Stock Fundamentals

What’s in it for minority shareholders in the Thyrocare buyout

Sai Prabhakar Yadavalli BL Research Bureau | Updated on June 26, 2021

With founder exiting, the change in management could weigh heavily on investors’ minds

Acquiring 66.1 per cent stake in Thyrocare Technologies at ₹1300 a share, API Holdings has announced an open offer for 26 per cent of outstanding shareholding at the same price, without commenting on any delisting plans. API may itself be floating an IPO in the medium-term.

The open offer price, lower than Friday’s closing price of ₹1,448, values the company at 45 times FY22 EPS estimates compared to 66 times for Metropolis and 72 times for Dr. Lal Path labs. These two listed peers earn two to three times Thyrocare’s revenues. Thyrocare has a higher focus on wellness programs (packaged preventive diagnostic tests) which gives the company a higher operating margin profile of about 34 per cent, compared to 25 – 30 per cent posted by competitors. The three companies reported close to 15 per cent CAGR in revenues for the period FY16-21. Operating in a largely unorganized sector, these diagnostic companies are expected to grow faster than the industry, based on brand value and consolidation.The pandemic has helped a valuation re-rating for the listed players from the 30- 40 times earnings that they were trading at earlier.

While there could perhaps not have been a better time for the Thyrocare founder to exit, the change in management could weigh heavily on investors’ minds, with the management now expected to pass on to a younger and digitally acute team. Dr. A Velumani will take a 5 per cent stake in API, and ensure smooth transition of operations with no further association with Thyrocare.

At the same time, the management control by a digital-based company could bring substantial synergies in operational reach of diagnostic companies like Thyrocare which rely on a hub (central processing lab) and spoke (regional and zonal laboratories) model. Digital technologies facilitating test booking, sample collection and report generation are increasingly being adopted by diagnostic chains with impetus from the pandemic, when social distancing is preferred. API plans on leveraging its existing B2B business for strong growth of B2C business of Thyrocare.

That said, investors are now somewhat left in the lurch in this bargain. The open offer price may be revised based on market price and also depending on API’s long-term plans for Thyrocare. The selling out of the business could also mean a potential delisting for the public shareholders, if the minimum public shareholding norms are breached in the process. While the way forward is uncertain for minority shareholders currently, the path to price discovery can be long-winded.

Published on June 26, 2021

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