Thyrocare Technologies: Healthy recovery in base business

Thyrocare Technologies’ (Thyrocare) Q1FY23 performance was in line with our estimates on all fronts. Non-Covid pathology revenue improved 8.7% QoQ driven by 19.1% QoQ growth in volume. Covid sales contribution sharply declined to 2.1% of total revenue vs 38.6%/12.3% in Q1FY22/Q4FY22. Total revenue fell 22.4% YoY to Rs 1.3bn as expected. EBITDA margin contracted 1,520bps/70bps YoY/QoQ to 28.1% (I-Sec: 28.1%). Sharp fall in margins was due to aggressive expansion, discounting and decline in the high-margin Covid sales. While margins in the near term are likely to remain under pressure with 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 the company, especially with integration of API Holdings. Maintain BUY with a revised DCF-based target price of Rs 960/share (earlier: Rs 980).

Business review: Non-Covid business rose 8.7% QoQ to Rs 1.2bn driven by volume growth of 19.1% while realisation declined ~9% as was guided by the company. Non-Covid revenue CAGR over 3 years stands at 5.2% on the back of 6.3% volume growth. 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 contribution to non-Covid business stood at ~13% in Q1FY23 vs ~8% in Q4FY22. Covid and allied revenues slumped 96% / 83% YoY / QoQ. Imaging business revenue also reported strong growth of 58.6% / 18.1% YoY / QoQ with normalising footfalls. Margins contracted 1,520bps / 70bps YoY / QoQ to 28.1%. This was due to: 1) decline in high-margin Covid opportunities, 2) aggressive price discounts offered on packages 3) increased employee cost to support growth, and 4) increase in overall fixed costs to expand the network throughout India.

Concall highlights: 1) Expansion plan by FY23-end envisages addition of two regional labs taking the total to 24, adding 8 satellite labs and increasing reach from 3,500 PIN codes to 5,000; 2) working on lifestyle packages of skin care, hair care, smoking, cancer and genomic testing in tandem with doctors; 3) increasing NABL-accredited labs from 4 to 16 by end of FY23, which will cover ~90% of volumes.

Outlook: On the high base of FY22 (which benefited from Covid-related tests), we estimate revenues to decline at a CAGR of 2.6% over FY22-FY24E. Aggressive expansion and discounting in the packages would pressurise EBITDA margin, which we expect to drop 780bps over the same time period. We estimate volume to grow over the longer term due to integration with API Holdings and aggressive growth strategy.

Valuations and risks: We maintain our revenue estimates for FY23E, but cut EBITDA by 16% due to margin pressures. We have raised FY24E forecasts for revenue/EBTIDA by 3%/1% to factor-in higher non-covid sales. Remain optimistic on growth potential for the company, especially with integration of API Holdings. Maintain BUY with a revised DCF-based target price of Rs 960/share (earlier: Rs 980/share). Key downside risks: Slow recovery in the base business.

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