Published on 21/09/2020 11:25:59 AM | Source: ICICI Securities Ltd

Hold Thyrocare Technologies Ltd For Target Rs.675 - ICICI Securities

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COVID tests and cost control aided margins

Thyrocare Technologies’ (Thyrocare) reported better than estimated performance in Q1FY21 supported by COVID-19 tests and tight cost control. Consolidated revenue declined 48.7% YoY to Rs563mn (I-Sec: Rs431mn). EBITDA margin dropped 2,660bps YoY and 1550bps QoQ to 15.0%. The company conducted 0.08mn COVID-19 tests which contributed ~42% to total sales in Q1FY21. Regular pathology business witnessed a volume decline of 64.6% in the number of samples due to lockdown which impacted preventive tests significantly. The company’s model of low pricing/high volume strategy was severely affected and focus on preventive tests would take few quarters to revive. However, proportion of preventive and wellness tests to total diagnostics industry is expected to improve materially in long term. Maintain HOLD.


* Revenue impacted by nationwide lockdown: The company witnessed revenue decline of 48.7% due to volume decline and lower realisation. Volume decline in pathology (ex-COVID tests) stood at 64.6% in number of samples primarily on account of lockdown. Realisation per sample decreased 12.4% YoY. The company’s strategy of low pricing/high volume was severely affected due to the nationwide lockdown which reduced working OPDs resulting in lower footfalls. However, COVID -19 tests helped in arresting some of the fall and contributed ~42% of sales. Imaging business (Nueclear) witnessed 80.3% drop in sales.


* Profitability impacted by lower revenue: Thyrocare reported EBITDA margin drop of 2,660ps YoY and 1,550bps QoQ to 15.0%, better than our estimate of negative EBITDA. The drop is primarily due to decline in revenue. Lower personnel costs and S,G&A expenses helped in reporting positive EBITDA margin. We believe S,G&A expenses would gradually increase as lockdown situation is easing but would be lower than previous year. We estimate EBITDA margin to reach back to previous levels of ~40% by FY22E.


* Outlook: We have raised our revenue and earnings estimates by 5-10% and 6-22% for FY21-FY22 to factor in revenue from COVID-19 tests and lower cost structure. Overall, we expect 10.5% revenue and 18.1% EPS CAGRs over FY20-FY22E. We have assumed growth recovery from H2FY21 in our estimates. Growth would be driven mainly by ~10% volume CAGR with stable realisation. Imaging business would continue to remain under pressure and we expect it to continue to negatively affect profitability.


* Valuations and risks: Given likely delay in recovery of wellness business and limited upside to our target price, we maintain HOLD rating with revised DCF-based target of Rs675/share, implying 26.9xFY22E earnings and 16.5x FY22E EBITDA. Key upside risks: faster recovery in preventive care business and incremental tie-ups with standalone labs for sample processing. Key downside risks: Competitive and regulatory hurdles


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