 "Diagnostics companies' premium might sustain")
Diagnostic major Thyrocare Technologies, listed at a 49 per cent premium over its initial public offering (IPO) price of Rs 446 last Monday, is trading near Rs 630. The trend is similar to the one seen with Dr Lal PathLabs, which listed a few months back. Compared to the IPO price of Rs 550, Dr Lal gained 50 per cent on the listing day and closed on Rs 955 on Monday. Notably, the IPOs of both companies were already at premium valuations, and after listing the premiums have only spiked further. At IPO price, Dr Lal and Thyrocare were priced at 26-27 times the FY18 earnings, whereas they now trade at 43 times and 39 times the FY18 estimated earnings, respectively.
Increasing awareness, preventive treatment, ability to pay, rising share of chronic diseases and preference for evidence-based treatments, all remain in favour of high growth rates for organised players. The high-end testing is where their forte lies and is also likely to keep their margins elevated, say analysts. Manoj Bidani, chief financial officer of Dr Lal, is targeting Ebitda (earnings before interest, taxes, depreciation and amortisation) margins of 25 per cent, while analysts at Kotak Institutional Equities say margins will remain stable at 25 per cent, despite the expansions being undertaken.
Their business models, too, support the margins. Expansion through the franchise route helps in controlling overhead costs. With core business remaining asset-light, balance sheet and cash flows remain robust, reflecting positively on return ratios. IIFL estimates Thyrocare’s return on equity (RoE) to increase from 18.2 per cent in FY16 to 19.3 per cent in FY18. Analysts at Citi, referring to Dr Lal, say 31 per cent RoE versus 16/11 per cent for Global Diagnostics/Asian Hospitals should drive premium multiples.
With such attractive prospects, the level of competitive intensity, though, would be interesting to see.
Increasing awareness, preventive treatment, ability to pay, rising share of chronic diseases and preference for evidence-based treatments, all remain in favour of high growth rates for organised players. The high-end testing is where their forte lies and is also likely to keep their margins elevated, say analysts. Manoj Bidani, chief financial officer of Dr Lal, is targeting Ebitda (earnings before interest, taxes, depreciation and amortisation) margins of 25 per cent, while analysts at Kotak Institutional Equities say margins will remain stable at 25 per cent, despite the expansions being undertaken.
Their business models, too, support the margins. Expansion through the franchise route helps in controlling overhead costs. With core business remaining asset-light, balance sheet and cash flows remain robust, reflecting positively on return ratios. IIFL estimates Thyrocare’s return on equity (RoE) to increase from 18.2 per cent in FY16 to 19.3 per cent in FY18. Analysts at Citi, referring to Dr Lal, say 31 per cent RoE versus 16/11 per cent for Global Diagnostics/Asian Hospitals should drive premium multiples.
With such attractive prospects, the level of competitive intensity, though, would be interesting to see.