Thyrocare: There is a possibility of doing a Jio in the diagnostic industry

Update on the Indian Equity Market:

In a much volatile trading session, markets ended the three-day losing streak as Nifty closed 0.5% up at 11,910. The weekly F&O expiry likely fuelled the volatility in the market. Among the sectoral indices, 9 out of 11 indices traded higher with IT (1.2%), REALTY (0.9%) and FIN SERVICES (0.7%) leading the index while METAL (-0.3%) and PSU BANK (-0.1%) were the only losers. Within the index stocks, GAIL (5.3%), ZEEL (4.9%) and NTPC (2.9%) topped the chart whereas YESBANK (-13.9%), HEROMOTO (-1.9%) and VEDL (-1.3%) offset the gains.

Key takeaways from the interview of Dr A. Velumani, Chairman and MD-CEO, Thyrocare Technologies dated 11^th December 2019 published in CNBC TV18:

• In the last few days, reports indicate that Reliance Industries is set to enter the diagnostics business through its subsidiary Reliance Life Sciences. On this development, Dr Velumani commented that it was an expected move. He said that initially there was a monopoly of BSNL and MTNL, and then came Airtel. There is a possibility of doing a Jio in the diagnostic industry and he is confident that if it gets executed well, it will be very powerful.
• The industry is already very competitive. The company was able to grow at a CAGR of 40-50% for the first 10 years. He mentioned that the growth was coming because the business model was new to industry at that time. In the current scenario, getting 20% YoY growth itself is very challenging for company. He added that this is happening because the market has understood what works and how it can be made to work.
• He pointed out to the opportunities to disrupt the diagnostics market. He was tempted to disrupt the market in the past. But, in an investor-dependent company, in a listed company, every decision needs a discussion and after discussions there are no decisions.
• He said that he is happy to experiment new things until EBITDA of company goes below that of others in the market.
• About the growth estimates in the Pathology segment, he said that the company delivered growth of 13% in Q1 as well as Q2 of FY20.He expects the FY20E to end somewhere in the 13-14% range which he considered as a good growth in the current market situation.
•  On being asked about possibility of consolidation in the industry, he said that this industry is brand-driven. Whether it’s a small, local or national brand. Acquiring and merging the brands result in the loss of one brand. Buying a costly brand by paying a premium and killing that brand is something that is not wise. There are some challenges in doing it. He made a case for big players. He is of the opinion that big players can do many things because this industry has a huge potential. It is large and highly unorganized.

Consensus Estimate (Source: market screener website)

• The closing price of Thyrocare was ₹ 533/- as of 11-December-19. It traded at 23x/ 21x/ 18x the consensus estimate EPS of ₹ 23.1/ 25.4/ 29.8 for FY20E/21E/22E respectively.
• Consensus target price of ₹ 636/- implies a PE multiple of 21x on FY22E EPS of ₹ 29.8.