Thyrocare investors should exit given open offer discount to current price

Investors in Thyrocare should exit given the open offer discount to the current price

Investors in Thyrocare may not gain much by staying put in the company following the Rs 4,546-crore buyout of the promoter’s stake by API Holdings. The acquirer has also launched an open offer to buy 26 per cent stake in Thyrocare. 

“Given the current market price, which is at a 11 per cent premium to acquisition cost and open offer by API Holdings, investors in Thyrocare are better off selling their shares. The lack of clarity from the new management about the future course of action (offer for sale and delisting among others) is an additional risk for investors,” says Surajit Pal of Prabhudas Lilladher Research. 

Thyrocare has been the best-performing diagnostics play with returns of 186 per cent over the past year. 

The ongoing merger and acquisition (M&A) wave in the Rs 74,000-crore ($10-billion) diagnostic sector is expected to continue.  Ameera Shah, promoter and managing director, Metropolis Healthcare, believes the consolidation in the market will continue as will the company’s strategy of remaining aggressive. Metropolis acquired south India-based Hitech Diagnostics in the December quarter for Rs 620 crore. IIFL Research in a recent report said the Hitech deal demonstrates the company’s aggressive appetite for inorganic growth. 

The recent deals are also expected to increase the market share of larger players. Only 17 per cent of the diagnostic pie is controlled by the organised chains, while the major chunk is run by hospital-based labs (37 per cent) and unorganised standalone diagnostic centres (46 per cent). New investors are eyeing the attractive 12-15 per cent projected annual growth of the diagnostic sector. 

A spokesperson of India’s largest listed diagnostic player Dr Lal Pathlabs says the (Thyrocare) deal is a positive development and will further accelerate overall market growth of the Indian diagnostic sector.  

API Holdings’ co-founder and CEO Siddharth Shah said the company would look at expanding the footprint and network increasing the reach from the current 70 per cent to 100 per cent. While the company ended the March quarter with an operating profit margin of 35 per cent, Shah indicated that there could be short-term pressure, given the investments to expand the diagnostic business and improve customer experience. 

The investments by API Holdings to scale up its presence, the ongoing consolidation and the need to expand market share by all players could lead to pricing pressures in the sector, says Pal of Prabhudas Lilladher Research. 

There has been considerable M&A activity in the recent past and investor interest is high given the IPO-bound diagnostic companies, such as Vijaya Diagnostic Centre, southern India’s largest diagnostics chain, and Krsnaa Diagnostics, the same may not reflect in valuation multiples of other listed entities. An analyst at a domestic brokerage says: “Given average returns of about 50 per cent year to date, the sector has been a huge outperformer. Moreover, with a price-to-earnings ratio of 58-63 times FY23 earnings estimates for Metropolis and Dr Lal Pathlabs, valuations are already in the expensive zone and upsides are priced in.”

API Holdings is adopting an integrated health care model combining consultation, diagnostics, and treatment (delivery of medicines) on a single technology-enabled platform. Given the investments in technology to scale up volumes by API Holdings, cash-rich listed entities (Dr Lal, Metropolis) may be forced to spend more on improving their online presence to preserve market share. “This could impact their cash flows and return ratios in the near term,” says a pharma analyst.