Aarogyam continues strong momentum- reiterate LONG
Thyrocare’s 1Q sales at Rs 1,097mn came 4% ahead of EE on the account of better than expected realization. Overall realizations improved yoy despite price cut taken last year on the account of higher contribution of Aarogyam in overall revenues. We expect with deeper penetration into Tier-II & III cities the overall Aarogyam growth momentum will continue, while sickness care will be relatively witnessing softer growth. Better volume growth along with offload of loss-making NHL (Nuclear Healthcare) will boost profitability and return ratios, and are the key catalysts for the stock. We believe the stock is attractively placed at current valuations (20x/16x PE on FY20/21 earnings) and offers a good entry point to investors. We restate LONG on the stock with a Jun’20 TP of Rs 612 (unchanged) set at 27x P/E(unchanged).
Beat across all fronts: Sales at Rs 1.10bn (+13% yoy/4% qoq) were 4% ahead of EE. Revenues were better across sickness care and Aarogyam (preventive care) owing to better than expected realization. Co. mentioned revenues would have been better as few government revenues got delayed owing to elections, which will be executed in consequent quarter. Gross margins at 72% were bit softer (180bps down qoq) on the account of accounting treatment (some rental cost moved to purchase cost). Beat in revenues and lower than expected opex, translated into 19% EBITDA beat; at Rs. 456mn (+11% yoy/32% qoq). Consequently, EBITDAM at 41.6% (-85bps yoy/+890bps qoq) came 520bps ahead of EE. PAT at Rs. 275mn (+17% yoy/ 66% qoq) came 18% ahead of EE.
Strong Aarogyam growth gets offset by slow pick-up in Sickness care: Overall volume growth for the quarter stood at 9%, despite strong momentum in Aarogyam. Higher growth in Aarogyam (23% in volume terms) was offset by slow pick-up in sickness care (grew by 7% yoy). Aarogyam value growth was 18% as strong volume growth got partially offset by decline in realizations as company had taken price cuts in basic Aarogyam profiles (major chunk) last year.
NHL hive-off to buoy profitability, return ratios: As announced in the last quarter, the promoters intend to fully acquire NHL owing to higher gestation period required in the imaging business to improve performance. The management stated that the valuation report for NHL business is expected shortly (within few weeks) post which the decision will be finalized. We believe this action is in right direction and would remove overhang on the stock; offloading of NHL from the balance sheet will boost margins (~200bps) and return ratios (core ROIC to 50% from 21% in FY19). NHL’s 1QFY20 revenues were at Rs 87.1mn, and EBITDA at Rs 13.1mn.
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