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Reduce Thyrocare Technologies Ltd For Target Rs. 985

Thyrocare Technologies (Thyrocare) reported largely inline results during Q4FY21 with non-COVID business normalising to pre-COVID levels. Revenue grew 44.8% YoY to Rs1.5bn (I-Sec: Rs1.5bn). EBITDA margin grew 460bps YoY (-80bps QoQ) to 35.1% (I-Sec: 36.5%). The company conducted 0.39mn COVID-19 tests which contributed ~14% to total sales in Q4FY21 which has declined QoQ from ~20%. Regular pathology business witnessed a volume growth of 28% in the number of samples on a low base of last year with easing of lockdown. Although base business is recovering, recent surge in COVID-19 cases leading to partial lockdown could limit growth in the near term. Downgrade to REDUCE

* Normalised base business:

The company witnessed overall revenue growth of 44.8% YoY (+6.2% QoQ) driven by normalisation in the non-COVID business. Volumes for regular pathology (non-COVID tests) grew 28.0% YoY (+21.0% QoQ) with stable realisations, resulting in regular business growing 28.1% YoY (+21.0% QoQ). COVID-19 related tests witnessed a sequential jump of 33.8% in volumes but sharp decline of 44.8% in realisations caused a QoQ fall of 26.1% in revenue. Contribution from COVID-19 tests during the quarter stood at ~14% of total sales, down from ~20% in Q3FY21. Imaging business declined 5.2% YoY, though recovered 24.7% QoQ to Rs77mn. We expect imaging business to remain under pressure in near term due to rising COVID-19 cases.

* Margin flattish QoQ despite recovery in base business:

Thyrocare reported EBITDA margin jump of 460bps YoY to 35.1% on a low base of Q4FY20. However, It was below our estimate of 36.5% due to lower than estimated realisation in the base business and increased costs. Sequentially, gross margin improved 70bps but, rise of 7.6% in personnel costs and 12.7% in S,G&A expenses caused EBITDA margin to decline 80bps. Growth trend in the base pathology revenues and continued recovery in the imaging business would provide operating leverage lifting EBITDA margin to 38-39% for the next two years.

* Outlook:

Company’s model of low pricing/high volume strategy has aided some recovery in non-COVID tests. However, recent surge in COVID-19 cases leading to partial lockdown could limit growth in the near term. Expect revenue and EBITDA to CAGR 11.1% and 16.8% over FY21-FY23E with growth in pathology business largely driven by volume and stable realisation. Imaging business will improve on the low base of FY21 as most of its centres are now functional.

* Valuations and risks:

We raise our revenue and EBITDA estimates for FY22EFY23E by 4-5% and 1-2% to factor in higher revenue from COVID-19 tests as well as its associated expenses. Considering the recent rally in the stock price we downgrade to REDUCE from Hold with a revised DCF-based target of Rs985/share, implying 30.5xFY23E earnings and 21.7xFY23E EBITDA (earlier: Rs874/share). Key upside risks: faster recovery in preventive care business and incremental tie-ups with standalone labs for sample processing.

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