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Volume growth remains weak
Thyrocare Technologies (Thyrocare) has reported Q4FY19 revenue at Rs1.05bn (I-sec est. Rs1.1bn), registering a growth of 9.2% YoY. The revenue growth was below expectation due to moderation in volume (samples) growth (11.6%). The realisation also dropped 3.2%. This resulted in 580bps drop in EBITDA margin, 32.7% below estimated 39.1% and 20.1% drop in PAT. Considering the last few quarters of moderate growth and uncertainty over benefits of just pricing strategy for driving higher volumes, we expect revenue growth to remain in-line with peers at 14-15% despite aggressive pricing. We expect ~16% volume growth and 2% decline in annual realisation over FY19-21. We believe recent stock price correction (>15%) has largely factored-in the growth moderation. Retain ADD with a revised target price of Rs495 (earlier Rs555).
* Revenue growth moderates despite aggressive pricing strategy:
The company has witnessed moderate revenue growth of 9.2% due to lower double digit volume growth in diagnostic services business despite reduction in prices. The growth in samples stood at 11.6% and revenue/sample declined 3.2%. However, tests per sample improved to 5.8 from 5.3 YoY indicating better conversion. Pathology segment revenue grew 8.1% YoY and imaging services (PET-CT) increased 25.8% contributing 7.9% to the total revenue. FY19 had been a weak year for Thyrocare’s growth due to increased competition. We expect 14-15% growth to be a new norm from ~20% growth rate, previously.
* EBITDA margin fall on lower realisation and revenue mix:
Thyrocare reported EBITDA margin decline of 580bps YoY to 32.7% with lower gross margins and lower profitability in imaging business. Imaging business EBITDA margin dropped to nil vs 23.6% as SG&A expenses increased significantly (up 2400bps). There were certain one-time expenses during the quarter which impacted consolidated margins by over 200bps. We believe EBITDA margin would stabilise ~36-37% going forward vs earlier level of 38-40% with price rationalisation in B2B business by the company, particularly, in pathology segment.
We expect 14.5% revenue CAGR with EBITDA and PAT CAGR of 12% and 13.2%, respectively, over FY19-21. The growth would be mainly driven by ~16% volume increase and margin would be impacted by ~2% lower realisation. FCF generation would continue to be strong and we expect over Rs1.5bn FCF generation over the next two years.
* Valuations and risks:
We cut revenue a EPS estimates by 2-4/7-8% for FY20-21 to factor-in lower growth. The recent fall in the stock price has factored-in lower growth to some extent and hence, we maintain our ADD rating with a revised DCF-based target price of Rs495/share (implying 27.6xFY20E and 23.9xFY21E earnings). We have revised our growth assumption in the DCF model for FY25-30 to 9% from 10%. Key downside risks are: Competition risk and delay in ramp-up of imaging business.
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