Friday, 29 April 2016

Thyrocare IPO: a quick Diagnosis

Thyrocare IPO: Today is the last day for the IPO, so just made a quick view. I am not much in favor of investing in an IPO as usually they are overvalued with regard to their present financials and growth. Like mostly they are running at high PE ratios like in this case PE ratio is around 45. So if there are growth options then one can invest in it but it will fall if it fails to perform accordingly in the future. This is for slight long term period, for listing gains there is no basis. It  can go anywhere based on market view, short term hype, analysts’ views, any pumping news (like in the case of Quick Heal).

Also too much emphasis is put on the financial ratios like net profit margins, return over assets, pe ratio etc. But these are all past and thus provide only a point of reference, whereas generally an IPO is for future growth. Financial data can only be used relative to the business scenario like Kodak was the giant in photography and used to have scintillating financial ratios but It failed to comprehend the digital revolution and just vanished from the scene. Everything good about its financial was only related to past so everything bad in financials is also for past. The thing to look is to the future, whether one can improve upon it and this future analysis is the most decisive factor in the performance of an investment.

Thyrocare is into diagnostic business which is largely unorganized in india as diagnostics labs are everywhere in streets. So only thing which is worth studying in this case is whether Thyrocare will be able to gain market share from these unorganized players. And this is where I feel Thyrocare is very strong due to its business model which provides cheap diagnostic solutions coupled with high quality standards. It is having one centralized lab in Vashi Maharashtra which is capable of doing around 2 lac tests everyday (this is huge). So thyrocare operates on a unique model where its franchisee collects the samples and send the same to centralized lab everyday via aircargo (That’s why Thyrocare is primarily in cities with Air travel) where tests are conducted and reports are made even at nights and then final reports are sent via email and post. All this concludes within 24 to 48 hours!! This is electric. You make an online appointment for test and shortly their franchisee visits your home and collects the blood samples. This is so good. They have superior logistics and IT capabilities to handle this huge volume of data.

Then comes the costs, I have checked that Thyrocare charge something like Rs. 1600 for some tests which cost around Rs. 5000 if done in a local lab!! I think due to this low cost model and very high tech logistic abilities, it can disrupt the unorganized sector in a big way. Its turnover is just 200 cr…if I take all the organized players like Dr. lal path and SRL…they may be handling over 2000 cr to 3000 cr turnover whereas current market is around 20000 cr which is going to grow much bigger due to spending on healthcare by Indians and Govt. we are way underspent on healthcare. So future scale is huge and it has all the strengths to run up to last mile.

I have some reports where they cite the low return over assets of around 13% with 26% of Dr Lal path. I think these are not required and useless….there can be reasons for this like underutilization of centralized labs capacity, Thyrocare share around 50-60% of a lead with franchisee owners whereas others just 30%. Although I could not check the reasons for this but future growth will take care of it.

Promoters are good with high credentials. So I may like to put my money into it for long term. Regarding listing gains there are 70% chances of gains but if it falls then time will be for adding more of it. We need to have a strategy for both because it is running at a high pe ratio of 45 although its business model supports this high valuation. . I couldn’t apply for Quick Heal but when it falls to 190…I picked it and it is just doing what it has planned as it is spending big on brand building on media.

I like these healthcare stocks like Narayana Hrudalya which are providing high quality healthcare solutions at a fraction of cost of premium service providers and of Global counterparts. I think these can bring huge foreign earnings much higher than IT if our Government has the vision to look into this sector. The vision is simple that we need to focus on our strengths and utilize those for establishing a place for us at Global arena…..and there is no need for a diagnostic test for it.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)