Diagnostic tests suggest this stock has 45% upside potential

NEW DELHI: Shares of Thyrocare Technologies have had an ordinary year in 2016, with the stock gaining a mere 15 per cent, compared with a 27 per cent surge in the BSE500 index in the same period.

Going by what brokerages say, this stock can rally up to 45 per cent in the year to come.

The company reported a 36 per cent YoY jump in net profit at Rs 190 crore for March quarter, on a 35 per cent YoY jump in net sales at Rs 877 crore. Pat margins for the quarter rose to 21.6 per cent from 21.4 per cent a year ago.

Chairman, CEO & MD A Velumani compared his industry to the Arabian Sea, where “nobody is catching my fish, everybody is catching their fish.”

In an interview with ETNow, Velumani said the diagnostic market was big and growing fast and there was no competition, but there remains pricing pressure.

“The pricing pressure will challenge margins, but growth is going to support. I am not going to change the model till my Ebitda levels are challenged and my growth is challenged,” Velumani said.

Many brokerages have a positive view on the stock.

Prabhudas Lilladher noted that despite the impact of demonetisation till mid-February, the company improved its pathology business in the fourth quarter. The brokerage has a target price of Rs 1,067 on the stock, suggesting a 45 per cent upside potential.

“The stock trades at a PER of 38 times and 28 timers FY18E and FY19E, respectively. We expect it to achieve 31 per cent revenue growth and 40 per cent Ebitda margin in FY18E. With strong free cash flow and guidance for 25 per cent (+/- 2 per cent) sustainable annual growth and 40 per cent Ebitda margin, we expect valuations of diagnostic companies to remain at a premium,” the brokerage said.

Brokerage JM Financial said the company’s stable margins in fourth quarter were driven by 36 per cent growth in the diagnostic testing business, but the PET-CT imaging business remained weaker than expected at 4 per cent on a sequential basis.

“Given Thyrocare’s cost leadership and strengthening brand position, we expect it to remain fairly insulated from increasing competition and prospective price control measures. We expect an uninterrupted 24-25 per cent topline growth trajectory over the medium term, supported by increasing penetration and growing contribution from the lucrative preventive healthcare segment,” it said.

The brokerage has a March 2018 target of Rs 880 for the stock, promising 20 per cent upside potential.

Edelweiss Securities expects the company to report revenue and Ebitda growth of 25 per cent and 27 per cent (CAGR), respectively, over five years to FY20, driven by preventive healthcare.

But the brokerage is also a bit cautious.

“Valuations of diagnostics players are factoring in high terminal growth rates of 9-10 per cent, which we believe are at risk given the competition, impending quality regulations and price controls. We maintain ‘buy/SP’ rating with a target price of Rs 740,” the brokerage said. This brokerage’s target price for the stock is one per cent higher than the prevailing market price.