Recommendations From Healthcare Services Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year. 

Thyrocare Technologies 

Rx FOR YOUR PORTFOLIO 

HERE IS WHY
Strong financial performance
Better dividend yield
Visible growth prospect 

Thyrocare technologies is India's first fully automated diagnostic laboratory. It operates with a centralised processing laboratory in Mumbai for esoteric tests; and regional processing laboratory in major metro cities of India and certain regions of Asia. 

Business model they follow is not localised and doctor dependent. Instead, they deal with laboratories and hospitals in remotest of locations who give them access to large volumes of customers. Business is largely B2B with 77% share in revenue and operates through franchise model .B2Bprovides recurring revenue, which requires lesser marketing, is asset light and easier to expand. 

Healthcare segment, especially the wellness segment has tremendous growth potential due to growing awareness among people regarding lifestyle-related disorders and rising income levels. Organised players have better growth prospects as demand is shifting from small and regional unorganised diagnostic laboratories, that currently control more than 70 per cent of the total diagnostic market due to improving economic conditions and rapidly emerging urban population. Also organised players including Thyrocare are better off in terms of services, speed and quality. India’s diagnostic market is small compared to developed countries, but it is amongst the fastest-growing segment. So the organized players have room to expand. 

The consolidated sales have shown a CAGR of 21% over 4 year period of 2015-2019. On a year-on-year consolidated basis, total income from operations increased by 11.90 percent to Rs116.24 crore in Q2FY20. EBITDA (excluding other income) rose 21.22 percent to Rs52.16 crore and EBITDA margin jumped 345 basis points to 44.87 per cent (as against 41.42 per cent inQ2FY19). Net profit jumped 40.19 per cent to Rs34.78 crore 

There is likelihood of improved financial performance in the coming quarters in terms of increased topline and reduced commission fees. This is because the franchise holders used to absorb most of the price cuts offered by the company and direct customers were denied of this benefit. The company is undertaking efforts to ensure that the end clients get benefit from price cuts. It has started appointing field agents who forge direct links with B2B clients. 

The company is also expected to enjoy significant economies of scale driven by investment in advanced technologies and high levels of automation. Higher volumes will ensure effective distribution of overhead costs. The company recently entered prenatal screening test segment and provides noninvasive prenatal testing. This test is gaining popularity internationally and in India. This business can boost bottomline growth and prevent balance sheet stress as it is less capital intensive. 

The above factors along with the under-penetration of organised healthcare diagnostic players and rising health consciousness of the middle class gives a huge upside potential to Thyrocare . The stock is trading at a TTM PE multiple of 26.08 times. We recommend BUY