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Base business weak; covid-19 tests helped

Thyrocare Technologies (Thyrocare) reported largely inline revenue but higher, margins aided by reduction in costs. Ex-covid revenue grew at 2-year CAGR of 4.4%, with volumes declining 8.3%. RT-PCR and anti-body tests contributed 30.6% of total revenue. Total revenue grew 193% YoY to Rs1.6bn (I-Sec: Rs1.6bn) on a very low base. EBITDA margin improved 820bps QoQ to 43.3% (I-Sec: 36.5%) due to significant reduction in S,G&A and staff expenses.

The company conducted 1.1mn RT-PCR tests in Q1FY22. The realisation in base pathology business increased to Rs259 per sample. Although base business is recovering but pace of recovery is slower than peers. PharmEasy had recently announced to acquire Thyrocare which may help in improving volumes over long term. Maintain HOLD with a revised target price of Rs1,300/share (earlier: Rs1,386).

* Base business recovery slow: The non-covid business of the company witnessed a 2-year revenue CAGR of 4.4%, largely aided by higher realisation. The number of samples declined 8.3% over this period. This volume recovery is slower than the peer companies. However, revenue from covid-19 related tests contributed 30.6% of total revenue, incremental over the base business and helped in meeting our revenue estimate. The average realisation has grown as 2-year CAGR of 12.7% to Rs259 per sample and we believe this might not sustain as covid-19 would have resulted in change in test mix to higher value tests. The strategy of Thyrocare had been on price disruption and the same is likely to continue. The imaging business remained under pressure and declined 30% QoQ.

* Margin improvement led by higher covid-19 tests revenue and cost reduction: Thyrocare reported EBITDA margin jump of 820bps QoQ to 43.3% despite drop in gross margin on account of higher contribution of covid-19 tests. The staff cost and S,G&A expenses declined materially in absolute amount as company has reduced field staff. We believe some of the costs would revert as situation improves and expect EBITDA margin to sustain at ~38-40% levels.

* Outlook: Company’s model of low pricing/high volume strategy has aided some recovery in non-COVID tests. However, the pace of recovery has been slower than expectation. We expect revenue and EBITDA to CAGR 14.0% and 19.8% over FY21-FY23E on a low base of non-covid business. We believe acquisition by PharmEasy would help in improving the volume growth over medium to long term for the company.

* Valuations and risks: We raise our revenue and EBITDA estimates for FY22E by 2.5% and 7% respectively to factor in higher revenue from covid-19 tests but largely maintain FY23 estimates. Maintain HOLD on the stock with a revised DCF-based target of Rs1,300/share, implying 40.4xFY23E earnings and 27.4xFY23E EBITDA (earlier: Rs1,386/share). Key downside risks: slower recovery in base business volumes. Key upside risks: faster recovery in preventive care business and incremental tie-ups with standalone labs for sample processing.

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