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Company Report Industry: Healthcare

Surajit Pal ([email protected]) +91-22-66322259

Thyrocare Technologies Pathology and imaging businesses both at inflexion point

November 17, 2016 2

Thyrocare Technologies

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Contents

Page No.

Executive Summary .................................................................................................... 4

Plenty of growth drivers to be realized in key verticals ............................................. 5

Pathology: Expansion of network, B-2-C, expansion remain key ...................................................... 5

Diagnostic being a sunrise sector, Thyrocare being a smallest among the top-4, its options are plenty for growth, margin expansion ................................................................................................ 6

Small is smart: Technology, logistics increase reach with minimum investment ........................ 6

Strategies of franchise, execution, preventive-care to drive sales .............................................. 8

Co-operation strategy expands market share in expanded pie of diagnostic sector .................. 9

Growing number of samples to facilitate lower Opex/test ....................................................... 10

Online offers, insurance, customised corporate deals led growth in B-2-C business ................ 10

Aarogyam to benefit from growing ecosystem with ASPs, RPLs ............................................... 11

Flexible partnerships agreement helps in faster addition of franchise network ....................... 12

Flexible strategy for new RPL to meet geographical, competitive requirements ...................... 13

DNA of low-cost structure remains key for large volume, B-2-C, corporate deals .................... 14

Minimal Employee growth with freshers contributing large part of headcount ....................... 17

Overseas operation to contribute 25% of pathology business by 2020 .................................... 18

Imaging Business: PET-CT to be crown Jewel of future ............................................ 19

Competitive pricing to be strong USP for network expansion, volume .......................................... 19

Targeting key cities to gain from concentrated cancer patients ..................................................... 20

Strong background work to ensure faster turnaround of new centres .......................................... 20

Infrastructure of cyclotron plant, logistics remain key for new centres ......................................... 21

Partnership with Franchisees, hospitals to be key for expansion ................................................... 22

Strategic deal with GE for critical machinery to be catalyst ............................................................ 22

Financials: Volume growth is the name of the game ............................................... 23

Pathology business growth to be led by B-2-C with at 42% CAGR .................................................. 23

New scan centres, volumes to drive imaging business ................................................................... 24

Pathology led in contribution, growth in EBITDA ............................................................................ 25

Asset optimising philosophy to limit annual capex at Rs300-350m ................................................ 25

ROE, ROCE, ROIC, Cash flow, tax rate .............................................................................................. 26

Valuation and Risk .................................................................................................... 27

Risk and concerns ..................................................................................................... 30

Brief Business, Management, IPO profile ................................................................. 32


Company Report November 17, 2016

Rating BUY

Price Rs592

Target Price Rs1,067

Implied Upside 80.2%

Sensex 26,228

Nifty 8,080

(Prices as on November 17, 2016)

Trading data

Market Cap. (Rs m) 31,804.3

Shares o/s (m) 53.7

3M Avg. Daily value (Rs m) 65.9

Major shareholders

Promoters 63.96%

Foreign 4.75%

Domestic Inst. 11.18%

Public & Other 20.11%

Stock Performance

(%) 1M 6M 12M

Absolute (7.9) (5.3) 0.0

Relative (3.1) (7.1) 0.0

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2017 14.1 1.0 1311.8

2018 19.1 1.0 1805.8

Price Perf. (RIC: THYO.NS, BB: THYROCAR IN)

Source: Bloomberg

0100200300400500600700800

9/M

ay/1

6

30

/May

/16

20

/Ju

n/1

6

11

/Ju

l/1

6

1/A

ug/

16

22

/Au

g/1

6

12

/Se

p/1

6

3/O

ct/1

6

24

/Oct

/16

14

/No

v/1

6

(Rs)

Thyrocare Technologies operates in high growth segments of pathology and imaging business which are at an inflexion point. With strong growth visibility for the next decade, high free cash generation and high capital return ratios, Thyrocare offers a great opportunity for multi fold returns over the next few years. We initiate coverage with a BUY and a TP of Rs1,067.

Thyrocare operates in a segment which has strong growth potential as preventive health checkups and health awareness will continue to drive growth as the current penetration levels is low at 5%. While diagnostic segment is dominated by the unorganised players with a share of 85%, there is a consolidation and shift towards the organised sector resulting in growth in the organised diagnostic segment. The sector is expected to grow with a) improved healthcare services and awareness, b) accessibility with rising income (per capita income: 7.6% CAGR in 2014-19) and c) favourable demographic mix (elderly population to be 169m by 2026 from 98.9m in 2014). Being the smallest among the top-4 diagnostic players with core competency in costs, Thyrocare aspires to grow at 30% till CY30. With purported increase in lifestyle diseases, Thyrocare aims at 80% contribution from B-2-C segment and reaching out to unorganised segment for drawing B-2-B revenues.

We expect 32% CAGR in revenues which includes 29% and 79% CAGR in pathology and imaging respectively, in FY16-19E. While pathology business offers growth through bio-chemistry tests to new Aarogyam franchise (23% CAGR), corporate/insurance companies (1.15x CAGR) and online/DSA (45% CAGR) clients, its imaging business expands through partnership (PSP) model and vendor tie-ups. The daily PET-CT scans is expected to grow to 120-140 in FY19E from 91 in FY16 due to addition of 5-10 new centres and new patients in existing centres.

With increased shift from unorganised to the organised sector with strong growth potentials, the diagnostic business is a sunrise sector with high free cash generation. With strong profit growth of 34%, 39% and 40% CAGR in Gross profit, EBITDA and PAT respectively in FY16-19E, Thyrocare is in an enviable position. We value the company at an EV of Rs57.3bn and initiate coverage of Thyrocare with a “BUY” recommendation with a TP at Rs1,067.

Key financials (Y/e March) 2015 2016 2017E 2018E

Revenues (Rs m) 1,746 2,312 3,075 4,076

Growth (%) 16.4 32.4 33.0 32.6

EBITDA (Rs m) 640 838 1,238 1,649

PAT (Rs m) 452 518 758 1,024

EPS (Rs) 8.9 9.6 14.1 19.1

Growth (%) (78.8) 7.8 46.4 35.0

Net DPS (Rs) 3.8 9.6 10.0 10.0

Profitability & Valuation 2015 2016 2017E 2018E

EBITDA margin (%) 36.7 36.2 40.3 40.5

RoE (%) 18.7 16.1 20.4 25.9

RoCE (%) 15.7 14.8 19.7 25.0

EV / sales (x) 17.1 13.7 10.3 7.7

EV / EBITDA (x) 46.7 37.9 25.6 19.1

PE (x) 66.1 61.4 41.9 31.0

P / BV (x) 10.8 8.7 8.4 7.7

Net dividend yield (%) 0.6 1.6 1.7 1.7

Source: Company Data; PL Research


November 17, 2016 4

Executive Summary

Thyrocare has three business verticals in the diagnostic sector: Pathology

contributed 89%, Nueclear imaging contributed 6% and others (including

diagnostic kits and FDG) contributed 5% of revenues in FY16.

In Pathology, retail (B-2-C) contributes 47% and B-2-B business (from

unorganised segment) contributes 42% of consolidated revenues. B-2-C business

is mainly contributed by Aarogyam franchisee with 35% revenues, while

Corporate/Insurance clients and online/DSA clients contribute only 5% and 7%

of revenues currently, we expect revenues from Corporate/Insurance to be the

medium-term growth driver and online/DSA to be the long-term growth driver.

To support its focus on B-2-C volume growth, management is aggressively

expanding its geographic reach across India with the set-up of four new RPLs

(Regional Path Lab) annually. With a target to set-up 20 RPLs by FY20E,

Thyrocare currently has one central Lab (CPL) in Mumbai and six operational

RPLs in Delhi, Kolkata, Hyderabad, Bhopal, Coimbatore and Bengaluru.

With addition of 5-10 new PET-CT scan centres, Thyrocare’s imaging business is

to contribute 15% of revenues in FY19E from 6% in FY16. While all the three

existing centres (5 scanners) are owned by Thyrocare, its future expansion plan

will be through partnership (PPS) model only. Surat commenced operation on

21st Sept 2016 and five new centres are expected to be operational in FY18E.

With offerings of 198 tests, Thyrocare focuses only on preventive care and

human body disorders which is one of the key differentiating factors vis-à-vis

large peers. This has helped in procuring specimens limited to longer stability

(48 hours) only and achieving higher level of mechanisation. Longer stability and

mechanisation also reduces operational costs and probability of errors in final

outcome of tests.

Selective choices of volume-driven preventive care and high mechanisation have

resulted in lower headcounts and manpower cost. Besides, the company

employs freshers from local medical colleges for lab operations in CPL and RPLs

resulting in higher revenues/employee and lower manpower cost v/s peers.

With 29% and 79% CAGR in pathology and imaging, respectively, Thyrocare is

likely to grow at 32% CAGR in FY16-19E. EBITDA and PAT to increase at 39% and

40% CAGR with EBITDA margin increases to 41.7% in FY19E from 36% in FY16.

Higher asset utilisation to increase ROE to 31% in FY19E from 16% in FY16.

With smaller revenue base among organised players and franchisee model,

Thyrocare’s growth is expected to be faster, while operational costs remain

lower than peers. Therefore, Thyrocare’s valuation is likely to reflect premium

for higher growth and sunrise sector. We value the company at Rs57bn in three-

tier FCFE model and initiate coverage with ‘BUY’ recommendation with TP of

Rs1,067.


November 17, 2016 5

Plenty of growth drivers to be realized in key verticals

Exhibit 1: Bird’s eye view of revenue flow in Thyrocare

Source: Company Data, PL Research

Pathology: Expansion of network, B-2-C, expansion remain key

Pathology contributes 56% of Rs322bn diagnostic markets in India, of which,

organised diagnostic chains contributes only 8% of the industry. While Thyrocare

contributes only 14% of the organised diagnostic chain market, its co-operation

strategy also expands target market among the standalone labs and small/niche

healthcare centres those together contributes 85% of the market. With 89% revenue

contribution in FY16, Pathology will remain the key contributor of Thyrocare’s

diagnostic business. Management’s focus to expand revenue contribution from

Aarogyam brands to 80% by FY20E from 53% in FY16 are through a) expansion of B-

2-C franchisee, b) setting-up of new RPL and c) corporate deals (including insurance

companies).

Thyrocare

FY16 Revenue : Rs 2,312m

Pathology Serviceas

(89%)

B-2-B (42%)

B-2-C (47%)

Aarogyam (35%)

Corporates (5%)

Online / DSA (7%)

Imaging Services

(6%)

PET/CT Scan (6%)

Others/ Diagnostics Kits

(5%)

Glucose Strips,

Tubes, Kits

(4.5%)

FDG Sales

(0.5%)


November 17, 2016 6

Exhibit 2: Broad break-up of major players in the Indian Diagnostic market

Single Lab, Mom & Pop centers

48%

Healthcentres,

Nursing homes,

Regional players37%

Multi-chain

diagnostic

8%

Pan-india

Hospitals

7%

Organised players

15%


Diagnostic being a sunrise sector, Thyrocare being a smallest among the top-4, its options are plenty for growth, margin expansion

Small is smart: Technology, logistics increase reach with minimum investment

Thyrocare is the smallest among the top-4 organised sector players in the Indian

pathology market. Diagnostic being a sunrise sector has been a choice of the

management to remain asset-light in its pan-India presence and pursue strategy of

optimising asset class at its disposal. Thyrocare’s key fundamental decision of

restricting into one CPL and expand through RPL is one big differentiator with large

peers which helps to follow asset-light strategy and keep capex low. In comparison

to large peers (Metropolis, Dr Lal Pathlabs and SRL), Thyrocare has been growing at

24% CAGR and average asset-turnover (ATO) was at 2.7X in FY11-16 including yearly

ATO of 5.6X in FY12 before venturing into imaging business. With capex of Rs1,076m

for a large CPL (0.5mn tests/day), six RPLs (regional path lab), five PET-CT scanner (in

three centres) and one cyclotron-production facility in FY13-16, the company is

poised to optimise its investments in pathology and imaging business through

growth in revenues, EBITDA and margins. We expect 33%, 39% and 40% CAGR in

revenues, EBITDA and PAT with 550bps expansion of EBITDA margin to 41.7% in

FY16-19E.


November 17, 2016 7

Exhibit 3: Break-up between Imaging and Pathology

Pathology Diagnostics

56%

Imaging Disgnostics

44%

Source: CRISIL, PL Research

Exhibit 4: Three broad categories of pathology testing service

Others

21%

Hematology18%

Immunology

22%

Sugar & Lipid

Profile

29-31%

Other Tests71-69%

Biochemistry

39%


Exhibit 5: Major industry contributors in diseases/disorders

Clinical Chemistry36%

Immuno-Chemistry21%

Hematology19%

Microbiology culture

8%

Infectious immunology

5%

Histology & Cytology

6%

Genetic Testing2%

Others3%



November 17, 2016 8

Exhibit 6: Hub-and-spoke model


To remain asset-light and mobile in execution, the company’s philosophy remains a)

maintain only one CPL, b) expansion through RPL/franchise/logistics and c) keep

minimum human intervention at its laboratories, especially in CPL. With only 850

employees, it creates standardised quality assurance and highest level of automation

including longest line of APTIO automation (conveyor belt system) in CPL and

enables RPL for voluminous basic/preliminary-level tests. This has increased capacity

to conduct more number of tests/day for CPL and RPL in comparison to similar

investment by peers. Further plan to add 14 more RPLs (total no. of target RPL is 20)

to add large headroom in CPL without capacity expansion has ensured no large

investment for pathology business in setting up another CPL till FY20E.

Strategies of franchise, execution, preventive-care to drive sales

With policy of accepting samples with 48-hours of stability and expanding franchise

model together with Aarogyam branding, Thyrocare has been persuading preventive

care in a big way. Management focuses on 80% contribution of preventive care by

FY20E from 53% in FY16. Its drive to ramp-up corporate deals in medium term and

expansion of Aarogyam brands along with new RPLs and addition of new tests in

long term to help management achieve robust contribution from preventive care.

Macro-economically, increasing income levels and penetration of awareness in Tier-

II and III class cities will also help in bigger contribution of preventive care in the pie

of pathology tests in India. Thyrocare’s Preventive care contribution in revenues has

been increasing from 20% in FY10 to 51% in FY15 and 53% in FY16 due to rapid

expansion of bouquet of tests, branded as Aarogyam.

National Reference

Lab

Regional Reference

Lab

Satellite Labs

CC

CC

Satellite Labs

CC

CC


November 17, 2016 9

Exhibit 7: Preventive, Wellness tests in Indian diagnostic market

Rest of the market

92%

Wellness, Preventive

Mkt8%

FY13-14

Rest of the market

91%

Wellness, Preventive

Mkt9%

FY17-18E

Source: Crisil, PL Research

Co-operation strategy expands market share in expanded pie of diagnostic sector

With core competence of processing voluminous business that draws benefits of

economies of scale (lower operating costs/unit) and optimise assets utilisation, one

of Thyrocare’s key strategies is co-operation with standalone pathology centres.

Strategically, it offers expansion of target market into 48% of diagnostic business,

which is dominated by standalone pathology labs followed by small nursing homes,

healthcare centres and doctors with single laboratories. Thyrocare also leverages

lower operating cost-benefits with sizeable discount-offer of specialty tests to multi-

chain/small-chain regional hospitals, which contributes 37% of the diagnostic sector

revenues of Rs377bn. Unlike peers, Thyrocare focuses on these 85% of the sector pie

for sourcing its B-2-B business, which contributes 42% of revenues in FY16 and would

likely to grow at 11% CAGR in FY16-19E. Thyrocare’s 80% of volume is dominated by

B-2-B segment which is contributed by 70% from standalone laboratories, 15% by

small hospitals/health-centres and 15% contributed by Doctors with small

laboratories.

Exhibit 8: Thyrocare’s B-2-B revenues to grow at 11% CAGR

783

962

1,129 1,204

1,323 23%

17%

7%

10%

0

0.05

0.1

0.15

0.2

0.25

-

200

400

600

800

1,000

1,200

1,400

FY15 FY16 FY17E FY18E FY19E

B-2-B YoY Gr. (RHS)


23-25% CAGR

Total Market Rs377bn

Total Market Rs585-616bn


November 17, 2016 10

Growing number of samples to facilitate lower Opex/test

With reagent-suppliers agreement at lowest rate in the industry v/s the peers (due

to commitment of highest volume) and robust growth in samples/employees

through geographic expansion, the company is to benefit from increase in volume,

especially in its Aarogyam brand. Each RPL employs maximum headcount of 15

employees but release higher capacity for high value tests in CPL. Thyrocare’s focus

on automation of testing process and minimum human intervention will result in

higher operating leverage. With expansion of Aarogyam brand, online DSA/Internet

business and other corporate deals, Thyrocare’s B-2-C business contributed 53% of

revenues in pathology in FY16 from 51% in FY15 and is expected to grow at 42%

CAGR in FY16-19E.

Exhibit 9: Pathology—Operating costs/tests tends lower with higher volume

356 425 552 670

14.2 12.2 11.5 10.8

28.3

23.3 22.3 22.7

-

5.0

10.0

15.0

20.0

25.0

30.0

-

100

200

300

400

500

600

700

800

FY13 FY14 FY15 FY16

COGS (Rs m) Opex/Test (RHS) Total costs/Test (RHS)


Online offers, insurance, customised corporate deals led growth in B-2-C business

Aarogyam, Corporate deals and Online business contribute in Thyrocare’s B-2-C

business, of which, revenues in corporate deals to grow at 1.2x CAGR in FY16-19E.

With average contribution of 50% in incremental revenues, corporate business is to

be led by customized offer for corporate in-house employees/clients and mandatory

medical test business of the insurance clients. Corporate deals are achieved with TCS

(large contribution in incremental revenues in Q1FY17) and Kotak as well as Royal

Sundaram and Star Health among insurance companies. While there are many deals

in the negotiation stage, we expect large clientele such as Big-Bazaar, Reliance JIO,

ICICI Bank and Infosys and insurance companies such as LIC, ICICI Life and Aegon Life

to be the game changers for pathology business and help to achieve company’s

aspiration of 80% revenue from B-2-C by 2020.



Exhibit 10: B-2-C sub segments: All guns blazing

-

500

1,000

1,500

2,000

-

1,000

2,000

3,000

4,000

5,000


Pathology Testing Services B-2-C

B-2-B Aarogyam (RHS)

Corporates (RHS) Online/Internets/DSAs (RHS)


Thyrocare is also investing in future line of business through offer for online

customers on its site and other websites (including aggregators) with differentiating

discount offer. With savings of partnership fees in franchisee fees, the company has

headroom for offering discount in online selling of its services, while operating

margin remain similar to other B-2-C business. Thyrocare’s revenues in futuristic

business such as online business/internet-offers/aggregators/DSAs together

contributes 15% of B-2-C business (7% of consol rev.) in FY16 and are expected to

grow at 45% CAGR in FY16-19E.

Aarogyam to benefit from growing ecosystem with ASPs, RPLs

With strong focus on expansion of high-margin business of Aarogyam brand,

Thyrocare is strategically increasing its ecosystem across the country through ASPs,

RPLs and 22 collection hubs. Thyrocare’s ASP network increased from 782 in FY14 to

1,041 in FY16, comprising 30,000 sample collection centers, 687 TAGs (aggregators)

and 354 TSPs (service providers) across 466 cities in 29 states. With six RPLs

established till Q2FY17, management plans to set up total 20 RPLs (roughly four RPLs

in a year) by FY20E, which will create 40 hubs and each hub to manage operation of

30-40 franchisees. Hence, the plan of 20 RPLs to create ecosystem of 1,200

additional franchisee, which suggests setting up of one RPL equivalent to create an

ecosystem of two hubs and 80 franchisee network.



Exhibit 11: Functioning of the hub-and-spoke model


To protect franchisee partners from cannibalising business of each other, the

company’s policy is to award partnership contract which has to be away from the

300 meters surroundings of the nearby franchise partner. Thyrocare source B-2-B

samples from TAG partners and their addition in the network are faster and

numerically higher as it requires no permanent establishment. The TAG partners are

aggregators in real terms as they collect specimens from institutional clients

(standalone labs, small hospitals/nursing homes, healthcare centres and doctors) to

deposits in collection hub/centre in return of collection fees. The TSP partners

source B-2-C business through promotion of Aarogyam brand in return of

partnership fees and require permanent establishment with safeguard of no other

TSPs in the surroundings of 300 meters.

Flexible partnerships agreement helps in faster addition of franchise network

With competitive edge of Aarogyam/Thyrocare brand and favourable sharing of

revenues with partners, Thyrocare also offers flexibility in franchisee agreement for

reference laboratories as per the choice of franchise. Like its B-2-B segment,

Thyrocare also offers option to its franchise on reference lab in case partner find

profitable proposition to send the specimens in other labs. Management is confident

about quality and cost leadership of Aarogyam’s bouquet of tests and shares 25% of

its revenues from walk-in clients which is also the highest in the industry standard of

sharing revenues with franchisee. As per management, around 60% of the franchisee

have tie ups with Thyrocare labs only, while 30% of franchises have 2-3 labs tie ups

and 10% franchise have tie ups with more than 3 laboratories.



Exhibit 12: Decentralising 58% of tests to RPL benefits franchisee partners, cost leadership

Type of Thyroid Tests Performed

@CPL Performed @RPL

Thyroid Simulating Hormone P P

Total Triiodothyronine P P

Total Thyroxine P P

Non-Thyroid tests

CLIA P P

ELISA P

HPLC P P

Electrophoresis P

Flow cytometry P

Flourescence Flow cytometry P P

Nephelometry P

Photometry P P

Liquid Chromatography Mass Spectrometry P

ICP-MS P

Wellness and Preventive Tests

Aarogyam A P P

Thyroid Diabetic Screen, Iron deficiency, Kidney, Cholesterol, Pancreas, Liver, Complete Hemogram

All except Pancreas

Aarogyam B P P

Vitamin D & blood Elements & Aarogyam A excluding pancreas

All except Blood Elements

Aarogyam C P P

Aarogyam B & Cardiac, Arthritis, Vitamin B12, Folic Acid, Serum Ferritin, Testosterone, Electrolytes

Aarogyam B and Vitamin are done

Aarogyam D P P

Thyroid, Liver, Cardiac, Complete Hemogram, Diabetes, Iron Deficiency, Lipid, Renal

All except Cardiac and Renal

Mini Aarogyam P P

Thyroid, Diabetic, Complete Hemogram

All


Flexible strategy for new RPL to meet geographical, competitive requirements

With priority of optimising assets, Thyrocare’s existing policy is to establish new RPL

in the geography only where it receives minimum 3,000-5,000 specimens daily.

Management policy is however subject to the adjustment with competitive density

and geographical remoteness. The flexibility in decision-making process with shorter

hierarchy helps the company establish stronger footprint across the country at faster

space. Thyrocare’s setting up of new RPL in Bengaluru in Q1FY17 with 2000

specimens/day and plans for a new RPL in Bhubaneshwar (due to logistic

remoteness) are a result of flexibility in management policy and will help in faster

ramp-up of market share in the expanded pie of diagnostic business.



Exhibit 13: Large headroom for volume growth: Specimens per day and utilisation

RPL centers Capacity Utilisation Utilisation (%)

Kolkata 10,000 4,000 40

New Delhi 10,000 8,000 80

Coimbatore 7,000 3,500 50

Hyderabad 6,000 4,000 67

Bhopal 6,000 2,500 42

Bengaluru 5,000 2,000 40

Total Sample in RPL/day 44,000 24,000 55

Average Sample/day 7,333 4,000

Total Tests in RPL/day (1:5 sample:Test ratio) 220,000 120,000


DNA of low-cost structure remains key for large volume, B-2-C, corporate deals

Thyrocare’s major philosophy of offering diagnostic services at affordable prices

remains the key for its growth since inception. It began operations in CY2000 with

offerings of Thyroid-profile tests at less than half the price in comparison to peers.

The foundation of its capability of offering highly cost competitive services has been

low-costs structure of its business. There are four areas where the cost effective

management are exercised:

Reagent costs: While reagent costs of the industry (mainly large peers) is 30-

35% (Crisil report), Thyrocare’s reagent costs has come down to 25% of sales in

FY16 from 27.5% in FY15. Despite 22% YoY increase in reagent costs in FY16, the

contribution of reagent costs has come down due to efficient procurement at

lower unit-costs and higher optimisation of assets with rapid rise in volume.

Thyrocare’s strength of large volume and its growth ensure significantly lowest

rate of reagent than the large peers, with a rider of minimum annual purchase

commitment. With 53% growth in volume to 200,000 tests/day in FY16, its

annual offtake of reagent is much higher than the minimum purchase

commitment, e.g. Thyrocare reagent expenses were Rs584m in comparison to

minimum purchase commitment of Rs449m in FY16. Thyrocare has Reagent

Rental Arrangement with major suppliers for 2-6 years including either annual

purchase commitment or rate commitments based on the workloads. Currently,

Thyrocare has purchase commitment of Rs3.1bn for 5-6 years.



Exhibit 14: Focus on higher volume to reduce reagent costs further

22%24%

28% 27%

0%

5%

10%

15%

20%

25%

30%

FY13 FY14 FY15 FY16


Limited menu of tests dominated by choice of Biochemistry test: Thyrocare’s

test-menu offers 198 tests including 59 profile tests (Aarogyam-16 profile tests),

which are dominated by Biochemistry tests. The universe of pathology is

contributed by 36% from biochemistry tests which aims at detection of chronic

disorder. Thyrocare’s strategic choice of biochemistry tests in menu requires at

least 48-hours of stability of specimens and helps in highest level of automation

to conduct tests. In comparison, its large peers offers 2,500-4,000 tests in menu

which entail a) time-bound diseases tests, b) acute-therapy tests, c) hospital-

patient tests and d) tests which require frequent human intervention. This has

resulted in large peers having 20-25% of employee costs v/s Thyrocare’s 11%

employee costs in FY16.

Exhibit 16: Prominence of Biochemistry tests in Pathology

Hematology19%

Immunology21%

Others24%

Sugar & Lipid profile

11%

Other Tests25%

Biochemistry36%


Exhibit 15: Top-10 tests in pathology in India

1. Blood Sugar

2. CBC

3. Thyroid Profile tests

4. Hba1c

5. Vitamin-D profile test

6. HDL (Lipid profile)

7. Hep-B&C

8. HIV

9. HPV

10. Vit-B12 (B Complex)




Shifting of many tests to RPL to reduce unit costs/test: With 84% lower

power/fuel costs (1.13% of sales in RPL v/s 7% in CPL) and 73% lower HR costs

(3% of sales in RPL v/s 11% in CPL), Thyrocare strategically enhanced RPL’s

capability to reduce unit-cost of tests. Thyrocare has shifted 54% of overall tests

in menu to RPL including all thyroid profile tests and 40% of non-thyroid tests.

Increase in RPLs also will provide additional benefits of non-binding reagent

procurement as Thyrocare has already bought equipments for RPL centres. This

will result in lower unit-cost of reagent procured from existing large suppliers.

Exhibit 17: Thyrocare reduces unit costs by shifting 58% of tests in the menu to RPL

Relative Costs (CPL v/s RPL) CPL RPL

Raw Material 30% 30%

Employee Costs 11% 3%

Power Costs 7% 2%

Lease Costs - 3%


Zero rental costs in setting up Aarogyam TSP centres: While large peers spend

5-7% in rental costs in the company-rented service centre for walk-in clients,

Thyrocare entirely sources its revenues from ASPs including 53% from Aarogyam

brands through franchise establishments. It spends rent only for RPL and hub

centres at local rate, which contributes 2.3% of sales in FY16 v/s 5% by peers

such as Dr Lal Pathlabs.

Exhibit 18: Franchisee model draws benefits for Thyrocare v/s peers

0.04% 0.05%

1.02%

2.34%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

-

10.00

20.00

30.00

40.00

50.00

60.00

FY13 FY14 FY15 FY16

Thyrocare % of Sales (RHS)

4.74%

4.47%

4.75%4.82%

4.20%

4.30%

4.40%

4.50%

4.60%

4.70%

4.80%

4.90%

0.0

100.0

200.0

300.0

400.0

500.0

FY13 FY14 FY15 FY16

Dr Lal Pathlabs % of Sales (RHS)


Employee costs/lab assistant reduced with set up of RPL: With setting up of

new RPLs and selling Aarogyam brands through franchise, Thyrocare’s employee

costs per lab assistant has come down, while front office assistants and

executives are non-existent. Each RPL requires maximum 15 lab assistants

(when operating at full capacity) at local salary-level, which are lower than CPL

employee costs. Out of total headcount of 850 employees, there are 90 lab

assistants in six RPLs.



Exhibit 19: Sizeable gap in employee costs to sales vs. peer

0%

5%

10%

15%

20%

25%

FY13 FY14 FY15 FY16

Thyrocare Dr Lal Pathlabs


Headroom for rise in capacity/utility to keep away large investment in pathology

With aggressive strategy to set up 20 RPLs and 1,200 ASPs, Thyrocare will not require

any big investments for another CPL. While it process 120,000 specimens/day and

80,000 specimens/day in RPLs and CPL respectively, its CPL has capacity to process

500,000 specimens/day with addition of machineries in the large unutilised space of

the CPL. Besides, addition of 14 more RPLs and unutilised capacity in the existing six

RPLs will open up more capacity of CPL to process more number of specimens till

FY20.

Minimal Employee growth with freshers contributing large part of headcount

Thyrocare keeps the growth of workforce disproportionately lower due to higher

level of automation at laboratories and use of franchise network to promote its

brand Aarogyam and B-2-B sales. Hence, employee costs per tests are decreasing

with increase in collection of specimens. Besides, it focuses mainly on freshers for

lab assistant position as it sets up RPL only in place where medical colleges are

available in the local ecosystem. This has resulted in lower salary costs of employees

in comparison to its peers. Since FY15, the company is however focusing on

recruiting high-value marketing and sales team with strong focus to increase sales

from corporate deals and insurance companies by FY20E. With current marketing

and sales of 116 employees, Thyrocare will be able to convert large number of

corporate clients in medium term as is seen in customised deal for TCS and Kotak

Bank. We expect strong conversion of large corporate such as Infosys, Reliance JIO,

ICICI bank, Big Bazaar and large insurance companies such as LIC, ICICIPru Life Aegon,

Star Health in the near-to-medium term.



Exhibit 20: Revenues v/s costs per employee

-

200

400

600

800

1,000

1,200

-

1,000

2,000

3,000

4,000

5,000

6,000

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Rev/ Employee (in Rs.'000) No. of Employees (RHS)

Emp.unit Costs (in Rs.'000) (RHS)


Overseas operation to contribute 25% of pathology business by 2020

With aspiration of 25% of pathology revenues coming from overseas operation by

FY20E, Thyrocare has begun operation in Bahrain, Nepal and Bangladesh since FY13.

We believe that management is still in exploration mode in overseas operation and

are fully concentrated for pan-India growth. While Bangladesh venture is joint

venture with local partner, its operation in Bahrain and Nepal is a wholly-owned

business. Specimens from Bangladesh are processed in local partner’s Lab, while

Nepal sends specimens to CPL. Bahrain business owns one small lab locally which is

used for 15% of specimens in Gulf and sends remaining 85% of specimens to CPL,

Mumbai.

Thyrocare’s gains from processing fees of the specimens collected from Bahrain and

Nepal, while ownership of the three business units belong to a Mauritius-based

Holding company personally owned by promoter group. Thyrocare, however, has

9.9% stake in the holding company. Hence, business prospect in overseas operations

will not benefit Thyrocare’s shareholders directly except operating gain from

processing of specimens.

Exhibit 21: Overseas expansion among pan-India diagnostic chains

Diagnostic Chain Major tests Overseas presence Accreditations EBITDA margin (%) ROCE (%)

Metropolis Pathology USE, Sri Lanka, South Africa, (recently wind-up), Kenya, Mauritius, Ghana

NABL, ISO, CAP, CLIA (US) 29 26

Dr. Lal Pathlabs Pathology, Imaging Oman, Saudi Arabia, Kuwait, Nepal, Malaysia, Bangladesh, Qatar

NABL, ISO, CAP, CDC (US) 27 36

SRL Diagnostics Pathology, Imaging Dubai, Sri Lanka, Nepal, Africa, Middle-East, Hong Kong, Maldives, SAARC Countries

NABL, ISO, CAP, ICAL, APLAC 24 NA

Thyrocare Tech. Pathology, Imaging Nepal, Bangladesh, Gulf (Bahrain) NABL, NAGL, ISO, CAP 36 18




Imaging Business: PET-CT to be crown Jewel of future

With Radiology business contributing 44% in India’s Rs377bn diagnostic market,

Thyrocare’s foray into niche area of PET-CT scan is made with an aim to gain from

robust growth in oncology therapeutic area. Thyrocare currently has five scanners in

three PET-CT centres, supported by one cyclotron facility in Mumbai. While

constraint of highly priced PET-CT scan draws limited users, Thyrocare is poised to

gain from dormant potential of PET-CT scan market with its DNA of low-cost

offerings. The company aspires for opening 60 centres by FY20E though we find

visibility of 5-10 additional centres by FY19E. Thyrocare has 5% market share and

10% capacity-share of PET-CT business in India.

Competitive pricing to be strong USP for network expansion, volume

With high costs and sporadic presence of scan centres, PET-CT scan for cancer

patients is not yet a preferable option for medical practitioners. Thyrocare’s offer of

full body scan at Rs10,000 is 55% lower than average price of the competitors who

offers scan only for single body part. We believe that Thyrocare’s competitive pricing

will be key differentiating factor to expand market size of PET-CT scan and also help

to gain dominant market share. With replicating its success (in pathology) of

partnership franchise model in imaging business, the company plans to leverage

discount-offer deal with GE to expand in pan-India PET-CT scan market by FY20.

Exhibit 22: Survey in Mumbai—Competitive pricing to be key differentiator in PET-CT scan

Hospitals Costs of PET-CT

(Rs. Unit) Area of scan

Lilavati hospital 22,500 only single body part

Nanavati hospital 16,000-21,000 only single body part

Jaslok hospital 24,000 only single body part

Hinduja hospital 25,000 only single body part

Bombay hospital 22,000 only single body part

Tata Memorial Cancer hospital

17,000 7,000 (only, in case of special permission with average delay of 1 mth for scan); Only single body part

Hiranandani hospital Nil No PET-CT facility

Fortis hospital Nil No PET-CT facility

Global hospital Nil No PET-CT facility

S.L.Raheja Hospital Nil No PET-CT facility

Breach Candy hospital Nil No PET-CT facility

Thyrocare 10,000 Full body parts (also offer scan Rs.7,000 for cases recommended by Govt hospitals of Delhi)




Targeting key cities to gain from concentrated cancer patients

Thyrocare follows the concentration of Linear Accelerator (LINAC) and oncologists

for opening PET-CT centre across the country. LINAC is used as a preliminary

treatment for cancer patients to deliver high-energy X-Rays in the region of patient’s

tumour. Post opening of three PET-CT centres, Thyrocare also observes the patient-

flow across India and identifies latent need of scanners geographically. This has

resulted in its decision to open new centres in Pune and Nashik along with Surat,

Baroda, Borivili, Dadar and Raipur in FY17E-19E. Currently, Thyrocare has three PET-

CT centres in Delhi (2 scanners), Mumbai (2 scanners) and Hyderabad.

Exhibit 23: Progress in number of scans in three PET-CT centres since inception

34

2,348

11,173

15,903

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY13 FY14 FY15 FY16


Strong background work to ensure faster turnaround of new centres

With 140 scanners in CY15 (90 scanners in CY10) in India and national average of

100-700 scan/day, Thyrocare conducted 90 scans/day with 6 scanners in four centres

(including recently opened Surat centre). Benchmarking 20 scans/day for achieving

break-even per scanner, Thyrocare’s achieves 15 scans/day-machine in Q1FY17,

including 20 scans/day-machine in Delhi, 15 scans/day-machine in Mumbai and 10

scans/day-machine each in Surat and Hyderabad. With commissioning of three

centres since FY14, we believe that high probability of faster ramp-up in volumes is

the key criterion for opening scan centres. With network among 2,000 medical

practitioners, management set additional criterion of competitive density analysis,

presence of niche health centres and small to medium hospitals which lacks PET-CT

scanners.



Exhibit 24: Neuclear Imaging business maintains steady progress QoQ

Period Navi Mumbai New Delhi Hyderabad Surat Total

Apr-Jun 2014 936 1,092 22 NA 2,050

Jun-Sept 2014 1,016 1,465 204 NA 2,685

Oct-Dec 2014 1,164 1,505 215 NA 2,884

Jan-Mar 2015 1,501 1,778 275 NA 3,554

Total scans in FY15 4,617 5,840 716 NA 11,173

Apr-Jun 2015 1,585 2,016 344 NA 3,945

Jun-Sept 2015 1,661 1,866 425 NA 3,952

Oct-Dec 2015 1,724 1,723 460 NA 3,907

Jan-Mar 2016 1,683 1,879 537 NA 4,099

Total scans in FY16 6,653 7,484 1,766 NA 15,903

Apr-Jun 2016 1,731 2,101 530 NA 4,362

Jun-Sept 2016 1,891 2,305 580 49 4,825


Infrastructure of cyclotron plant, logistics remain key for new centres

With capacity of supporting 12 PET-CT scanners, Thyrocare established one cyclotron

facility In Navi Mumbai to produce and supply FDG (Fludeoxyglucose) to operate

scanners in the three centres (Hyderabad centre uses local supply as cheaper

source). Air logistic infrastructure and distance from Cyclotron production plant are

also key criterion for opening new scan centres as the quantum of FDG reduced to

half in every 110 minutes post production. The company’s long term plan is to set up

four more cyclotron facilities (East, North, South and Central) across India. To

maximise the use of FDG for more number of scans, Thyrocare has integrated

production plan for FDG with air and road logistic infrastructure from Mumbai. It

uses air logistics for Delhi, while Surat, Navi Mumbai and upcoming Nashik centre

use road logistics for supply of FDG to PET-CT centre.

Exhibit 25: Proposed new PET-CT Centres across India

Centers Current status

Surat Commissioned in Q2FY17

Baroda (Q3FY17E) To be commissioned

Raipur (Q4FY17E) To be commissioned

Pune (FY18E) To be commissioned

Nashik (FY18E) To be commissioned

South Mumbai (FY18E) To set up with shifting of one machine from Navi Mumbai

Borivili Proposed

Dadar Proposed




Partnership with Franchisees, hospitals to be key for expansion

While the first three centres (Delhi, Mumbai, Hyderabad) are owned by the

company, Thyrocare plans to expand its PET-CT centres only through franchise

model (PPS agreement). We expect revenue (50:50) sharing franchisee-partnership

to quickly expand the network of scan centres as Thyrocare will buy PET-CT machine

and incur the cost of production and supply of FDG, while partners will build-up

infrastructure and will contribute 100% of operation expenditures (costs of power,

manpower etc). The first scan centre under PPS agreement is commissioned in Surat

in Q2FY17 and has plans to open four new centres in Baroda, Raipur, Nashik, Borivili,

Dadar and Pune.

With predominance of cancer among corporate work-force mainly due to sedentary

lifestyle, the management plans to replicate its successful strategy of corporate deal

(in pathology) for ramp-up in Radiology business. Currently, it is negotiating deals

with large companies as well as medium-to-large hospitals under religious or

community trusts. With strong possibility of deal conversion of religious/community

trust hospitals due to lowest price in the industry, there will be rapid increase in

traffic flow in its PET-CT scan business of Thyrocare and reduce break-even period

significantly shorter.

Strategic deal with GE for critical machinery to be catalyst

Thyrocare negotiated exclusive deal with GE for buying out PET-CT scanners and

Cyclotron production reactor. Thyrocare is likely to receive one scanner free in case

it places bulk order of four scanners. This results in reducing effective costs of

scanner to US$0.75m (Rs50m)/machine from US$1m/machine with approximate life-

span of 10 years. Similarly, Thyrocare receives preferable rate of US$2.2m

(Rs150m)/machine for buying out cyclotron reactor, which will have approximate

life-span of 20 years. With capacities of 40 scans/day for one PET-CT scanner and

supplying FDG for 12 machines from one cyclotron facility, management is aspired to

open 60 PET-CT centres across the country and set-up five cyclotron facilities

strategically at the heart of five different geographies in the country. Thyrocare’s

offer of bearing the cost of scanner and supply of FDG in return of 50% share of

revenues will require only 30% contribution of partner in opening new centre of

scanner along with bearing of operating expenditures to encourage more partners to

join PPS (partnership) programme. This will result in faster expansion of PET-CT scan

centres by FY20E.



Financials: Volume growth is the name of the game

We expect 32% CAGR in revenues during FY16-19E led by 29%, 79% and 11% CAGR,

respectively in pathology, imaging and product sales. Gross profit and EBITDA grew

at 34% and 39% in FY16-19E. With growth in volume (specimens) resulting in faster

expansion of RPL and scan centres, Thyrocare to be benefitted from lower unit-costs

due to higher operating leverage. This has resulted in higher operating-profit growth

than revenue growth. This has also resulted in higher EBITDA margin of 41.7% in

FY19E from 36.2% in FY16. Maintaining tax rate at 35-37%, PAT is likely to grow at

40% CAGR in FY16-19E.

Exhibit 26: Consolidated revenue break-up (%)

-

20

40

60

80

100

FY15 FY16 FY17E FY18E FY19E FY20E

Diagnostic B-2-C B-2-B Imaging Services


Pathology business growth to be led by B-2-C with at 42% CAGR

With average contribution of B-2-C from 42% in FY16 to 57% in FY19E, Thyrocare’s

focus in expanding franchise network will drive pathology business at 28%, 31% and

28% to Rs2.6bn, Rs3.4bn and Rs4.4bn of sales in FY17E, FY18E and FY19E

respectively. Setting-up of more RPLs will create favourable ecosystem and helps

faster expansion of B-2-C business through the sales of Aarogyam brand, corporate

deals and tie-up with insurance companies for mandatory tests of clients. Though

management identify revenues from online/internet offers to be future leading

business, we believe Aarogyam and customised bouquet of offers to

corporate/insurance companies to be major drivers of B-2-C revenues in medium

term.



Exhibit 27: Revenue break-up of pathology tests


Rev. from Pathology Tests 1,598 2,048 2,626 3,439 4,410

B-2-B 783 962 1,129 1,204 1,323

B-2-C 815 1,085 1,497 2,235 3,087

Aarogyam 652 814 928 984 1,513

Corporates 163 109 299 894 1,081

Online/Internets/DSAs - 163 269 358 494


With more number of discount-offers in corporate/insurance deals and online sales

along with rapid rise in TAGs and TSPs, we assume specimens collection to grow at

35% CAGR in FY16-19E. Also, more customised bouquet of test-offers to increase

test-sample ratio by 2-3% to 5.7x in FY19E from 5.3x in FY16. These have resulted in

increase in number of tests by 38% CAGR in FY16-19E

New scan centres, volumes to drive imaging business

Assuming three and two new centres in FY17E and FY18E and growth in number of

scans/per day-centre at 13% CAGR in FY17E and FY18E, we expect revenue growth in

imaging business to be 121%, 56% and 67% in FY17E, FY18E and FY19E, respectively.

Revenues per scan also been assumed to grow at 3% CAGR in FY16-19E. New centres

at Surat, Baroda and Raipur in FY17E and Nashik and Pune in FY18E also result in

increase in number of scans/day by 74% CAGR in FY16-19E.

Exhibit 28: Imaging business growth path

-

2,000

4,000

6,000

8,000

10,000

-

5

10

15

20

25


No. of scans perday/per center Rev. per scans (Rs. m) (RHS)




Pathology led in contribution, growth in EBITDA

Increasing volume from new sources of B-2-C business, the average contribution of

pathology is 91%, followed by imaging at 6% and products/kits at 3% in FY17-19E.

Sources of retail business from variety of sources at discounted-offer increases

volume and so is EBITDA of pathology business at 27.5% CAGR and EBITDA margin

increased to 41.7% in FY19E from 36.2% in FY16E. We, however, expect strong rise

in volume from insurance business to increase margin from pathology business to

45.4% in FY19E. With lower base, Imaging business EBITDA to increase at 92% CAGR

in FY16-19E as EBITDA margin is expected to be 18.5%, 22% and 25% in FY17E, FY18E

and FY19E.

Exhibit 29: EBITDA contribution Incl. other op. income (%)

96 94 92 91 89

3 5 6 9 4

4 3 3 2

0%

20%

40%

60%

80%

100%


Pathology Imaging Sale of prods


Asset optimising philosophy to limit annual capex at Rs300-350m

With assumptions of four new RPLs per annum and eight PET-CT scan centres, we

expect Rs300-350m capital expenditure per annum in FY17E-19E. The set-up cost of

a RPL is Rs35m leading to total capex for pathology business is Rs140m per annum.

We assume outright buy of three, two and three PET-CT scanners in FY17E, FY18E,

and FY19E, respectively. With discount-offer of GE for PET-CT machine at

US$.75m/scanner, we expect total capex of Rs402m for imaging business in FY17E-

19E.



Exhibit 30: Capex plan to limit within Rs300-350m

-

50

100

150

200

250

300

350

400

-

50

100

150

200

250


Pathology biz Imaging biz Total capex (RHS)


ROE, ROCE, ROIC, Cash flow, tax rate

With capex of Rs1,076m in FY13-16 for new CPL, six RPLs and five PET-CT scanners,

Thyrocare’s ROE, ROCE and ROIC fell to 14-16% in FY16. With renewed focus on

expansion of ecosystem in new markets, we expect all key return ratios to reach

between 30-35% in FY19E. Net operating cash flow is expected to grow to 34% of

sales in FY19E from 29% in FY16 and Free-cash-flow is expected to grow to 27% of

sales in FY19E from 23% in FY16. We continue to assume zero leverage ratio. Cash

and Investments of Rs1bn represent 3% of market cap. We assume Tax rate reduce

to 35% in FY19E from 37% in FY16 due to set-off of historical loss in nuclear imaging

business.

Exhibit 31: Steady improvement in key ratios, financial parameters

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


ROE (%) ROIC (%) ROCE (%) Net OCF to sales Tax rate (%)




Valuation and Risk

We expect diagnostic industry to grow at 16%, organised diagnostic sector to grow at 20-22% and top-20 players to grow at 30% for next 10-15 years. We assume Thyrocare to grow at 32% CAGR in FY17E-19E, 25% CAGR in FY20E-26E, 15% CAGR in FY27E-36E and 3% terminal growth in revenues. With 1,041 authorised partners and

plans to add new ecosystem with yearly addition of four new RPLs, we expect Thyrocare has large headroom to increase franchise partners in many untapped territories in India.

Thyrocare’s average EBITDA margin is expected to be 40-41% in FY17E-19E despite only 6% contribution from imaging business. With cost leadership, lowest pricing and strong growth potential of PET-CT scan markets, we expect Thyrocare to expand scan centres across the country through its franchise partnership (PPS) model.

Average EBITDA margin is expected to be 40-41% despite assuming 22% EBITDA margin from imaging business in FY17E-19E. While there is strong probability of 40-60% EBITDA margin from imaging business, we, however, remain conservative and

assume 45% overall EBITDA margin in long term.

Exhibit 32: Revenues, FCFE

FY17E FY18E FY19E FY26E FY36E Terminal Value

Growth in Revenue 33% 33% 32% 25% 15% 3%

Revenue 3,075 4,076 5,379 25,647 103,756

EBIT (1-t) 645 895 1,267 7,386 16,601

+ Depreciation 214 250 294 573 1,485

- Capital Expenditures 310 355 355 500 891

- Change in WC 100 145 187 404 1,066

= FCFE 449 645 1,019 7,055 16,129


Operating cash flow is expected to improve from 29% in FY16 to 34% in FY19E and generates cash significantly higher than yearly capex requirement of Rs300-350m. Net working capital remains 55-57 days or 7% of sales, mainly contributed by the storage of reagent chemicals. With high generation of cash and low requirement for

working capital, the company is expected to fund its capex from internal accruals and remain debt-free for long term. We expect 28% CAGR in cash and current investments in FY16-19E.

Exhibit 33: Basic assumptions and derivation of Cost of Equity

Risk free rate - Rf 6.9 Yield on 10-yr GOI bond

Market risk premium-(Rm - Rf) (%) 7.6 Rm calculated on the inverse of Risk-free rate

Beta (b) (x) 0.7

Cost of Equity - Ke (%) 12.2 Ke = Rf + b * (Rm - Rf)

Cost of Debt - Kd (%) 0.0 Estimated gross cost of debt

Tax rate (%) 37.0

Post - tax cost of Debt 0.0

Debt / Capital (%) 0.0

Equity / Capital (%) 100




With risk-free rate of 6.9%, risk-premium rate of 7.6% and assumptions of 36% tax

rate and 3% terminal growth rate, our DCF-based (FCFE) intrinsic value of the

company is Rs57.3bn and derive target price of Rs1,067. We initiate coverage of

Thyrocare with a ‘BUY’ recommendation.

Exhibit 34: Valuation under 3-tier FCFE methodology

(Rs m) % of EV

Value of the firm for 2017E-2026E 14,644 25.60% Assumed 25% CAGR in revenues between 2017E-2026E

Value of the firm for 2027E-2036E 16,615 29.00% Assumed 15% CAGR in revenues between 2027-2036E

Terminal Value 26,054 45.50% Assumed 3% CAGR for terminal years

E.V 57,313

Less: Value of Debt -

Value of Equity 57,313

No. of Equity Shares (in m) 53.7

Intrinsic Value per share 1,067


Comparative Valuation

Thyrocare’s currently trades at a PER of 32.2x and 23.4x FY18E and FY19E with an

implied valuation to our target price at 53.3x and 38.7x FY18E and FY19E PER. The

company’s EV/EBITDA is 19.2x and 13.8x of FY18E and FY19E. Comparing PE

valuation together with other key parameters will be a better platform to verify the

justification of current and implied valuation of Thyrocare.

Exhibit 35: Key Financial Parameters


ROE (%) 18.7 16.1 20.4 25.9 31.2

ROIC (%) 16.6 15.1 20.4 26.6 35.0

ROCE (%) 15.7 14.8 19.7 25.0 30.2

Net OCF to sales 19.7 29.3 28.9 29.9 33.9

Tax rate (%) 34.9 36.7 37.0 36.0 35.0

Capex (Rs. m) 99.2 143.5 309.8 355.0 355.0


Thyrocare’s Asset-Turnover ratio (ATO) went as high as 5.6x FY12 when its capex was

around Rs20-50m per annum. With large capex of Rs690m for setting up CPL, its ATO

came down to 1.8 in FY13 and accumulated capex of Rs1,076m (in FY13-16) for RPL

and PET-CT centres, ATO has been in the 1.5-1.8X range during FY13-16. With

utilisation of only 55% in RPL, 40% in CPL and 34.5% average utilisation in PET-CT

centres, the asset turnover ratios is currently lower and expect to grow faster with

traction of volume. Thyrocare is poised to increase revenues from investments due

to strong geographic expansion, large headroom to accommodate rapid rise in

specimens and scans in matured PET-CT centres. Limiting capex at Rs300-350m per

annum, we expect ATO to rise to 2.5-3 in FY17E-19E.



Exhibit 36: Key growth, margin, ratio


Revenue gr (%) 16 32 33 33 32

Gross profit gr(%) 11 35 37 33 33

EBITDA gr (%) (7) 31 48 33 36

PAT gr (%) (2) 15 46 35 38

Gross profit margin (%) 68.0 69.6 71.6 71.7 72.3

EBITDA margin (%) 36.7 36.2 40.3 40.5 41.7

Asset-Turnover ratio (ATR) 0.9 1.1 1.3 1.5 1.7


Thyrocare’s growth in headline numbers and margins is also another reason for

premium valuations in comparison to peers. With smaller base than the large peers

and benefits of high automation in specimens processing, Thyrocare’s growth in

revenues, EBITDA and margins were higher than peers. Revenues, gross profit,

EBITDA and PAT to grow at 33%, 34%, 39% and 40% CAGR, respectively, in FY16-19E.

With manifold increase in capex since FY13, Thyrocare’s first phase of large capex

are through and additions of RPL and PET-CT centres are to be on consistent basis of

yearly capex. With ramping-up of ASPs and franchisees, Thyrocare’s utilisation rate

of existing assets will be faster than the rate of addition of new assets. Hence, it’s

ROE and ROCE is likely to grow to 29% and 40% in FY19E from 14% and 18% in FY16,

respectively.

Exhibit 37: Revenue break-up (Rs m)


Pathology Testing Services 1,598 2,048 2,626 3,439 4,410

B-2-C 815 1,085 1,497 2,235 3,087

B-2-B 783 962 1,129 1,204 1,323

Aarogyam 652 814 928 984 1,513

Corporates 163 109 299 894 1,081

Online/Internets/DSAs - 163 269 358 494

Imaging services 36 138 305 476 794

Sale of Products 112 127 144 161 174

Net Sales (core biz excl Other Op. income) 1,746 2,312 3,075 4,076 5,379




Risk and concerns

Concentration risk of thyroid-profile tests

While Thyroid test remains USP of Thyrocare brand since inception, we believe that

revenues from thyroid-profile tests are a concentration risk. Management has no

intention to discontinue the tests from its menu of tests despite being a low margin

business, as it has been the identity of the company since commissioning of its

operations. Instead, Thyrocare has enabled its RPLs and shifted all local

requirements of thyroid tests to RPL and reduces operation costs. With expansion in

Aarogyam brand and corporate business, we expect contribution of thyroid-profile

tests to come down further from 24% in FY16.

Exhibit 38: Thyrocare's revenue break-up of service category by value

Services (by value) FY13 FY14 FY15 FY16

Thyroid (%) (B-2-B) 27 21 16 17

Non-Thyroid (%) (B-2-B) 32 32 33 30

Aerogram (%) (B-2-C) 41 47 51 53


Exhibit 39: Contribution of Thyroid tests by volume

FY13 FY14 FY15 FY16

No. of Thyroid Tests (m Unit) 9 11 14 15

Contribution in total Tests (%) 37 30 28 24


Fragmented business, low entry barriers

The pathology segment (56% of the industry) of diagnostic sector being highly

fragmented with many competitors, there is a risk of low entry barrier for new

players or risk of conversion of regional player into a national player (with PE

funding). The nature of high price-sensitive competition and requirement of

minimum capital to set up laboratories for basic tests are the key features in the

industry. The competitive scenario may intensify with entry of new players and spoil

the market and profitability of the organised players. Thyrocare are, however,

strategically focussed on expansion of the Aarogyam brand, which offers bouquet of

tests to B-2-C clients at a competitive price, which seems to be tough to be

replicated by small lab/players due to their comparatively lower volume business.

Thyrocare also offers high discount for basic tests to small/single-lab players

including small hospitals/health centres/nursing homes and gain stake in the 48%

market share of single-lab players.



Margins may come under pressure

While there are concerns on strong price competition from PE-funded new players,

we believe that Thyrocare’s USP of cost leadership provides large headroom to take

away competition on price front. Besides, high volume from network expansion and

high automation will ensure lowest costs of reagents and lower headcounts for

Thyrocare, which will lead to lowest employee expenditures among the organised

players. With focus on only through franchise partnership, the company has low

overhead expenditures.



Brief Business, Management, IPO profile

Business profile

Thyrocare Technologies is one of the leading pan-India diagnostic chains which

conduct an array of in-vitro diagnostic tests and profiles of tests that centre on early

detection and management of disorders and diseases. The company offered 198

tests and 59 profiles of tests to detect a number of disorders, including thyroid

disorders, growth disorders, metabolism disorders, auto-immunity, diabetes,

anaemia, cardiovascular disorders, infertility and various infectious diseases.

Thyrocare’s profiles of tests include 16 profiles of tests administered under

“Aarogyam” brand, which offers patients a suite of wellness and preventive health

care tests.

Exhibit 40: Brands, services offered by Thyrocare across the country

Brand Name Type of Services Offered Examples of Tests Offered Brand Logo

Thyrocare Diagnostic Testing Thyroid Testing and Non-thyroid tests based on

different types of testing

Aarogyam Wellness & preventive care

Liver, cholesterol, kidney, thyroid, iron deficiency, testosterone, cardiac pancreas, electrolytes, arthritis, serum ferritin, folic acid and toxic

elements tests and profiles of tests

Diabetic Screens

Complete Hemogram

Vitamin Profile

NHL Cancer Monitoring Full body and brain scans

WHATERS Water Testing Physical & chemical, elements, microbiology,

pesticide and volatile organic compound testing

Sugar Scan Testing of Blood glucose levels Sugar scan blood glucose monitor




Thyrocare primarily operates testing services through a fully-automated CPL and has

recently expanded operations to include a network of RPLs. Since the opening of

RPLs in 2015, the company has seen an increase in the volume of tests that have

been conducted from a daily average of approximately 95,610 in Fiscal 2014 to

approximately 200,000 in FY16. Thyrocare conducts PET-CT scan business through a

wholly-owned subsidiary, NHL (Nueclear Healthcare), which operates a network of

molecular imaging centres in New Delhi, Navi Mumbai and Hyderabad, focused on

early and effective cancer monitoring.

Exhibit 41: Key milestones achieved by Thyrocare

Year Particulars

2000 Incorporation of 'TTL' and commencement of operations

2001 Received ISO 9001 certification

Acquisition of TDPL and TBPL

2005 Received NABL accreditation

2006 Issued fully convertible debentures to BCCL of Rs250m

2007 Received accreditation from College of American Pathologists

2010

Issued compulsory convertible debentures of Rs250m to Agalia

Agalia also acquired equity shares of Rs1,250m from Promoters & others

Launched wellness packages under brand 'Aarogyam'

2011 Migrated to 'total laboratory automation system' installed by Siemens

2012 NVP acquired Equity shares of Rs1,200m from certain entities

2013

EIF acquired equity shares from Agalia

Commenced operations at PET-CT centres at Navi Mumbai and conducted 1000 scans in the first year of operation

2014

Installed India's first and longest track automation system from Siemens Limited

Commissioned operations in Cyclotron facility in Navi Mumbai

Commenced operations at PET-CT centres at New Delhi and Hyderabad and conducted 1000 scans in the first year of operation

2015

Commenced RPLs in Delhi, Coimbatore, Hyderabad, Kolkata

Acquired equipments for testing of water samples and commenced operations under brand 'Whaters'

Completed 10,000 scans in PET-CT at New Delhi and Mumbai each, and over 1,000 scans in Hyderabad from the date of inception




Operating infrastructure profile

Pathology

Thyrocare’s CPL is located in Navi Mumbai and equipped with largest automated

pathology systems APTIO, diagnostic testing instruments and processes from leading

international and Indian healthcare brands. The CPL is fully automated and driven by

a bar-coded and bi-directionally-interfaced system and a LIS. The CPL meets

international standards of quality as it received global accreditations from CAP, the

NABTCL and the ISO.

Thyrocare commenced setting up RPLs since CY14 and opened four RPLs (New Delhi

Coimbatore, Hyderabad, and Kolkata) in CY15, opened one RPL in CY16 in Bhopal

and another one in Bangalore in CY17. The RPLs process samples sourced from their

respective catchment area. The pathology services offered at the RPLs process

primarily routine tests conducive to high volume testing, including thyroid tests,

profiles of tests offered under the Aarogyam brand, liver and kidney function tests.

Such samples are sent to the RPLs if they are collected near to an RPL, such that

directing the sample to the RPL requires less time and transportation costs than

directing the sample to the CPL. With routing these tests to nearby RPLs, the

resources of the CPL can be utilised to process the additional samples generated by

its pan-India network of ASPs that are not proximate to a RPL. In order to further

expand the offering of tests, Thyrocare is now using the CPL to test new technology

and develop innovative testing. For example, the company explored 52 new

specialized testing techniques in CY15, such as cytogenetic testing, water testing and

the development of new tests based on mass spectrometry.

Exhibit 42: Hub locations of Authorised service providers (ASPs)




Network of franchise partners

Thyrocare collects samples through a pan-India network of ASPs, comprising of TAGs

(Thyro aggregators, mainly for B-2-B) and TSPs (Thyro service providers, mainly for B-

2-C), which operate under franchise agreements. Currently, the company has a

network of 1,041 ASPs, comprising of 687 TAGs and 354 TSPs spread across 466

cities, 29 states and one union territory. The widespread network of ASPs has

enabled the reach of the CPL and RPLs, thereby, providing access to a larger

customer base. ASPs collect samples from local hospitals, standalone laboratories,

diagnostic centres, nursing homes, clinics and doctors. Besides, TSPs are also

authorized to draw samples directly from a) patients referred to them by doctors, b)

patients that are procured by them, c) referred to them by Thyrocare, d) direct sales

associates (DSAs) and e) from patients’ homes, as part of the company’s home

collection services. ASPs also receive samples through the company’s OLC network,

which allows persons or organizations with sample collection capabilities to

outsource the processing of specimens/samples by placing an order at

https://www.thyrocare.com/wellness/ and delivering samples to the nearest ASPs.

The ASPs either deliver samples directly to one of the RPLs or to one of the

company’s 22 hub locations (in case, the specimens are to be processed at the CPL),

where samples are aggregated and transported directly to the CPL.

Exhibit 43: India map of Franchisee partners




PET-CT Imaging

Through NHL, Thyrocare is developing an expanding network of molecular imaging

centres, which focuses primarily on early and effective cancer monitoring. Each of

the imaging centres use PET-CT scanners to assist in cancer diagnosis, staging,

monitoring of treatment and efficacy and evaluation of disease recurrence. The

company currently has six operating PET-CT scanners in four imaging centres: two in

Navi Mumbai, two in New Delhi and one each in Hyderabad and Surat, respectively.

The management intends to open imaging centres in Baroda, Nashik, Pune, Kolkata,

Raipur, Borivili, Dadar and Coimbatore. NHL also owns and operates a medical

cyclotron unit in Navi Mumbai, which produces the radioactive bio-marker FDG

required for PET-CT scanning. Thyrocare acquired NHL as a wholly-owned subsidiary

in March 2015 on a going concern basis, pursuant to a Slump Sale Agreement and

addendum slump sale letter agreement dated September 29, 2015. The cyclotron

unit generates FDG used by our PET-CT scanners in Navi Mumbai and New Delhi as

well by third-party PET-CT imaging centres. Currently, 60% of the production of FDGs

is used for owned/franchise PET-CT centres, while 40% are sold to third-party. The

Hyderabad PET-CT centre currently meets the FDG requirements from third parties

in Hyderabad in order to optimize cost and time efficiencies.

Exhibit 44: Operational, proposed NHL facilities




Niche diagnostic expansion: Water testing, Sugar scan

Post developing a platform for affordable diagnostic services, Thyrocare is now

poised to further develop services and enhance multiple automated test offerings.

For example, Thyrocare has acquired equipment for testing of water samples and is

operating such equipments under the brand “WHATERS”. The water testing division

currently conducts the following tests: physical and chemical testing, elements

testing, microbiology testing, pesticide testing and volatile organic compounds

testing. The company also offers niche/specialised offer through its new brand

“Sugar Scan”, where it offers a sugar scan of blood glucose, which is one of the

simplest ways for patients to instantly determine their blood glucose levels at an

affordable cost. We are also in the process of setting up TMC, which is intended to

be a nation-wide branded metabolic clinic for individuals with chronic illnesses or

who plan to undergo a healthcare procedure.

Key Management: Professional background

Dr. A. Velumani is the Chairman and Managing Director of Thyrocare. He is a first generation entrepreneur with more than 19 years

experience in the diagnostic industry. Previously he was with Bhabha Atomic Research Centre, for over 12 years, as a scientific officer.

Mr. A. Sundararaju is a Director and Chief Financial Officer of Thyrocare, responsible for the finance, legal, administrative and

franchisee departments for the company. He has 18 years of experience in the field of finance, legal and administration.

Dr. Caesar Sengupta is the Vice President-Operation of Thyrocare, responsible for overall quality management system in the

laboratory and liaison with external parties such as certification body and consultants. Previously he was with TDPL, Education and

Research Institutes and has 18 years of experience as a medical microbiologist. He has been with the company since January 1, 2006.

Exhibit 45: Management Organisation


CEO

General Manager Business

Development

General Manager

Laboratory

Deputy GM

RPL

Deputy GM

Lab Processing

General Manager

Infrastructure

Sr. Officer

IT

CFO

Head Legal & Secertarial

General Manager Finance



Issue detail of Thyrocare’s IPO in April 2016

Exhibit 46: Detail of Initial public offer (IPO)—100% offer for sale

Shares offered (no. of shares) 10.74m

Post issue equity (no. of shares) 53.72m

Price Band Rs 420-446

Amount proposed to be raised Rs 4.5-4.8bn

Pre-issue promoter holding 64.96%

Post-issue promoter holding 63.96%

Market cap post issue Rs 22.5-23.9bn


Exhibit 47: Pre issue - Capital Structure

Category of Investors No. of Shares % of holding

Promoters and Promoter group 34,898,981 64.96

Dr. A Velumani 14,213,348 26.46

Thyrocare Properties 5,217,800 9.71

Thyrocare Publications 6,534,500 12.16

A. Velumani HUF 1,091,828 2.03

A. Sundararaju HUF 2,596,540 4.83

Anand Velumani 810,400 1.51

Others 4,434,565 8.26

Public Shareholding 18,689,952 34.79

Agalia 11,294,540 21.02

NVP 5,064,880 9.43

Samara Capital Partners Fund 1,089,052 2.03

Others 1,241,480 2.31

Employee Welfare Trust 134,600 0.25

TOTAL 53,723,533 100


Exhibit 48: Post issue - Capital Structure

Post issue - Capital Structure No. of Shares % of holding

Promoters and Promoter group 34,361,745 63.97

Dr. A Velumani 14,213,348 26.46

Thyrocare Properties 5,217,800 9.71

Thyrocare Publications 6,534,500 12.16

A. Velumani HUF 911,828 1.7

A. Sundararaju HUF 2,416,540 4.5

Anand Velumani 633,164 1.18

Others 4,434,565 8.26

Public Shareholding 19,227,188 35.79

Agalia 1,087,068 2.02

NVP 5,064,880 9.43

Samara Capital Partners Fund 1,089,052 2.03

Others 11,986,188 22.31

Employee Welfare Trust 134,600 0.25

TOTAL 53,723,533 100




Income Statement (Rs m)

Y/e March 2015 2016 2017E 2018E

Net Revenue 1,746 2,312 3,075 4,076

Raw Material Expenses 558 704 874 1,156

Gross Profit 1,188 1,609 2,201 2,920

Employee Cost 175 257 323 432

Other Expenses 373 514 641 840

EBITDA 640 838 1,238 1,649

Depr. & Amortization 129 182 214 250

Net Interest — — — —

Other Income 165 163 180 201

Profit before Tax 676 818 1,204 1,600

Total Tax 236 300 445 576

Profit after Tax 440 518 758 1,024

Ex-Od items / Min. Int. (12) — — —

Adj. PAT 452 518 758 1,024

Avg. Shares O/S (m) 50.5 53.7 53.7 53.7

EPS (Rs.) 8.9 9.6 14.1 19.1

Cash Flow Abstract (Rs m)

Y/e March 2015 2016 2017E 2018E

C/F from Operations 345 678 889 1,220

C/F from Investing (180) (177) (353) (403)

C/F from Financing (228) (450) (488) (488)

Inc. / Dec. in Cash (63) 52 48 329

Opening Cash 114 51 103 —

Closing Cash 51 102 151 329

FCFF (513) 634 664 880

FCFE (746) 670 671 887

Key Financial Metrics

Y/e March 2015 2016 2017E 2018E

Growth

Revenue (%) 16.4 32.4 33.0 32.6

EBITDA (%) (6.8) 30.8 47.7 33.2

PAT (%) (2.0) 14.6 46.4 35.0

EPS (%) (78.8) 7.8 46.4 35.0

Profitability

EBITDA Margin (%) 36.7 36.2 40.3 40.5

PAT Margin (%) 25.9 22.4 24.7 25.1

RoCE (%) 15.7 14.8 19.7 25.0

RoE (%) 18.7 16.1 20.4 25.9

Balance Sheet

Net Debt : Equity — — — (0.1)

Net Wrkng Cap. (days) 53 57 57 57

Valuation

PER (x) 66.1 61.4 41.9 31.0

P / B (x) 10.8 8.7 8.4 7.7

EV / EBITDA (x) 46.7 37.9 25.6 19.1

EV / Sales (x) 17.1 13.7 10.3 7.7

Earnings Quality

Eff. Tax Rate 34.9 36.7 37.0 36.0

Other Inc / PBT 24.3 19.9 15.0 12.5

Eff. Depr. Rate (%) 6.7 8.6 8.9 9.0

FCFE / PAT (165.1) 129.4 88.4 86.6

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2015 2016 2017E 2018E

Shareholder's Funds 2,764 3,656 3,765 4,138

Total Debt 32 68 75 83

Other Liabilities 424 58 61 64

Total Liabilities 3,219 3,783 3,901 4,285

Net Fixed Assets 1,562 1,536 1,633 1,739

Goodwill 453 1,069 1,069 1,069

Investments 843 916 1,008 1,109

Net Current Assets 191 114 170 393

Cash & Equivalents 51 103 151 329

Other Current Assets 213 325 350 414

Current Liabilities 73 314 331 351

Other Assets 170 148 21 (23)

Total Assets 3,219 3,783 3,901 4,285

Quarterly Financials (Rs m)

Y/e March Q3FY16 Q4FY16 Q1FY17 Q2FY17

Net Revenue 540 622 668 762

EBITDA 199 217 248 280

% of revenue 36.8 35.0 37.1 36.7

Depr. & Amortization 46 50 41 43

Net Interest — — — —

Other Income 32 51 48 69

Profit before Tax 184 218 255 305

Total Tax 76 79 91 103

Profit after Tax 108 139 164 202

Adj. PAT 108 139 164 202

Key Operating Metrics

Y/e March 2015 2016 2017E 2018E

Diagnostic Testing Services 1,598 2,048 2,626 3,439

Imaging Services 36 138 305 476

Others 112 127 144 161

Source: Company Data, PL Research.



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0.0%0%

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BUY Accumulate Reduce Sell

% o

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BUY : Over 15% Outperformance to Sensex over 12-months

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