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API Holdings to acquire majority stake

Thyrocare Technologies (Thyrocare) announced that the promoters of the company have entered into a share purchase agreement with Docon Technologies Pvt Ltd whereby promoters will sell their entire 66.1% shareholding to the later at a price of Rs1,300/share. Docon along with API Holdings Pvt Ltd have also announced an open offer for additional 26% stake in the company at Rs1,300/share. API Holdings is the parent company of PharmEasy, an online healthcare services company. The deal values Thyrocare at 40.3x FY23E EPS and 27.3x FY23E EV/EBITDA. We believe Thyrocare would benefit from additional volumes through PharmEasy customers and B2C business would improve meaningfully through integration with PharmEasy. Upgrade to HOLD.

Promoters to exit Thyrocare and to take minority stake in acquirer:

The promoters, led by Dr A. Velumani, of Thyrocare will sell their complete 66.1% equity stake in the company to PharmEasy parent API Holdings. The deal values company at Rs68.7bn, implying P/E of 42.6x and EV/EBITDA of 28.8x on FY23E. Promoter group will receive Rs45.5bn from the stake sale. API Holdings will raise funds from external investors to fund this deal and Dr A. Velumani will also invest Rs15bn in API Holdings to get ~5% equity stake. There will be change in the management of the Thyrocare post this deal.

Impact on Thyrocare from this deal:

We believe this deal makes sense for both the companies. Thyrocare has largely been a B2B player and can leverage the customer base of PharmEasy which may help in increasing volumes faster. Similarly PharmEasy offers lab tests for its customers and can benefit by conducting tests at Thyrocare which is also a low cost centre. We expect B2C segment of business to increase faster through this integration and Thyrocare will benefit from higher volumes.

Implications for other listed players:

The impact on other companies would depend mainly on the business strategy of new management for Thyrocare in terms going aggressive on franchise network. However, we don’t foresee any major impact on other players as this industry is highly fragmented and share of organised players is consistently rising. Also, looking at the existing business models of Thyrocare and PharmEasy, we don’t expect any material competition with existing players.

Valuations and risks:

We raise revenue and EBITDA estimates by 1-7% and 1-6% respectively for FY22E-FY23E to factor in higher volume growth possibility through PharmEasy. We also raise our target price to Rs1,386/share (earlier Rs985) as we increase growth potential for future years for DCF calculation. We upgrade the stock to HOLD from Reduce. At our target price, the stock will trade at 43.0xFY23E earnings and 29.2xFY23E EBITDA. Key upside risks: faster recovery in preventive care business and synergies from this deal. Key downside risks: volume growth doesn’t improve and heavy investments are made to create B2C franchise.

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