Cost control drives margin surprise
Thyrocare Technologies (Thyrocare) has reported Q1FY20 profitability higher than our estimate though revenue growth remained subdued. Consolidated revenues grew 12.9% YoY to Rs1.1bn (I-Sec: 14.1%) and EBITDA margin declined 80bps to 41.6% but was above our estimate due to cost control. Revenue growth was below our expectations due to continued weak performance in pathology segment where the growth rate remained weak despite aggressive pricing. 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%. We expect ~16% volume growth and 2% decline in annual realisation over FY19-FY22. Retain ADD.
* Moderate revenue growth despite aggressive pricing strategy: Company witnessed moderate revenue growth of 12.9% (though better than the 9.2% growth in Q4FY19). Pathology segment revenues grew 12.5% YoY and imaging services (PET-CT) increased by 19.0% contributing 8.6% to the total revenues. Volume growth in pathology stood at 18.4% in number of investigations and 9.2% in number of samples. We believe the strong growth phase of >20% is past now and the growth rate would reset to 12-15% for Thyrocare with increasing competition in wellness and preventive care segment. Imaging business reported volume growth of 7.4% in number of scans.
* EBITDA margin strong on controlled operating costs: Thyrocare reported EBITDA margin decline of 80bps YoY (+890bps QoQ) to 41.6%, higher than our estimate of 35.5%. This also included 90bps benefit due to Ind-AS-116 adjustment. SG&A expenses remained flat in absolute terms YoY and decreased 17.7% QoQ. EBITDA margin of the pathology business stood at 43.7%, flattish YoY despite 5% drop in average realisation on back of cost control. Imaging business continued to make loss at EBIT level. We believe EBITDA margin of the pathology business would stabilise at ~38-39% going forward with price rationalisation in the B2B segment.
* Outlook: We expect 13.6% revenue and 11.9% EBITDA CAGRs over FY19-FY22E in the pathology business. Our estimates don’t include imaging business (NHL) as that would be hived off (as announced in May’19). Growth would be driven mainly by ~16% volume increase and margin would be impacted by ~2% lower realisation. FCF generation would continue to be strong and we expect over Rs3bn FCF generation over the next three years.
* Valuations and risks: We maintain our estimates for the pathology business. Current valuations look reasonable at P/E of 21.9x and EV/EBITDA of 11.7x on FY21E. We maintain our ADD rating with a DCF-based target price of Rs505/share (implying 23.8xFY21E and 21.2xFY22E earnings). Key downside risks are: competition risk and regulatory hurdles
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