Demand growth, market share gains for Thyrocare

Stock one of the top picks among analysts in health care space

With regulatory and pricing pressures for top generic drug companies on the rise, resulting in sharp drop in stock prices, brokerages are looking at companies in the health care space which have better growth opportunities. Among the highgrowth segments within the health care universe is the diagnostic space; and the top pick within this is Thyrocare Technologies. Unlike the drug majors which are expecting revenue growth in low singledigit, analysts expect Thyrocare’s revenue to grow 23 per cent annually and profits by 26 per cent over FY17-19.

One major trigger would be the potential for market share gains for organised players, such as Thyrocare. The share of these players in the diagnostic segment is pegged at 16 per cent. This is expected to increase to 20 per cent over the next three years. The company, given its reach and product portfolio (pathology and radiology), is expected to outperform the sector on revenue growth over the next two years.

Some of the strong growth opportunity in the diagnostics was visible in the March quarter results, as the segment grew 36 per cent year-on-year. This coupled with higher realisations helped the company report a 35-36 per cent operating profit and net profit growth. Analysts at JM Financial expect the company to report 24-25 per cent growth in top line over the medium term, supported by increasing penetration and higher contribution from the preventive health care segment. Given the company’s cost leadership and strengthening brand position, it will be fairly insulated from increasing competition and prospective cost control measures from the government.

One reason for being able to scale up quickly has been its ability to offer significant discount on diagnostic services over its competitors. Analysts at ICICI Securities say that focus on cost control was through strategies, such as having a single central processing lab and a gradual increase in regional processing laboratories coupled with no front end investments. An example of discounted offering is the pricing of its positron emission tomography-computed tomography (PET-CT) scan at ~9,999 against peers who have priced it at ~17,000.

Most analysts are positive on the long term outlook of the company due to the increasing demand for quality diagnostic services and the company’s ability to price its products competitively. Given the price target of about ~870, there is a 20 per cent upside from the current levels.