Testing recovery gains factored in Thyrocare Technologies stock

Margin pressures and valuations would limit major upsides

The stock of Thyrocare Technologies gained nearly 4 per cent in early trade (1 per cent higher at close) after the company indicated a recovery in non-Covid business in the quarter. Recovery in overall testing volumes is expected to help the company post a 34 per cent year-on-year (YoY) growth in revenues in Q3.

The company indicated that the revival in business coupled with aggressive marketing to promote preventive health care packages across key markets have helped increase sales. The growth is slightly lower than analysts’ expectations, which had pegged it around 40 per cent.

While volumes would still be largely Covid-led, the share of the Covid business to revenues is expected to reduce from 42 per cent in Q1 to around 26 per cent in Q3, due to reduction in prices for the tests. Margins in the quarter, according to analysts at ICICI Securities, will be lower as the non-Covid segment, which is largely business-to-business, is yet to recover completely and some of the cost savings during the lockdown starts to reverse.

Also the business mix within Covid tests will have to lean more towards RT-PCR rather than rapid antigen tests, which is currently the case for margins to move up. Operating profit margins for the quarter are expected to be 100-200 basis points lower YoY and sequentially at about 39 per cent.

In addition to Covid business, the growth metrics for the core business will be a key monitorable in the quarter. Most analysts expect this to grow at 10 per cent.

One key trigger for the sector is lower competitive intensity. In addition to the unorganised players, analysts believe any reduction in aggression by PE-backed players will help diagnostic chains such as Thyrocare to expand and gain market share.

While the competition will need to be monitored, analysts believe the stock may not provide sharp returns after the 83 per cent rally over the past year. The stock has been rerated from 26 times one-year forward earnings estimates to over 40 times now, and given the lack of new triggers, it will be difficult to meet expectations once the Covid-19 driven growth wears off in a couple of quarters.