnessed slowdown due to increased competition in preventive healthcare, as Dr. Lal and several other players forayed into the wellness space with aggressively priced packages. Additionally, September had 7 fewer days due to early start of the festive season. Going forward, we believe this growth will taper as competition continues to intensify in a market where Thyrocare enjoys leadership. We remain cautious on the diagnostics space. Maintain BUY with TP of INR740. Pathology run-rate slows, despite higher revenue per sample Pathology (~92% of sales) grew just 16% YoY, down from the 25% run-rate in the previous 5 quarters, as increased revenue per sample in preventive care B2C was offset by increased competition and early start to the festive season. Imaging (~7% of total sales) grew 35%, while other income declined 78%. EBITDA margin improved ~172bps YoY to 40.6%, as the company moved away from the earlier rental/reagent model to outright purchase of equipment, thus reducing reagent costs. Management commented that the new structure is better for companies operating at their scale. Sector appeal continues to add new entrants The ~40% growth in wellness has attracted several other players to enter a space where Thyrocare is the leader. Dr. Lal is already in the fray with its Swasth offering. Having said that, most PE-backed players use Thyrocare s cost leadership for back-end testing of samples, via their online selling direct selling agencies (DSA) model. The proportion of sales via the DSA channel has been growing strongly, and currently comprises ~12-15% of total sales. Outlook and valuations: Back-end model strong; maintain BUY We forecast revenue/ebitda growth of 25% in FY18E, in line with management guidance. However, given the rising competitive intensity, we remain cautious on the diagnostics sector. At CMP, the stock trades at 18.4x FY19E EBITDA. We maintain BUY/SP with TP of INR740 (20x FY19E EV/EBITDA). Financials (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change FY17 FY18E FY19E Net revenues ,068 3,852 4,812 EBITDA (2.0) 1,184 1,497 1,906 EBITDA margin (%) bps bps Adjusted profit 246 (89) (376.9) ,169 Diluted P/E (x) EV/EBITDA (x) ROACE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Edelweiss Securities Limited Performer Medium MARKET DATA (R:, B: THYROCAR IN) Equalweight CMP : INR 675 Target Price : INR week range (INR) : 871 / 611 Share in issue (mn) : 53.7 M cap (INR bn/usd mn) : 36 / 563 Avg. Daily Vol.BSE/NSE( 000) : 78.8 SHARE HOLDING PATTERN (%) Current Q1FY18 Q4FY17 Promoters * MF's, FI's & BK s FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty : NIL EW Pharma Index 1 month (1.2) months (0.8) months (9.2) Deepak Malik deepak.malik@edelweissfin.com Ankit Hatalkar ankit.hatalkar@edelweissfin.com Archana Menon archana.menon@edelweissfin.com December 12, 2017
2 Healthcare Q2FY18 result: Conference call highlights Results: Weakness was due to 5-7 days of missing revenue due to early Dussehra and high base from last year s Q2 It was the worst September that the company has witnessed this far. In October, things improved. In no way seeing any challenges (2-3% give or take from FY17 growth outcome) EBITDA maintained, for the first time touched 42% levels Industry: Several new players and PE funds have ventured into industry. o o All players have the same quality. Hence, cost and quality aren t a selling point. The only way to achieve traction is through pricing. Investors put in money and set targets based on volumes. B2B is undergoing disruption. Around 100 players have receive investments of an average USD2mn o B2C pricing for Thyroid is INR300 Multiples enjoyed by the 2 listed players has encouraged others to enter RPLs are doing well. Given the confidence, the company can afford to go in for more labs (maybe 40, given that they don t add much to cost). RPL setup cost is INR20-25mn Growing workload from Navi Mumbai will keep shifting to RPL Company has moved from the reagent/rental model. Vendors have been putting 15% markup in reagents. So, the company has changed their cost model. They have an improved EBITDA from change in strategy. They now purchase the machines. Pathology Water: Thyrocare had invested USD500k in the past However, the company cannot do both water and blood together Board felt it s best to handover the management of the water business to a company that manages something similar (food and air) Tuberculosis (TB): Company had invested in a TB business 3 months ago (more of a B2B business) TB is more hospital and less lab. Pathology is more lab and less hospital. Stated that it wants to focus on tuberculosis (have setup a 5,000sq ft facility) Facility to focus only on TB which has enough volumes and business 2 Edelweiss Securities Limited
3 Thyrocare Technologies Ltd Management said they could have created a business model around thyroid. But, it is not life threatening. Uttar Pradesh/Bihar make-up 70% of the country s burden for TB. The government agencies are putting in their efforts. The setup will sustain for 24 months without profit. We feel profits will follow volumes. Focused on the TB brand. Assembled a team for the same. Wellness: Wellness only caters to the rich consumers Health freak numbers freak The company so far has not been after regular customers, and will look to invest more on the recall value in the next 2-3 quarters. Imaging: The PET-CT business has challenges in scaling up Company has identified 3 more partners in Surat (no competitor), Raipur (no competitor) and Baroda (3-4 competitors) EBITDA appears to have improved because there are no costs but only revenue sharing because of new PET-CTs Company is setting up 3 more franchises in Jan and Feb. So by March, 18 there will be 12 machines operating (currently 8 machines operating). Variables to assess: number of scans per machine per day Thyrocare was the first to declare INR9999 rate for PET-CT Company estimates INR30-40mn investment initially. RPL maybe INR20-25mn. PET-CT INR65mn. All these expenses will not come in this year Competition: Thyrocare is yet to explore technology to tap new patients and retain existing ones. Company depends on cost leadership Reaching the customer has been a challenge. At present, 500,000 customers are being sent annual coupons (offline printed coupons). Mailers are also being sent. The company is currently on the look-out for an agency to help it reach customers. Thyrocare mentioned that the wellness market is huge. It has seen no disruption from Dr. Lal s direct competition. Wellness is not a small segment. Wellness is big enough to grow. Channels: Online client model (utilizes Thyrocare as the backend because Thyrocare costs are lowest) 2,700 clients Backend testing: Online players are overcrowding for the small online market. DSA: direct selling agencies = 12-15% of the business is from DSAs (5 years back it was only 2%) 3 Edelweiss Securities Limited
4 Healthcare Table 1. Actual versus estimates Year to March Actual Q2FY18 Y-o-Y Growth (%) Edel estimates Y-o-Y Growth (%) Deviation from Actual (%) Net Sales (6.3) Diagnostic testing services (7.5) Imaging Services Gross profit (8.8) Gross margins(%) Employee Cost 72 (4.8) 75 (0.8) (4.0) Other expenditure (12.9) EBITDA (7.4) EBITDA margin (%) Depreciation (1.3) Other Income (19.3) 47.0 Interest 1 NA - NA NA PBT (4.7) Income tax expense 95 (16.5) (19.7) Tax rate Add: Exceptional items (1) - Reported profit Adjusted EPS 5 (376.9) 4 (372.3) 1.7 Source: Company, Edelweiss research 4 Edelweiss Securities Limited
5 Thyrocare Technologies Ltd Financial snapshot (INR mn) Year to March Q2FY18 Q2FY17 % change Q1FY18 % change YTD18 FY18E FY19E Net revenues ,758 3,852 4,812 Cost of revenue ,171 1,456 Gross profit (5.0) 1,276 2,681 3,356 Other expenses (11.1) ,007 EBITDA (2.0) 721 1,497 1,906 EBITDA margin Depreciation EBIT (3.9) 628 1,266 1,627 Other income (22.8) Interest Add: Exceptional items (1) Profit before tax (6.7) 710 1,363 1,745 Provision for taxes (16.5) 126 (24.3) Minority interest Reported net profit ,169 Adjusted Profit 246 (89) (376.9) ,169 Diluted shares (mn) Adjusted Diluted EPS 4.6 (1.7) (376.9) Cost of revenue Gross profit Total expenses Operating profit Reported net profit Tax rate Edelweiss Securities Limited
6 Healthcare Company Description Thyrocare, set up in 1995 and incorporated in 2000, is a leading pan-india diagnostic chain conducting an array of medical diagnostic investigations that focus on early detection and management of disorders. The company focuses on clinical chemistry. It has a CPL in Navi Mumbai and 6 RPLs. It is planning to set up RPLs in a few more places. Thyrocare has a nation-wide presence with over 30,000 source points for sample collection managed by its pan-india network of authorised service providers spread over more than 2,000 towns across more than 450 cities in 29 states. It has a wholly owned subsidiary Nueclear HealThyrocareare (NHL). NHL is engaged in imaging diagnostic services, viz. PET-CT scans, nuclear scanning, etc. Its scanning centres are in Navi Mumbai, New Delhi and Hyderabad. NHL is planning to set up scanning centres in more places. Investment Theme Thyrocare is one of India s largest diagnostics players specialising in cost-effective pathological biochemical testing. Its strategy is to marry high volumes with low costs by drawing best yields from infrastructure. Moreover, rising prevalence of evidence-based treatment, shift in favour of unorganised players and expanding product portfolio add growth heft. Owing to low capex requirements, strong FCF generation phase will continue, sustaining high valuations in the medium term. Key Risks Success of business hinges on network expansion Historically, Thyrocare s business growth has been primarily driven by expansion of network and through various partnership arrangements and acquisitions. It expects these to continue to be key drivers of future growth. Rising infrastructure costs could restrict investment Near-term upfront investments could suppress margin if infrastructure costs continue to rise. Rising competitive intensity In addition to established players in the market a number of new PE-backed players have entered the fray. This could suppress the company s growth in the future. 6 Edelweiss Securities Limited
7 Thyrocare Technologies Ltd Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Number of samples (mn) Realisation/ Sample (INR) EBITDA margin (%) Tax rate (%) Income statement (INR mn) Net revenue 2,410 3,068 3,852 4,812 Income from operations 2,410 3,068 3,852 4,812 Materials costs ,171 1,456 Employee costs Other Expenses ,007 EBITDA 935 1,184 1,497 1,906 Operating profit 935 1,184 1,497 1,906 EBIT 753 1,003 1,266 1,627 Add: Other income Profit Before Tax 818 1,094 1,363 1,745 Less: Provision for Tax Reported Profit ,169 Adjusted Profit ,169 Shares o /s (mn) Adjusted Basic EPS Diluted shares o/s (mn) Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio(%) Common size metrics Operating expenses Materials costs Staff costs Depreciation EBITDA margins Net Profit margins Growth ratios (%) Revenues EBITDA PBT Adjusted Profit EPS Edelweiss Securities Limited
8 Healthcare Balance sheet (INR mn) As on 31st March FY16 FY17 FY18E FY19E Share capital Reserves & Surplus 3,119 3,531 4,006 4,614 Shareholders' funds 3,656 4,068 4,543 5,151 Long Term Liabilities Def. Tax Liability (net) (26) (44) (44) (44) Sources of funds 3,757 4,150 4,648 5,301 Gross Block 2,113 2,286 2,886 3,486 Depreciation Net Block 1,522 1,518 1,887 2,208 Capital work in progress Total Fixed Assets 1,536 1,693 1,887 2,208 Goodwill on consolidation 1,069 1,069 1,069 1,069 Non current investments Long-term loans and adv Cash and Equivalents 1,019 1,131 1,476 1,650 Inventories Sundry Debtors Loans & Advances Other Current Assets Current Assets (ex cash) Trade payable Other Current Liab Total Current Liab Net Curr Assets-ex cash Uses of funds 3,757 4,150 4,648 5,301 BVPS (INR) Free cash flow (INR mn) Reported Profit ,169 Add: Depreciation Others (14) (75) Less: Changes in WC 9 41 (59) 11 Operating cash flow ,447 1,362 Less: Capex Free Cash Flow Cash flow metrics Operating cash flow ,447 1,362 Investing cash flow (450) (485) (438) (561) Financing cash flow (177) (415) (663) (626) Net cash Flow 52 (6) Capex (143) (363) (600) (600) Dividend paid Profitability and efficiency ratios ROAE (%) ROACE (%) Inventory Days Debtors Days Payable Days Cash Conversion Cycle Current Ratio Net Debt/Equity (0.3) (0.3) (0.3) (0.3) Operating ratios Total Asset Turnover Fixed Asset Turnover Equity Turnover Valuation parameters Adj. Diluted EPS (INR) Y-o-Y growth (%) Adjusted Cash EPS (INR) Diluted P/E (x) P/B (x) EV / Sales (x) EV / EBITDA (x) Dividend Yield (%) Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E Thyrocare Technologies Ltd Apollo Hospitals Enterprise 2, Dr. Lal Pathlabs Ltd 1, FORTIS HEALTHCARE LTD 1,031 (263.8) HealthCare Global Enterprises Limited Max India Limited Median AVERAGE Source: Edelweiss research 8 Edelweiss Securities Limited
9 Additional Data Thyrocare Technologies Ltd Directors Data Dr A Velumani Chairman & Managing Director Mr A Sundararaju Executive Director & CFO Mr Sohi Chand Non-Executive Nominee Director Mr Gopalkrishna Hegde Independent Director Mr Vishwas Kulkarni Independent Director Dr Neetin Desai Independent Director Mr N Palanisamy Independent Director Ms Amruta Velumani Non-Executive Director Auditors - BSR & Co LLP *as per last annual report Holding Top10 Perc. Holding Perc. Holding Velumani a Thyrocare publicatio Thyrocare properties 9.71 Norwest venture part 9.43 Reliance capital tru 7.2 Sundararaju a 4.96 Sbi funds management 3.49 Aditya birla sun lif 3.17 Sumathi infra projec 2.93 Dsp blackrock invest 2.77 *in last one year Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available *in last one year 9 Edelweiss Securities Limited
10 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk Apollo Hospitals Enterprise BUY SO L Dr. Lal Pathlabs Ltd BUY SP L FORTIS HEALTHCARE LTD BUY SO L HealthCare Global Enterprises BUY SP M Limited Max India Limited BUY SO L Thyrocare Technologies Ltd BUY SP M ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 10 Edelweiss Securities Limited
11 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 (INR) Thyrocare Technologies Ltd Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Aditya Narain Head of Research Coverage group(s) of stocks by primary analyst(s): Healthcare Apollo Hospitals Enterprise, Dr. Lal Pathlabs Ltd, FORTIS HEALTHCARE LTD, HealthCare Global Enterprises Limited, Max India Limited, Thyrocare Technologies Ltd Recent Research Date Company Title Price (INR) Recos 09-Nov Nov-17 Dr Lal Pathlab Healthcare Global Enterprises Prudent change amidst structural challenges; Result Update Strong performance continues, results in-line; Result Update 02-Nov-17 Max India Earnings soft on regulatory interventions; Result Update 834 Buy 279 Buy 134 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * 1stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period One year price chart Thyrocare Technologies 11 Edelweiss Securities Limited
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