Thyrocare Technologies: Right diagnosis

Thyrocare Technologies is a leading pan-India diagnostic chain facilitating a variety of medical diagnostic tests and profiling focused on early detection and management of diseases.

The company seems well-positioned for growth over the next two to three years, given its focus on expanding its ‘Aarogyam’ brand, strategy to penetrate the unorganised segment and traction in its high-growth imaging business. Besides these, the high potential in the diagnostics business in India, the company’s asset-light model and strong financials bode well.

At ₹722, the stock trades at about 55 times its trailing 12-month earnings, implying a premium of about 17 per cent to listed peer Dr Lal Pathlabs. This is marginally lower than its historical average of 56 times since listing in mid-2016.

While the prospects of the company are bright, buying the stock at this juncture entails some risk from a broad-based market correction. The small market capitalisation of the company makes it vulnerable in this situation. Investors can, therefore, hold the stock and wait for corrective declines to increase their holdings.

Thyrocare offers 198 tests and 59 profiles of tests to detect a number of disorders such as thyroid, growth and metabolism disorders and various infectious diseases. The company operates in three verticals in the diagnostic sector — pathology, selling diagnostic kits and fluorodeoxyglucose (FDG), and nuclear imaging. The contribution from pathology, including product sales to the total revenue, stood at 94 per cent, while the imaging business contributed 6 per cent during 2016-17. The company has developed different brands to cover a variety of tests and profiles of tests. They include Thyrocare (covering thyroid testing and non-thyroid tests), Aarogyam (wellness and preventive care covering 16 profiles), NHL (cancer monitoring), WHATERS (water testing) and Sugar Scan (testing blood glucose levels).

With an eye on the growth prospects in the wellness and preventive diagnostic services segment, the company introduced the Aarogyam brand in 2012, which includes 16 profiles with tests. Crisil has projected 25 per cent compounded annualised growth in this segment over the next few years. By following the strategy of increasing the number of tests per sample which, in turn, increases the average revenue per sample, the Aarogyam brand is offered with different sets of tests.

For instance, the most basic profile, Aarogyam 1.1 includes 30 tests, while the most complex Aarogyam 1.7 comprises 86 tests. Over the last three years, the number of samples collected under the Aarogyam brand increased by 56 per cent while the number of investigations conducted increased by 60 per cent.

The revenue share from the wellness and preventive diagnostic services segment increased steadily from 20 per cent in 2009-10 to 52 per cent of the revenue of diagnostic services in 2016-17. Expansion of call centre operations and setting up of health camps have enhanced the brand equity of the Aarogyam brand.

In the highly fragmented Indian diagnostics industry, about half the market share (48 per cent) is held by standalone players. Of the rest, 37 per cent is held by hospital-based diagnostic centres, while the remaining diagnostic chains, such as Dr Lal Pathlabs, SRL and Thyrocare have about 15 per cent market share. Unlike its peers, Thyrocare focuses on these standalone players and hospital-based diagnostic centres for sourcing its B2B business. The company gets business from these players by leveraging its lower operating cost to offer sizeable discount in specialty tests.

The company’s competitive pricing in the niche PET-CT scan segment can prop its revenue significantly. It is developing the network of molecular imaging centres through its subsidiary NHL.

The company charges ₹10,000 for a full body scan, which is almost half of what is charged by the competitors. The competitive pricing structure should help the company gain significant market share in the radiology business. The radiology business grew 56 per cent over the last three years. Owning seven centres currently, the company plans to set up 60 by FY-20 through franchise model.

The company’s focus on automation of testing process has resulted in higher operating leverage. Thyrocare runs its central processing lab (CPL) from Navi Mumbai, which is fully automated.

Majority of the testing equipment and automation systems used at the CPL are procured with a commitment to use at least a minimum quantity of reagents. This helps the company to reduce capital cost.

The six regional processing laboratories (RPL) located in the main cities in India process the samples sourced from their respective catchment areas. This has minimised the time and transportation costs, which could have been higher had the samples been directed to the CPL. This has also helped lower the unit cost of reagent procured.

The company plans to expand its geographic reach across India by setting up 20 new RPLs by 2020. Much of the funding for this is expected to be generated through internal accruals. This will provide a leg up to the growth in volume, lower the unit costs that will result in higher operating margin.

The company follows the hub-and-spoke business model like its peers. It collects samples through a pan-India network of around 1,041 authorised service providers (ASPs), which are operating under franchise agreements. They are spread across 466 cities, 29 States and one union territory. The widespread network of ASPs provide access to a larger customer base.

The company’s financial performance has been driven by growing volumes and operating efficiency improvements. In FY-17, the company posted revenue of ₹307 crore, up 27 per cent year-on-year. Net profit rose about 37 per cent to ₹71 crore. Operating margin has been around 42 per cent over the past two years. Thyrocare’s operating margin is relatively higher than its peers, given its asset-light, automation and franchise models coupled with relatively smaller base compared to peers.

The company’s healthy cash accrual and zero debt level should help in the execution of its expansion plans.

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