Thyrocare IPO Review: Test report is in – Subscribe

Thyrocare IPO opens for subscription on 27 April and will close on 29 April. In its red herring prospectus, the company said the issue will involve sale of 10.7 million (1.07 crore) shares through the public offer. The issue will be managed by JM Financial Institutional Securities Limited, Edelweiss Financial Services Limited, and ICICI Securities Limited while Link Intime India Private Limited will be the registrar.

Price band of the IPO has been fixed in the range of INR420 to INR446 per share and investors can place bids in multiples of 33 shares. Accordingly, the IPO size is between INR451.3 crore and INR479.2 crore. Given the tremendous success of Dr Lal Pathlabs, investors are looking forward for Thyrocare with great interest. These are the situations where past success may set precedence for high valuations in future. As a result, we have trained our eyes to look for these signs in our review.

Read Also: Thyrocare, Ujjivan get IPO approvals from SEBI

Thyrocare’s equity shares are proposed to be listed on BSE and NSE and listing is expected on 9 May. Here are some important details about the IPO before we delve deeper in the analysis.

Thyrocare IPO details

Thyrocare IPO structure

Thyrocare IPO has one of the simplest issue structures in recent times. There is no issue of fresh shares and all the 1.07 crore shares will be offered by existing shareholders through offer for sale (OFS) route. This is good for us as it makes calculations simpler and life easier but generally speaking, but not so good for IPO investors. Heavy cashing out by insiders is not a positive sign for new investors and mispricing can wreak havoc, as we have seen in the listing of UFO Moviez. Nevertheless, it remains a popular IPO route and has seen good outcomes in the case of Syngene International, Dr Lal Path labs, Alkem Laboratories, and Narayana Hrudayalaya when the pricing has been right.

Coming back to the point, selling shareholders in Thyrocare IPO are Agalia, A Velumani HUF, A Sundararaju HUF, and Anand Velumani. Agalia is the investment vehicle of CX Partners, and is the biggest shareholder after founder A Velumani. The IPO is primarily undertaken to offer an exit to CX Partners as A Sundararaju HUF and A Velumani HUF will sell only 180,000 shares while another 177,236 shares will be offered by A Velumani’s son Anand Velumani. Following the IPO, CX Partner’s stake in the company will get reduced to just 10.87 lakh shares.

It is important to highlight that apart from CX Partners, Norwest Venture Partners (NVP) and Samara Capital also hold important equity positions in the company – 9.4% and 2% respectively. However, both companies will not be participating in the IPO. This is something we like. 

Read Also: Thyrocare Technologies IPO price band fixed at INR420-446

Thyrocare IPO: Business background

Thyrocare is one of the leading pan-India diagnostic chains and conducts an array of medical diagnostic tests and profiles of tests that center on early detection and management of disorders and diseases. Established on 28 January 2000 in Mumbai by scientist turned entrepreneur A Velumani, Thyrocare is now a popular name.

As of February 2016, 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, anemia, cardiovascular disorders, infertility and various infectious diseases. Its profiles of tests include 16 profiles of tests administered under the “Aarogyam” brand, which offers patients a suite of wellness and preventive health care tests.

According to the latest count as of nine months ended December 2015, Thyrocare performed 159,350 tests daily through its network that comprises presence in more than 2,000 cities and towns in India and internationally. Through its wholly owned subsidiary, Nueclear Healthcare Limited, Thyrocare operates a network of molecular imaging centers in New Delhi, Navi Mumbai and Hyderabad, focused on early and effective cancer monitoring.

How do financials look?

Thyrocare Technologies is one of the most consistent diagnostics firms in India in terms of financial performance. As seen in the table below, the company has achieved consistent top line growth and profits have also increased in each of the last four years except in FY2014. Although profit margins of Thyrocare have come down after peaking in FY2013 amid increasing competition, absolute profits are still very attractive.

Although these are standalone results, consolidated figures – available only for FY2015 – are not very different. On a consolidated basis, the company earned revenue of INR190.3 crore while its profits stood at INR44.4 crore in FY2015. As the company has been increasing its revenues, it has already posted a topline of INR180.4 crore in the nine months ended December 2015. Similarly, profits jumped to INR40 crore in the period, Thyrocare said in its RHP.

Source: Thyrocare’s Red Herring Prospectus  

Should you invest?

Thyrocare is India’s second diagnostics firm to go public in recent months following a successful listing of Dr Lal PathLabs. Since Thyrocare is a consumer-centric company, it has a strong brand value, just like Dr Lal PathLabs. The presence of private equity investors NVP and Samara Capital sweetens the deal and the healthy top line and bottom line is the icing on the cake.

Executive compensation is an area where we regularly raise red flags given the unjustified high figures we come across in IPO documents (see here and here). We have got used to see management payout figures in crores and thus, were pleasantly surprised to see that A Velumani took INR48 lakh as gross salary in FY2015. Although these figures have gone up in the latest FY and some may find INR48 lakh also high but to offer a perspective, Power Mech Project’s S Kishore Babu was paid INR5.6 crore in FY2014 while Precision Camshafts’ Yatin Shah paid himself a remuneration of INR10.57 crore in FY 2015, in addition to INR5.8 crore in commission.

However, the most important detail is pricing and this is another area where Thyrocare scores. Thyrocare’s earnings per share (EPS) stood at INR8.98 in FY2015 and going by the nine month results, it is on track to post EPS of around INR12 for FY2016. This means the company is asking for a PE valuation between 35 and 37.2 times. This is certainly not a fire sale but attractive for a high growth company like Thyrocare which will probably continue to grow for several coming years.

Since Thyrocare has a listed peer in Dr Lal Path Labs, it will be benchmarked against its bigger competitor. In its IPO, Dr Lal Path Labs priced the shares to reflect a PE range of 46.9 – 47.8 on the basis of FY2015 earnings. This was high in our view but the market rewarded the company and Dr Lal Path Labs currently trades at a PE ratio of nearly 69. Now this is not an apples to apples comparison as Thyrocare’s PE range is based on FY2016 estimates but we would like to iterate that Thyrocare’s nine month results are already out and thus, FY2016 results have a high degree of earnings visibility.

Another important point is that Dr Lal Path Labs has already set precedence for valuing diagnostics chains. If the market is willing to offer a PE valuation of 69 to Dr Lal Path Labs, it is only logical that Thyrocare also attracts same valuation as long as the fundamentals of both companies are same. As we mentioned earlier, Thyrocare’s profit margins have come down but are still in the range of 20-25%. This range is up considerably from the 14.3% Dr Lal Path Labs earned in FY2015. Although Thyrocare’s return on net worth (RoNW) is less at 16.2% when compared to Dr Lal Path Labs’ 27.8%, it is compensated by better quality of margins. Even in the case of a discounted valuation of 50 PE for Thyrocare, its fair value translates to close to INR600 per share. This reflects a substantial premium over the upper price band of INR446 per share.

In total, there are lots of things to like in Thyrocare IPO while we have really struggled to find negatives. However, we would like to know what you think about Thyrocare IPO so feel free to participate in the discussion.