Thyrocare Technologies’ (Thyrocare) Q2FY18 earnings came in weaker than expected as revenue and EBITDA grew 13% and 18% y-o-y, respectively. This compares with the 25% run-rate in the previous five quarters, fuelled mainly by PE-backed players who used Thyrocare’s low-cost model as their back-end. Current quarter witnessed slowdown due to increased competition in preventive healthcare, as Dr Lal and several other players forayed into the wellness space with aggressively priced packages. Additionally, September had seven fewer days due to early start of the festive season. Going forward, we believe this growth will taper as competition continues to intensify in a market where Thyrocare enjoys leadership. We remain cautious on the diagnostics space. Maintain ‘Buy’ with TP of Rs 740.
Pathology grew just 16% y-o-y, down from the 25% run-rate in the previous five quarters, as increased revenue per sample in preventive care B2C was offset by increased competition and early start to the festive season. Imaging (7% of total sales) grew 35%, while other income declined 78%.
EBITDA margin improved 172 bps y-o-y to 40.6%, as the company moved away from the earlier rental/reagent model to outright purchase of equipment, thus reducing reagent costs. Management commented that the new structure is better for companies operating at their scale.
The 40% growth in wellness has attracted several other players to enter a space where Thyrocare is the leader. Dr Lal is already in the fray with its ‘Swasth’ offering. Having said that, most PE-backed players use Thyrocare’s cost leadership for back-end testing of samples via their online selling/ direct selling agencies (DSA) model. The proportion of sales via the DSA channel has been growing strongly, and currently comprises 12-15% of total sales.
We forecast revenue/EBITDA growth of 25% in FY18E, in line with management guidance. However, given the rising competitive intensity, we remain cautious on the diagnostics sector. At CMP, the stock trades at 18.4x FY19E EBITDA.