Earlier known as DalalStreetBulls

SEBI (Research Analyst) Registration Number: INH200004471

22 June 2017

Thyrocare Technologies - Long term prospects

Thyrocare Technologies has been generating a lot of buzz since its listing. Many investors are interested to know if they can expect multibagger returns from the stock. While preventive healthcare industry is one of the fastest growing industries in India, there are a very few branded players with superior technology in this field. Multibagger returns ( 3 times, 5 times, 10 times, etc) are usually from sectors that have significant tailwinds behind them. We have identified many multibaggers in the past – Dewan Housing, PC Jeweller, Shakti Pumps, Mold-Tek, etc to name a few based on this framework.

Company Overview:


Thyrocare Technologies is a diagnostic solutions provider. The company’s offerings include:
– Thyrocare ~ Metabolic and Thyroid testing
– Aarogyam ~ Wellness and Preventive care
– Nuclear ~ Cancer monitoring
– Whaters ~ Water Testing
The company was started in 1996 by Dr A Velumani. The company has a centralized processing laboratory which is fully automated. The company relies on Air logistics to bring around 25,000 samples a day from across India to its CPL. The samples are processed at night and reports are uploaded on the website for customers to see.
The company has a strong management – Something most multibaggers have in common.

Industry Overview:


The pathology segment of diagnostic industry in India has a lot of unorganized players due to low entry barriers. The healthcare expenditure in India trails both developed and developing nations in terms of spending as a proportion of the GDP. The preventive healthcare segment is even more under penetrated. The Indian diagnostic industry grew at a CAGR of 16% between FY12 and FY15, it is estimated that the growth rate will pick up to 18% p.a. for the period FY15 to FY18 and touch the Rs 60,000 Crore mark. The revenue break-up of the diagnostic industry is:

The healthcare sector has many strong tailwinds. This industry has the potential to deliver multibagger returns.

Business Model:


The radiology business has seen revenues increase but was seeing negative to low EBIDTA levels. In FY17 the EBIDTA levels of this division stood at ~ 13%, we however expect lower EBIDTA levels from this segment of the business as regional presence is pushed. Point to be noted is that the radiology business is showing a positive EBIDTA due to profits from the trading of materials. The imaging business is still in the negative EBIDTA territory.
Aarogyam:
– Aarogyam constitutes roughly ~ 52% of the pathology revenues, up from ~ 46% in the previous year
– The focus is on preventive healthcare under this segment and it offers packages starting from Rs 2,999 to Rs 6,999 for both males and females offering upto 87 tests
– These tests can be purchased online from Thyrocare’s website
– The volumes under Aarogyam have gone up from 10.19 Lakh samples in FY15 to 15.94 Lakh samples in FY17
Radiology:
– This segment is majorly focused on cancer detection
– The revenues have gone up from Rs 11.88 Crores in FY15 to Rs 18.29 Crores in FY17
– The EBIDTA in the above period has come upto Rs 2.5 Crores from a loss of Rs 1.63 Crores
Imaging – An asset heavy business.
Imaging includes procedures such as X-rays, ultrasounds, etc. These tests require specialized machines which involve a high capital outlay initially. Thyrocare is aggressively pushing up revenues in this segment (From Rs 5.12 Crores in FY15 to Rs 18.29 Crores in FY17). The EBIDTA is still negative but the losses have come down from previous year levels.

Thyroid Tests:
Thyroid tests make up roughly ~ 28% of the company’s tested samples while generating close to ~ 15% of its standalone revenues. This share is for FY15 and has been trending lower as seen from FY13 numbers.
Franchisee Setup:
– Thyrocare shares ~ 60% of its revenues with its franchisees compared to 30% sharing by DLPL, the sharing ratio has decreased off late (Below 60% now)
– Franchisees are basically collection centres that help increase the outreach and geographical presence of the company
– A new franchise owner gives a security deposit of Rs 50,000 to start business
– The company is aggressively pushing on increasing this reach which creates an asset light model of business
Interesting Note: When we had picked up PC Jeweller in the Rs 100 to 115 range (FV:10), the market feedback was that many local and unbranded players were keen to take up a franchisee with PCJ due to the shift of preference towards branded jewellery. The stock went on to give us strong multibagger returns. Going forward, we expect a similar change in trend in diagnostic industry. Companies like Thyrocare, Dr Lal Path Labs, etc enjoy roughly a 10% market share but their technology and reach is unparalleled. The pricing is lower than the local players, especially under the Aarogyam umbrella, the company is able to give many tests at low prices.
Financial Overview:


The company is on a > 20% growth trajectory but is facing pressure on the margins front. Where is this pressure coming from?

Cost of materials consumed has largely remained in a range for the last four years.
As a % of net sales, the employee expenses have gone up significantly from ~ 6.8% in FY11 to close to ~ 9.8% in FY17. The rising employee costs are majorly due to new line of businesses being developed and the rapid expansion. The employee strength has increased from 329 in FY11 to 671 in FY17. This has taken a toll on the EBIDTA.
– Thyrocare is a debt free company
– The company’s working capital has been reducing consistently, infact its creditor days are more than debtor days which signifies negative working capital requirements.
– The company has Rs 11 crores of cash and current investments of Rs 101.48 Crores at cost.

Peer Comparison

Dr Lal Path Labs is another listed company from the listed space. In the below table, we compare the standalone numbers of both the companies.

– Thyrocare enjoys higher margins than DLPL, however DLPL has been able to sustain its existing margins while Thyrocare is seeing margins drift lower
– The PE ratios of both the companies are similar however, DLPL has seen faster growth in revenues and profits
– The Price to Book ratio for DLPL is higher than Thyrocare as DLPL offers higher ROCE and RONW
– DLPL has better turnover ratios than Thyrocare
– DLPL trades at lower EV/EBIDTA and Market cap to sales ratio than Thyrocare
Can Thyrocare be a multibagger?

With a consolidated PE of 55, there is little margin of safety for investors at current levels. However, high PE stocks not delivering multibagger returns is a myth (Example: Kotak Mahindra, IndusInd Bank, etc). So should an investor invest in Thyrocare and if yes, how much % of the portfolio should he allocate to this stock?