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Thyrocare Technologies 8 September, 2017

Low cost services, economies of scale to aid growth

MANAGEMENT MEET We recently met Thyrocare Technologies’ (THYROCAR) management for an update on
Sector: Pharma Rating: Not Rated business affairs and future perspectives. Management was represented by Sachin Salvi
(GM-Finance) and Vatsal Goyal (Head- Strategy and Corporate development, Nuclear
CMP: Rs680 Target Price: NA Healthcare Ltd). THYROCAR expects to sustain a revenue growth of 25% over mid-to-long
term, while EBITDA margin will remain ~35-40%. The diagnostic industry is fast expanding
Stock Info
but prone to two risks: (a) government regulation may impose some price cap on diagnostic
Sensex/Nifty 31,723 / 9,946
services and (b) start-ups venturing into pathology and diagnosis business is set to intensify
Bloomberg THYROCAR IN
the competition. However, company is confident to sail through these challenges based on
Equity shares (mn) 54
the ability to provide low-cost service offerings and a play on economies of scale. Its PET-CT
52-wk High/Low Rs780/ 571 Imaging services (through 100% subsidiary, Nuclear Healthcare Ltd), would see a gradual
Face value Rs10 ramp-up, with more PET-CT machines being set up at different locations. However, being
M-Cap Rs36.5bn/ $562mn capex intensive, with long gestation period, we cannot expect a meaningful upside from
3-m Avg volume $0.4mn Nuclear imaging business in the near term. If we assume 25% revenue CAGR and average
EBITDA margin of 38% over FY17-19e, the EPS works out to Rs20.6 in FY19e, which implies
Financial Snapshot (Rs mn) that the stock trades at 33x FY19e EPS.
Y/E Mar FY15 FY16 FY17
Key takeaways
Net Sales 1,801 2,351 3,001
EBIDTA 747 952 1,171 Clinical biochemistry remains core: Clinical biochemistry remains the company’s core focus,
PAT 493 589 748 which is growing on the back of higher awareness on preventive healthcare and an increase in
EPS (Rs) 9.2 11.0 13.9 per capita income. THYROCAR takes up on its menu only such tests that (i) have a demand in
PE (x) 74.1 62.0 48.8 the market, (ii) can be automated or scaled up and (iii) do not compete with supporting
EV/EBITDA (x) 48.8 38.3 31.1 laboratories. Management expects this business to grow on the back of penetration to deeper
P/B (x) 13.1 9.7 8.7
markets in tier 3 cities and higher promotional and branding activities, especially its B2C
RoE (%) 17.7 15.7 17.8
business, which consists of the ‘Aroygyam’ brand.
RoCE (%) 23.0 22.5 25.3
Dividend yield (%) - - - Concerns rise but not a worry for THYROCAR: Despite competitors there is no real
competition for THYROCAR so far, due to a huge difference in price offerings for testing
Shareholding pattern (%) services versus competitors. Management also presumes the government would unveil a
Jun’17 Mar’17 Dec’16 pricing regulation on diagnostic services, which will affect select section of the industry,
Promoter 64.0 64.0 64.0 especially those charging a premium price. THYROCAR will not be affected by the regulation
–Pledged - - - due to its rock bottom pricing of services.
FII 4.8 4.5 3.9 Nuclear business to scale up gradually: PET-CT imaging business is capital intensive (each
DII 13.2 12 12.6 PET-CT machine costs ~Rs100mn) and thus revenue and profits are a function of the number
Others 18.0 19.5 19.5 of machines. Typically, breakeven point reaches on 10 scans per day from each machine for a
year (it scanned 18,510 patients from five machines in FY17, averaging ~10 scans per day).
Stock Performance (1-year)
With more machines being set up, a sizeable business can be built over a longer period.
Growth plans: THYROCAR plans to add 14 new regional processing laboratories (RPLs) to its
current count of six RPLs located at New Delhi, Hyderabad, Coimbatore, Kolkata, Bhopal and
Bengaluru in the next three years. Also, for its nuclear healthcare business, it plans to add
three more cyclotrons to the current count of four and ~80 PET-CT machines (to the current
count of four located at Mumbai, Delhi, Hyderabad, Surat and Vadodara) in the next five
years. In FY18, THYROCAR will set up PET-CT scan centres at Raipur, Nashik, Jaipur, Kolkata,
Mumbai and Aurangabad.
Outlook: Diagnosis industry is getting commoditised, as new entrants are crowding the
marketplace, with bigger players competing to gain market share. This scenario is set to exert
pressure on pricing and thus economies of scale will take a centrestage. THYROCAR is well
positioned in this segment with low-cost offering of services and an ability to absorb the
expected pricing pressure, due to its current EBITDA of ~40% versus competitors ~25-30%. We
T. Ranvir Singh adopt a positive stance on its business model.
ranvirsingh@systematixshares.com
+91 22 6704 8016

Investors are advised to refer through disclosures made at the end of the research report.

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8 September, 2017 Thyrocare Technologies

Company background
Founded in 1995 by Dr A Velumani as a specialised testing service provider for
thyroid related diagnosis, THYROCAR now has the distinction as India’s first fully
automated clinical chemistry laboratory, with a focus on providing low-cost testing
services to laboratories and hospitals. It operates with a Centralised Processing
Laboratory (CPL) in Mumbai for esoteric tests and Regional Processing Laboratories
(RPLs) in major metro cities. It is the first Indian numerical pathology laboratory to
have an IT enabled, 24x7 fully automated diagnostic laboratory set-up covering over
200,000sqft floor space that ensures processing capabilities of over 60,000
specimens and over 250,000 clinical chemistry investigations per night. THYROCAR
has more than 1,200 service providers spread across the country, who create an
interface between its laboratories and ~25,000 specimen collection points
(small/medium-sized laboratories and hospitals), who in turn serve the needs of
~300,000 doctors; the laboratories use THYROCAR’s centralised processing facilities.
The company posted a revenue and profit CAGR of 22.2% and 16.5% respectively
during the past five years. Its diagnostic business is asset-light, which helped it to
maintain a debt-free balance sheet. The foray into nuclear healthcare is capital
intensive and thus set to affect its consolidated balance sheet. Entire capex would be
funded through internal accruals.
Chart 1: Revenue trend- diagnostic & testing remains in core Chart 2:Geography-wise sales break for diagnostic & testing (FY17)

Source: Company, Systematix Institutional Research Source: Company, Systematix Institutional Research

Chart 3: Trend in volume of sample processed Chart 4: Business channel wise revenue break up (FY17)

Source: Company, Systematix Institutional Research Source: Company, Systematix Institutional Research

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8 September, 2017 Thyrocare Technologies

FINANCIALS (STANDALONE)
Profit & Loss Statement Balance Sheet
YE: Mar (Rs mn) FY13 FY14 FY15 FY16 FY17 YE: Mar (Rs mn) FY13 FY14 FY15 FY16 FY17
Net reveues 1,343 1,500 1,801 2,351 3,001 Share capital 109 109 505 537 537
YoY growth % 23.1 11.7 20.1 30.5 27.6 Reserve and Surplus 1,492 1,953 2,287 3,217 3,666
- Op. expenses 707 811 1,054 1,399 1,829 Net worth 1,601 2,062 2,792 3,754 4,203
EBIDTA 636 689 747 952 1,171 Minority Interest - - - - -
EBIDTA margin (%) 47.4 45.9 41.5 40.5 39.0 Total Debt 250 250 - - -
- Interest expenses 1 2 3 5 3 Def. tax Laib(net) 1 6 (9) (26) (44)
- Depreciation 33 64 107 113 117 Capital Employed 1,852 2,318 2,783 3,728 4,159
+ Other income 177 66 95 55 81 Net Fixed assets 856 937 885 939 912
- Tax 210.0 227.0 239.0 300.0 384.0 Investments 772 1,190 1,625 2,658 2,962
Effective tax rate (%) 27.0 32.9 32.7 33.7 33.9 - of which liquid
PAT 569 462 493 589 748 Net Working capital 49 72 230 54 180
+/- Extraordinary items - - - - - Cash and bank balance 175 119 43 77 105
+/- Income from associates/JV - - - - - Capital deployed 1,852 2,318 2,783 3,728 4,159
Reported PAT 569 462 493 589 748 Net debt 75 131 (43) (77) (105)
Adj. FDEPS (Rs/share) 10.6 8.6 9.2 11.0 13.9 WC (days) 13 18 47 8 22
Adj. FDEPS growth (%) 63.5 (18.8) 6.7 19.5 27.0 Book value (Rs/sh) 29.8 38.4 52.0 69.9 78.2
Source: Company, Systematix Institutional Research Source: Company, Systematix Institutional Research

Cash Flow Ratios

YE: Mar (Rs mn) FY13 FY14 FY15 FY16 FY17 YE: Mar FY13 FY14 FY15 FY16 FY17
PAT 569 462 493 589 748 P/E (x) 64.2 79.1 74.1 62.0 48.8
+ Non cash items 33 64 107 113 117 P/CEPS (x) 60.7 69.5 60.9 52.0 42.2
Cash profit 602 526 600 702 865 P/B (x) 22.8 17.7 13.1 9.7 8.7
- Incr/(Decr) in WC (195) 23 158 (176) 126 EV/EBITDA (x) 57.6 53.2 48.8 38.3 31.1
Operating cash flow 797 503 442 878 739 EV/Sales (x) 27.3 24.4 20.3 15.5 12.1
- Capex 684 140 42 171 87 RoE (%) 35.5 22.4 17.7 15.7 17.8
Free cash flow 113 363 400 707 652 RoCE (%) 32.6 27.0 23.0 22.5 25.3
- Dividend - - 190 513 269 Fixed Asset turnover (x) 2.1 1.8 1.9 1.9 1.9
- Tax - - 32 105 54 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
+ Equity raised 8.0 - 465.0 975.0 - Dividend payout (%) 0.0 0.0 0.0 0.0 0.0
+ Debt raised - - (250) - - Debtors (days) 33.9 36.9 37.4 40.3 119.1
- Investments 532 418 435 1,033 304 Revenue growth (%) 23.1 11.7 20.1 30.5 27.6
- Misc. items 4.0 1 34 (3) (3) EBITDA growth (%) 29.8 8.3 8.4 27.4 23.0
Net cash flow (415) (56) (76) 34 28 PAT growth (%) 63.5 -18.8 6.7 19.5 27.0
+ Opening cash 590 175 119 43 77 EPS growth (%) 63.5 -18.8 6.7 19.5 27.0
Closing cash 175 119 43 77 105 Net D/E ratio (x) 0.05 0.1 0.0 0.0 0.0
Source: Company, Systematix Institutional Research Source: Company, Systematix Institutional Research;

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8 September, 2017 Thyrocare Technologies

Institutional Equities Team

Nikhil Khandelwal Managing Director +91-22-6704 8001 nikhil@systematixgroup.in

Equity Research
Analysts Industry Sectors Desk-Phone E-mail
Jaspreet Singh Arora - Head of Research Cement, Building Material, Construction +91-22-6704 8062 jaspreet@systematixshares.com
Priya Ranjan Auto & Auto Ancs +91-22-6704 8067 priyaranjan@systematixshares.com
Sohail Halai BFSI +91-22-6704 8066 sohailhalai@systematixshares.com
Himanshu Nayyar Consumer, Agri, Logistics +91-22-6704 8064 himanshunayyar@systematixshares.com
T. Ranvir Singh Pharma, Healthcare, Agrochem +91-22-6704 8016 ranvirsingh@systematixshares.com
Ankit Gor Mid Caps +91-22-6704 8028 ankitgor@systematixshares.com
Divyata Dalal Construction, Infra +91-22-6704 8059 divyatadalal@systematixshares.com
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Rahul Khandelwal Mid Caps +91-22-6704 8003 rahul@systematixshares.com
Naushad Chaudhary Mid Caps +91-22-6704 8036 naushadchaudhary@systematixshares.com
Pragnesh Jain Technical Research +91-22-6704 8024 pragneshjain@systematixshares.com
Equity Sales & Trading
Name Desk-Phone E-mail
Pankaj Karde Head - Institutional Sales & Sales Trading +91-22-6704 8061 pankajkarde@systematixshares.com
Shraddha Shrikhande Sales +91-22-6704 8085 shraddha@systematixshares.com
Dinesh Bajaj Sales +91-22-6704 8065 dineshbajaj@systematixshares.com
Jigar Kamdar Sales +91-22-6704 8060 jigarkamdar@systematixshares.com
Venkat Ramesh Babu Sales +91-22-6704 8090 venkat@systematixshares.com
Sandesh Sawant Sales +91-22-6704 8045 sandeshsawant@systematixshares.com
Harsh Biyani Derivatives +91-22-6704 8097 harshbiyani@systematixshares.com
Bhavik Shah Sales Trading +91-22-6704 8053 bhavikshah@systematixshares.com
Vinod Bhuwad Sales Trading +91-22-6704 8051 vinodbhuwad@systematixshares.com
Amit Sawant Dealer +91-22-6704 8054 amitsawant@systematixshares.com
Paras Shah Dealer +91-22-6704 8047 parasshah@systematixshares.com
Sachin Malusare Sr. Manager +91-22-6704 8055 sachinmalusare@systematixshares.com
Sugandha Rane Assistant Manager +91-22-6704 8056 sugandha@systematixshares.com
Pramod Gauda Assistant Manager +91-22-6704 8049 pramodgauda@systematixshares.com
Corporate Access
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Mehek Talreja Manager +91-22-6704 8078 mehekbisht@systematixshares.com
Production
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8 September, 2017 Thyrocare Technologies

DISCLOSURES/ APPENDIX

I. ANALYST CERTIFICATION

I, T. Ranvir Singh, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in
this research report, (2) No part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by
Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) has taken reasonable care to achieve and maintain independence and objectivity in making any
recommendations.

Disclosure of Interest Statement Update

Analyst holding in the stock No
Served as an officer, director or employee No

II. ISSUER SPECIFIC REGULATORY DISCLOSURES, Unless specifically mentioned in Point No. 9 below:

1. The Research Analyst(s), Systematix Shares & Stocks(I) Limited (SSSIL), Associate of Analyst or his relative does not have any financial interest in the company(ies) covered in this
report.

2. The Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the company (ies) covered in
this report as of the end of the month immediately preceding the distribution of the research report.

3. The Research Analyst, his associate, his relative and SSSIL do not have any other material conflict of interest at the time of publication of this research report.

4. The Research Analyst, SSSIL and its associates have not received compensation for investment banking or merchant banking or brokerage services or for any other products or
services from the company(ies) covered in this report, in the past twelve months.

5. The Research Analyst, SSSIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for the company (ies)
covered in this report.

6. SSSIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in connection with the research
report.

7. The Research Analyst has not served as an Officer, Director or employee of the company (ies) covered in the Research report.

8. The Research Analyst and SSSIL has not been engaged in market making activity for the company(ies) covered in the Research report.

9. Details SSSIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. Yes /
Particulars
No. No.
Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by
1 No
SSSIL
Whether Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the
2 No
Research report
3 Whether compensation has been received by SSSIL or its associates from the company(ies) covered in the Research report No
SSSIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the
4 Research report No

Research Analyst, his associate, SSSIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any
5 No
other products or services from the company(ies) covered in the Research report, in the last twelve month

10. There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities.

STOCK RATINGS

BUY (B): The stock's total return is expected to exceed 20% over the next 12 months.
ACCUMULATE (A): The stock's total return is expected to be within 10-20% over the next 12 months.
HOLD (H): The stock's total return is expected to be within 0-10% over the next 12 months.
SELL (S): The stock's total return is expected to give negative returns over the next 12 months.
NOT RATED (NR): The analyst has no recommendation on the stock under review.

INDUSTRY VIEWS

ATTRACTIVE (AT): Fundamentals/Valuations of the sector are expected to be attractive over the next 12-18 months.
NEUTRAL (NL): Fundamentals/Valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months.
CAUTIOUS (CS): Fundamentals/Valuations of the sector are expected to deteriorate over the next 12-18 months.

III. DISCLAIMER

The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information
has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy completeness or correctness.

This document is for information purposes only. This report is based on information that we consider reliable, but we do not represent that it is accurate or complete, and one should
exercise due caution while acting on it. Descriptions of any company or companies or their securities mentioned herein are not complete and this document is not, and should not be
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guaranteed and a loss of original capital may occur. All opinions, projections and estimates constitute the judgment of the author as on the date of the report and these, plus any other
information contained in the report, are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice. This report is
intended for distribution to institutional investors.

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8 September, 2017 Thyrocare Technologies

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Systematix Shares & Stocks (I) Ltd. CIN : U65993MH1995PLC268414 BSE SEBI Reg. No.: INB/F011132736 (Member Code: 182) | NSE SEBI Reg. No.: INB/F/E231132730 (Member Code:
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