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Revamping business model to restore margins

Thyrocare Technologies has reported an improvement in gross margin (+270bps YoY) in Q1FY24 led by a decline in low margin partnership business. The company has revamped incentive structure offered to franchisees and this should drive a strong 12-14% volume growth in this segment. It is also trying to diversify overseas to emerging markets like Africa through its B2B model. Strengthening the existing network of franchisee and widening the test menu are the key growth drivers in the near term. We believe Thyrocare can register a revenue/EBITDA/PAT CAGR of ~12%/19%/24%, respectively, over FY23-25E. The stock trades at 31.8x FY25E earnings and 17.6x FY25E EV/EBITDA. We re-initiate coverage on the stock with ADD rating and a DCF-based target price of INR 645/share, implying 34.8x FY25E earnings and 19.4 x FY25E EBITDA.

Subdued growth; EBITDA margin (ex-ESOP) improves

Revenue rose 5.6% (-0.7% QoQ) to INR 1.3bn led by healthy growth in franchisee business, partially offset by a decline in partnership business. Gross margin expanded 270bps YoY (+250bps QoQ) to 71.8% led by price hikes taken by smaller franchisees and closure of low margin MCGM contract. EBITDA margin contracted 240bps YoY (+760bps QoQ) on account of ESOP expenses (INR 57mn) charged in Q1FY24. However, adjusted for these charges (ESOP and provisions), margins improved 290bps YoY at ~31%. Adjusted PAT declined 19.9% YoY (+40.1% QoQ) to INR 175mn.

API decline and closure of MCGM contract drag growth

Pathology revenue was up 3.7% YoY (-1% QoQ) to INR 1.2bn. Volumes declined 3.6% YoY (-5.3% QoQ). Franchisee business saw a healthy revenue growth of 16.2% YoY (+8.2% QoQ) driven by healthy volumes and price hikes. Partnership business revenue declined 15.8% YoY and QoQ on account of decline in revenue from parent (API Holdings) and closure of MCGM contract (~INR 60mn impact). Non-covid revenue CAGR over 5-yrs stood at ~6.7%, with volumes growing at 3.3% over the same period. Volume recovery in base pathology business has been slower than peers. Radiology grew a strong 31.8% YoY (+1.9% QoQ) to INR 113mn. Alok Kumar Jagnani (20+ experience) has been appointed as the new CFO of the company. Prior to joining Thyrocare, he has worked with Greencell Group, Vodafone Idea Limited and Tata Steel Ltd.

Valuations

We expect Thyrocare to register earnings CAGR of 11.7% over FY23-FY25E on a low base led by 1) recovery in volumes, 2) improvement in partnership business, 3) aggressive expansion. We expect RoCE to be 18.3% by FY25E with healthy free cashflow generation.

The stock currently trades at valuations of 37.2x FY24E and 31.8x FY25E earnings and EV/EBITDA multiple of 20.3x FY24E and 17.7x FY25E, respectively. The company’s model of low pricing/high volume strategy has aided some recovery in non-covid tests. However, the pace of recovery is slower than peers. We expect volume growth over long term due to integration with API Holding and aggressive growth strategy. However, near-term performance largely depends on the strategies of the new management and performance of its parent, API Holdings and hence, it may be volatile, though, valuation and macro factors provide us some comfort on the stock. We re-initiate coverage on the stock with ADD rating and a DCF-based target price of Rs645/share, implying 34.8x FY25E earnings and 19.4 x FY25E EBITDA. Key downside risks: Slow recovery in the volumes and increased competitive intensity

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