Retain ‘hold’ on Thyrocare with revised TP of Rs 1,450

Thyrocare is gearing for next leg of growth and is aggressively looking to expand its network.

Acquisition: Charting a new course API Holdings, parent company of PharmEasy, has announced acquisition of 66.14% stake in Thyrocare from Dr. A Velumani and affiliates at Rs 1,300 per share aggregating to ~Rs 4.55bn. It will make an open offer for additional 26% stake at Rs 1,300 per share. The acquisition puts Thyrocare into a different league to its diagnostic peers as it gets access to traditional as well as online channels. The deal is likely to be mutually beneficial as Thyrocare, one of India’s leading diagnostic chains and PharmEasy’s online reach complement each other. We also believe that the acquisition opens a window for higher valuation framework given that it is the first company with an online pharmacy as its parent. Retain ‘HOLD’.

Deeper penetration to aid volume growth: Thyrocare is gearing for next leg of growth and is aggressively looking to expand its network. It is planning to take the network of 500 committed franchisees to 2,000 in FY22 and add 10 more Regional Reference Laboratories (RPLs) to improve reach and go closer to customers. We expect Thyrocare to post 25% non-covid volume CAGR over FY21-24E given: a) steady recovery in core business; b) opening of regional & zonal labs likely to minimise disruption and improve turnaround time; and c) expansion via branded franchisee centers.

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Online-offline collaboration: Win win for all: While Thyrocare is making efforts to bolster its brand visibility through opening of Regional & Zonal Reference Laboratories and branded collection centers, the acquisition is likely to accelerate the process. PharmEasy’s reach in 22,000+ pin codes across 1,200+ cities and increased online adoption beyond metro cities acts as a natural fit to Thyrocare that primarily relies on B2B channels to generate samples, which is now likely to accelerate beyond traditional markets. The online-offline collaboration will also result in amplifying current orders in the home service segment. Other benefits include data generation to enable personalised healthcare, easy & affordable customer acquisition and closer relationships to provide scale.
Outlook and valuations: Entering different league; Maintain ‘HOLD’ We revise up our target multiple to 45x Sep 2022E EPS (from 35x June 2022E EPS) given structural tailwind around unorganised to organised, better preventive care prospects, deeper penetration and wider reach. This yields TP of Rs 1,450 (earlier Rs 985). We continue to maintain ‘HOLD/SN’.

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