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Limited volume growth hits profitability

Thyrocare Technologies(Thyrocare) Q2FY23 performance was below our estimates on all fronts. Non-covid pathology revenue grew by 4.6% QoQ, but volumes were flat sequentially. Total revenue was up 5.6% QoQ (-23.4% YoY) to Rs1.3bn. Imaging revenues posted healthy growth of 30.4%/13.9% YoY/QoQ. EBITDA margin contracted by 470bps QoQ to 23.4% due to limited room for operating leverage and ESOP charges. While margins in the near term are likely to remain under pressure given the company’s focus on volume growth led by aggressive expansion and discounting, operating leverage should support margins over the medium term. We remain optimistic on the growth potential for Thyrocare, especially with integration of API Holdings. Maintain BUY on the stock with a revised DCF-based target price of Rs834/share (earlier: Rs960)

* Business review: Non-covid business was up 5.6% QoQ to Rs1.2bn. Volumes remained flat QoQ while realisations per test improved by 4.6%. Non-covid revenue CAGR over 3 years stood at 3.1% with volumes growing 4.9% over the same period. Volume recovery in the base pathology business is slower than peers, but is expected to improve in the coming quarters, especially with integration of API Holdings (API). API’s share in non-covid business stood at ~12% in Q2FY23 vs ~13% in Q1FY23. Imaging business revenue also reported strong growth of 30.4/13.9% YoY/QoQ with normalising footfalls. Margins declined 470bps QoQ to 23.4% due to limited room for operating leverage ESOP-related expenses (~Rs60mn). We expect margins to remain under pressure due to aggressive expansion and high discounting on packages

* Key concall highlights: 1) Company added >400 active pincodes during the quarter; 2) it is extending its lifestyle range by >25 packages; 3) 10 labs are currently NABL-accredited and the company is on track to process 90% of samples in NABLaccredited labs by FY23; 4) most of the investments in manpower are now complete and management does not anticipate any more increase during the current year

* Outlook: On the high base of FY22 (due to gains from covid-related tests), we estimate revenue CAGR of only 2% over FY22-FY25E, as we introduce our FY25E estimates. Aggressive expansion and discounting in the packages would pressurise the EBITDA margin, which we expect to drop 950bps over the same period. We however expect volumes to grow over the longer term due to integration with API Holdings and aggressive growth strategy.

* Valuations and risks: We cut our revenue estimates for FY23E by ~ 3% to factor-in the slower-than-expected volume pickup in the pathology business. We also lower our EBITDA estimate by 15% to account for increased expenses and lower revenue growth. We remain optimistic on the growth potential for the company, especially with integration of API Holdings. We maintain BUY with a revised DCF-based target price of Rs834/share (earlier: Rs960). Key downside risks: Slow recovery in the base business.

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