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Thyrocare Technologies – Buy, Sell or Hold? An In-Depth Analysis : Stock Analysis December 2023

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COMPANY INTRODUCTION, PROFILE:

Thyrocare Technologies Ltd is a leading diagnostic services provider in India, offering a range of medical diagnostic tests and profiles. Founded in 2000 by Dr. A. Velumani, the company has a pan-India presence with a network of diagnostic laboratories, collection centers, and hospitals.

Some key details about the company:

  • Market Cap of ₹3,251 Cr
  • Current share price of ₹613 (as on Dec 2022)
  • Healthy dividend payout at 2.93%
  • Strong balance sheet with debt of just ₹42 Cr and debt/equity ratio of 0.09
  • 5-year sales CAGR of 7.95%, but profit growth has been declining
  • High promoter holding at 71%, but 100% is pledged

Overall, Thyrocare has built a robust diagnostics business on the back of high quality, low-cost model but growth and profitability have slowed down in recent years. Business quality seems decent but high valuation and promoter share pledging remains a concern.

Should We Buy, Sell or Hold This Stock and Why?

Looking at the data and ratios presented, our recommendation for Thyrocare Technologies would be to HOLD the stock for now or avoid fresh buying at current levels.

While business quality is good – low debt, high cash, high dividend payout, and reasonable return ratios, the high valuation at 55 P/E ratio against median industry P/E of 38 is a concern.

Promoter shareholding is high at 71% but the entire holding is pledged which increases risks. The company has delivered mediocre sales growth of 8% CAGR over 5 years, and profitability has declined by 10% over the same period.

Unless valuation cools off and clarity emerges regarding lower promoter pledging, the risk-reward is not favorable for new investment at CMP of ₹613. Investors already holding the stock can continue to HOLD.

Vital Company Ratios for a Layman

Thyrocare Technologies Ltd levels
Thyrocare Technologies Ltd levels

Here are some key ratios and metrics to analyze Thyrocare Technologies stock:

Valuation Ratios:

  • P/E Ratio: 55x (High)
  • P/B Ratio: 6.9x (High)

These ratios indicate that the stock valuation is high compared to its earnings potential and book value.

Growth Ratios:

  • 5 Year Sales Growth: 8% (Moderate)
  • 5 Year Profit Growth: -10% (Low)

While sales growth is moderate, declining profits over a 5-year period is a concern.

Profitability Ratios:

  • Return on Equity: 11%
  • Operating Profit Margin: 24%

While the company has delivered double-digit ROE, OPM has dropped to 24% indicating margin pressure.

Debt Ratios:

  • Debt to Equity: 0.09 (Low)

Low debt is a positive sign but needs to translate into higher earnings growth.

Valuation and growth trends seem unfavorable while profitability and debt ratios have shown some deterioration in recent years. Holding the stock is advisable until clarity emerges.

Promoter Holding: 71.14% (Sept 2023)

FII/DII Holding: FII – 10.13% (Dec 2022), DII – 8.68% (Dec 2022)

Sales Trend:

  • 5 Year CAGR7.95%
  • Latest Quarter (Sept 2023) – ₹136 Cr, 8.83% YoY growth

Profit Trend:

  • 5 Year CAGRNegative 10%
  • Latest Quarter (Sept 2023) – ₹20.29 Cr, 41.89% YoY growth

Debt Trend: Low at ₹42.1 Cr in latest year

Margin Trend: Operating Profit Margin (OPM) declined from 42% in Mar 2020 to 24% in Mar 2023

Latest News: No specific news updates provided

Company P/E: 54.6X

Industry P/E: 37.9X

Gap between Intrinsic Value and CMP:

  • Intrinsic Value – ₹221.2
  • CMP – ₹613 (Overvalued by 177%)

Market Cap: ₹3,251 Cr

Industry Peer Market Cap:

  • Apollo Hospitals – ₹79,849 Cr
  • Fortis Healthcare – ₹29,156 Cr

Industry Trend: Growing diagnostics market but intense competition

Cash in Hand: ₹22.4 Cr (Dec 2022)

Dividend Payout: 2.93%

Key Competitors: Diagnostic chains like Dr. Lal PathLabs, Metropolis Healthcare. Compared to industry median growth, Thyrocare has delivered better Sales CAGR of 8% vs peer median of 5%. However, margins and profit CAGR have lagged peers. Valuation at 55 P/E is also at a significant premium to the median industry P/E of 38x. While the business model is stable, growth and profitability lagging behind competitors is a concern.

Is This Stock Overvalued or Undervalued?

At the current share price of ₹613, Thyrocare Technologies stock appears to be significantly overvalued. It trades at a P/E ratio of 55x, which is well above both the broader industry average and its own historical multiples. Here’s why this rich pricing is concerning:

  1. Premium to Industry Average: Thyrocare’s P/E ratio of 55x is a substantial 45% premium compared to the diagnostics industry’s median P/E ratio of 38x.
  2. Historical Valuation: In comparison to its own 5-year average P/E multiple of 43x, the current valuation represents a 28% premium.
  3. Intrinsic Value: The market price is also a staggering 177% premium to the intrinsic value per share of ₹221, as calculated through fundamental analysis.

What further compounds the concern is the company’s deteriorating financial performance. Despite moderate revenue growth, Thyrocare has experienced steadily declining profitability over the past 3-5 years:

  • Revenue has grown at a CAGR of 8% over 5 years.
  • However, the profit has seen a negative CAGR of -10% over the same period.
  • Operating margins have slid from a healthy 42% to a concerning 24% over 3 years.

The industry’s growth prospects remain strong with a projected 16% CAGR, driven by factors like increasing health awareness, lifestyle diseases, and expanding access to diagnostic services. However, Thyrocare’s ability to maintain premium margins is being challenged by rising competition, which negatively impacts its growth and profitability.

Additionally, the high promoter share pledging of 100% raises corporate governance concerns.

In summary, the combination of an expensive valuation, deteriorating financials, and governance issues makes Thyrocare’s risk-reward profile unfavorable at this point. Significant correction in valuation multiples is necessary to make the stock attractive again.

How Is the Industry of This Company Growing?

The Indian diagnostics industry is positioned for robust growth, with a projected CAGR of 16% over the next 5 years. Several key factors are driving this growth:

  1. Increasing Health Awareness: Rising health consciousness and an increased willingness to spend on healthcare services are encouraging more individuals to undergo diagnostic tests regularly.
  2. Prevalence of Lifestyle Diseases: Lifestyle-related health issues, such as diabetes and cardiovascular diseases, are on the rise. This drives the demand for diagnostic tests for early detection and management.
  3. Expansion into Tier 2 and 3 Cities: Diagnostic chains like Thyrocare are expanding their reach into smaller cities and towns, bringing advanced testing facilities closer to people in non-metro areas.
  4. Health Insurance Coverage: The growing availability of health insurance coverage is incentivizing individuals to undergo diagnostic tests as part of preventive healthcare, leading to higher test volumes.

However, despite the overall positive outlook for the industry, organized diagnostic chains like Thyrocare are facing margin pressures due to intensifying competition. The industry has seen the entry of smaller regional chains, specialty startups, and standalone centers, which has increased competition and impacted pricing.

While Thyrocare enjoyed premium pricing and healthy margins until 2018, it has experienced faster erosion in profitability compared to its peers. Margins have decreased from 42% to 24%, and net profit has declined at a CAGR of 10% over the last 5 years.

While the long-term industry prospects remain promising, Thyrocare’s ability to defend its margins in the face of rising competition will be crucial for its profit outlook. Unless pricing pressures ease and margins expand, the current growth forecasts may prove challenging, adding further pressure to the company’s already high valuations.

Competitive Risks

The diagnostics industry is currently grappling with heightened competitive intensity, posing significant risks to Thyrocare Technologies:

  1. Competition from National Chains: Established national chains like Dr. Lal Pathlabs and Metropolis Healthcare are aggressively expanding into regions that were once considered Thyrocare’s strongholds. This increased presence is exerting downward pressure on pricing, impacting Thyrocare’s profit margins.
  2. Regional Challengers: Regional diagnostic chains are gaining market share by leveraging lower operating costs and localized branding strategies. Their competitive pricing can attract a significant customer base, eroding Thyrocare’s market share.
  3. Niche-focused Startups: New-age diagnostics startups, including Oncquest and Medgenome, are specializing in niche segments like molecular diagnostics. These startups pose a threat by catering to specific and growing market demands.
  4. Lower Barriers to Entry: The diagnostics industry is witnessing a reduction in barriers to entry, allowing smaller labs with minimal overheads to operate at a hyper-local level. This not only impacts volumes but also puts pressure on realizations.

Thyrocare’s operating margins have declined from 42% to 24% over the past three years, reflecting the competitive impact. To mitigate these competitive risks, Thyrocare must find ways to defend its pricing through differentiation and innovation.

Thyrocare Technologies - Buy, Sell or Hold? An In-Depth Analysis : Stock Analysis December 2023

Regulatory Risks

The diagnostics sector is susceptible to regulatory changes, which can adversely affect organized chains like Thyrocare:

  1. Price Controls: Government-imposed price controls, such as rate caps on certain medical tests, can squeeze profit margins, impacting the profitability of organized chains.
  2. Infrastructure Norms: Minimum lab infrastructure requirements or restrictions on the number of collection centers can increase operational costs for diagnostics companies.
  3. Licensing Norms: Stricter licensing regulations related to the types of tests or reporting requirements can lead to increased compliance overheads.
  4. Accreditation Requirements: Mandatory accreditation requirements can further increase the cost of operations and compliance.

While some regulatory changes aim to enhance industry standards, the fixed costs associated with compliance can disproportionately affect organized chains compared to smaller labs. This can level the playing field for unorganized segments at the expense of larger players like Thyrocare. Any adverse regulatory changes could surprise the margin outlook negatively.

Management Risks

While Dr. Velumani has a strong track record of founding and growing Thyrocare into a leading diagnostics chain, high promoter share pledging levels of 100% raise concerns:

  1. Pledged Shares: The pledged shares amount to 71% of the total equity capital, limiting the company’s financial flexibility to pursue growth opportunities.
  2. Funding Constraints: The inability to reduce the pledge percentage may indicate funding constraints for the promoter, which can impact the company’s financial stability.
  3. Volatility and Equity Dilution: In the event of forced selling due to margin calls, Thyrocare’s share price may experience excessive volatility. Additionally, any equity dilution required to repay expensive debt and reduce pledging would also impact minority shareholders.

The combination of high pledge levels and rich valuation multiples narrows the margin of safety for investors and suggests sub-optimal allocation decisions in light of the availability of cheaper debt for reputed companies. Reducing pledge levels significantly will be necessary to alleviate investor concerns.

Long Term (6-10 years) Performance:

Over the next 6-10 years, Thyrocare is expected to exhibit annual revenue growth of 12-15%. This growth will be fueled by various industry trends, such as increasing health awareness and expanding into smaller towns. Profitability may experience some volatility in the medium term but is likely to stabilize at 18-20% margins.

Key drivers of growth during this period will include diversifying the test portfolio, cross-selling to existing customers, and further expansion into non-metro regions. Despite fierce competition, Thyrocare’s first-mover advantage and economies of scale should help sustain these growth metrics.

While margin volatility may keep the stock range-bound in the medium term, in the long run, earnings normalization by FY27-28 could lead to a potential re-rating of valuation to a P/E band of 45-50x.

Medium Term (2-6 years) Performance:

In the 2-6 year timeframe, growth prospects remain positive, but profitability will be a key area to monitor. Topline growth is expected to be around 10-12% CAGR, but margins may continue to face pressure due to intense competition. Investments in branding and infrastructure upgrades may also impact margins.

Targeting 18-20% operating margins by FY25 while achieving a 12% revenue CAGR seems attainable. However, any delays in margin recovery or underperformance in earnings growth compared to peers could limit valuation multiples to 30-35x until the growth outlook improves.

Short Term (2-5 months) Performance:

In the short term (2-5 months), the stock is likely to remain range-bound, trading between ₹550-650. This is due to its rich valuation and the absence of immediate triggers for a breakout. Profitability is not expected to revive until H2FY24.

Positive surprises, such as margin recovery ahead of estimates in Q3FY23 or a reduction in promoter pledge by 15-20%, could boost sentiment and warrant an upside breakout. However, without such catalysts, the near-term outlook is expected to be lackluster and may constrain upside potential.

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