I am just sharing a note on thyrocare report incident that hapenned with a big hospital in hyderabad…these days, it is undeniable fact that doctors get remuneration/salary by the number of surgeries or the number of tests they write to hospital radiology lab.
When the thyrocare test report is shown to the doctor, the doctor clearly said that they will NOT believe the reports from other diagnostics as they cannot trust their numbers mentioned in the report.
The doctor had asked to get the tests done from the hospital lab…
Based on some recent scuttlebutt, the diagnostic business is moving from franchise model to DSA (Direct selling Agents) model. Independent agents can join without any upfront investment and will be provided with an interface to book tests on behalf of their clients. This is being done mainly for B2C segments.
Wondering what will be the impact of this shift in the business model going forward?
Thyrocare has won a tender floated by Municipal Corporation of Greater Mumbai (the “MCGM”) for outsourcing of laboratory investigative services. The report states the total contract cost of the tender to be executed over the period of 4 years is Rs. 532.27 million.
This is a good step to grow the core competency of the company (high volumes) further. In long run, more institutions will outsource their diagnostics infrastructure.
The board has decided to appoint a merchant banker to find the approximate value for nucleus health care.
This is starting to look like a farce. Won’t be surprised if no impairment is required according to the valuation given by the merchant banker.
Discl : Invested
What is wrong with the independent valuation of radiology business? If valuation is more (than 194 cr), Dr V might pay more for the business to take it private. I see no issues here. If valuation is lower, he has agreed to pay the invested amount of 194 cr.
You have to read it twice. First, no promoter directors were in the meeting. Second the board simply did not accept Promoter’s offer and decided to value the business which is what any sensible person would do before the sale of a business. If the valuation comes higher then thyrocare will not be forced to sell. If it comes lower, then the promoters will still buy at investment value. Nothing negative for minority shareholders.
The board has done the right thing here in getting a third-party valuation opinion before approving the sale. As @SlownSteady says, if the valuation is high, Dr.Velumani is free to give it a pass and Thyrocare as well is not obliged to sell, but if the valuation is lower, I believe Dr.Velumani will stick to his initial offer and go ahead. There is a possibility that the whole process is rigged to favor the former outcome where the assets are not impaired and Dr.Velumani still scores brownie points for offering. This would involve a lot of hands working together (for what incentive?), the probability of which are perhaps low.
You can question the guy’s capital allocation (cash in the books which was not returned, until recently) and commitment (self-promotion & meeting with investors often, wasting time) but I think the one thing you can be somewhat sure of is the promoter and the board’s integrity, (going by past actions) - which is a rare commodity in Indian businesses. Worry though is this business going the way of Accelya Kale sort of high-return ratios but zero growth dormancy if Dr.Velumani doesn’t stay hungry.
As rightly pointed out by @phreakv6 i do not see any evidence in the past to question Mr Velumani’s integrity. Thyrocare is in a very interesting conundrum at this stage. They are in place where they are unable to take a call on whether to focus on market share by comprising margins or whether to give some market share away by protecting the margins. There is a tremendous pressure on them to maintain margins from investing community or simply say Institutional investors and their stock prices are being punished for the fall in margins. Now they are taking a calculated approach to balance margins and volumes and they are achieving neither of them at this stage. So the stock is in a stage where neither growth backers nor margin lovers are supporting it. This bothers Mr Velumani a lot because he appears to be worried about justifying a higher multiple for his stock in the previous conferences. I am more worried when a promoter is worried on the stock price than his business. Mr Velumani should focus on his business and market will take care of the rest
In terms of growth , India has lot of growth left . I think future is brighter as the country will turn older with 3-4% population turning 30+ every 6-8 years (if I recollect from some earlier analysis on Apollo). Usually once someone crosses 30 , healthcare expenses slowly start going up. So, growth for sector is not an issue but problem is 1. No barrier to entry means too many players for same pie lowering return on capital , margin 2. Survival of the fittest in low barrier to entry business where PE money is chasing growth 3. Managing n adopting to disruption (Tata Elxsi website white papers n case studies have some interesting reading on tech in diagnostic sector but too early n which industry is not getting disrupted it’s more about embracing it and most important 4. as @phreakv6 said, key is does Mr vellumani n team has fire in the belly. Also, different stages of business need different traits of entrepreneur . What worked in taking company from 0 to 2000 cr could be a very different skill set from what it could take from 2000 cr to 10k cr . Further, I would like to highlight one more thing. As investors, things will never be 100% clear . Investing is similar to story of touching various parts of elephant blindfolded n then connect the dots . There could be some advantage with higher or lower level of expertise in a sector but still it remains a probabilistic game. So, we must learn to differentiate between the big dots which help to stitch the story and the small dots which creates more confusion than clarity . When stock performs, the same person’s same act is treated godly and when it does not , the same act is looked with eye of suspicion . It has been a learning for me too. Both things can’t be correct n usually it happens when we ignore the big messages and start picking small things n weight it higher than big message . Long story short , this still remains a low barrier to entry business with medium characteristics like some visibility in growth , terminal value etc (at least as of now ) and hence price to be paid is super important . Disc : Took a small long term position at 440-450 as not yet able to figure out what’s a sustainable ROCI n does management has motivation, energy , ability n skills to to take from 2k to 10k as some of the competitors are very respectful to give tough competition in whatever small or big competitive overlap they have
Frankly, not good at valuing company to a close range level. So, what has worked for me to take a small position once it starts coming close to my valuation range and then increase it in staggered way over every X% fall. We all have a process and till it’s working it is fine. In this case, my exposure is hardly 0.25%. So, net net we both agree though for me it’s not due to overvaluation but more due to my inability to find what is the perfect valuation. With all humbleness, If valuation Would have been an outcome of 2,3 numbers, life would have been so easy but perhaps not n those 2,3 numbers are outcome of so many assumptions of how future could shape up and hence valuation always remains a differentiated opinion. That’s beauty of market, Good to agree a bit n disagree a bit. Keeps market alive . Here, it’s more of : 1. difference over how one manages buy n sell. Some do 1 big buy n 1 big sell transaction n some like to do in staggered manner. Personally, m open to both based on conviction of research n valuation. 2. My lack of conviction/ability to truly see those N numbers of future assumptions to clearly say this is the range 3. Expectations from investment might differ
As pointed out by you diagnostic space is a secular growth story on count of unorganised to organised. Best strategy to play the sector would be to invest in all 3 companies namely Dr Lal Pathlabs, Metropolis and Thyrocare. Main threat to this sector is going regulation on pricing of tests. Even if it happens it would affect low margin simple tests and not complex tests
I am posting my personal notes on Diagnostic industry which I think is relevant in some part to thyrocare also.
IS DIAGNOSTICS A SECULAR GROWTH STORY ?
Diagnostics is broadly 50% - Basic Diagnostic centres with X-Ray machines and Ultrasound and Basic Blood and Urine Tests
30% is integrated play like Apollo Hospitals Narayana Hrudayalayas etc.
20% Large Integrated Diagnostic plays. As per RHP there are 3 listed ones and one Unlisted Player Basic Fundamentals of these companies are
Dr. Lal Path Thyrocare Metropolis SRL Diagnostics
(March’18 Aud.)
Sales 1203 403 761 982
Sales Growth 13.75% 13.20% 18.35% 4.84%
OPM 24.43% 33.28% 24.44% 11.80%
4-yr Sales CAGR 16.22% 23.24% 13.69%
4 Yr- N.P. CAGR 23.29% 20.07% 13.21%
ROE 21% 20% 29% 7.14%
ROCE 32% 30% 44% 11.94%
Insights on the industry
The earnings growth has been sluggish in the Big 4 so is the Sector’s growth so there is no tailwind in this sector right now to give the prices a fillip.
The market leaders are finding it difficult to replicate their success in new markets
There is some sort of Technology disruption happening in U.S. Market which is effecting all the markets (eg. earlier Sugar Test was done in Labs now small strips being used technically called POCT). DPL Say that the effect of POCT is limited on them now(may be true to some extent).
Health Insurance penetration has been rapidly increasing giving all the Hospitals a boost in their revenue, given a choice most of these hospitals would like to expand by buying the equipment themselves than depend on other network DC. (eg. Will you like to wait for 2 weeks for a complicated test result or move on to hospital on other street which charges you more which any way insurance company pays). Moreover the machine vendors are eager to put up one as mentioned in comments of DPL transcript (attached).
The Key question is Price Growth is required to define a company as secular growth company. From the Management commentary of DPL it seems it’s not happening moreover what we see as growth in sales is actual volume growth.
There is regulatory overhang of NEDL to the whole industry beautifully described in Page No. 13, 15 (highlighted para) by the management itself. surely an issue worth its seriousness.
So overall for Investments in DPL
EPS – 24/-
P/E -49
Div. Yield-0.5%
Price -1170/-
Growth of only 13%, it doesn’t seem to be secular growth with the potential risks to capital
I think we can use 1 or 2 numbers to say with fair confidence that its an avoid or not, If you believe value of any business is the present value of all the future cash flows then any business growing 10%, trading 20x earnings and discounted back with 15% hurdle rate will look over valued.
We can debate on 10% CAGR is low and business can grow 25% CAGR or somewhere in between.
ROE is good but only makes sense when business is available at book value or business able to generate similar ROE with retained earnings yoy and i think that’s where the genesis of over valuation begins when street pricing in some kind of incremental return on capital for this business, If you start putting 30% ROE maintained on retained earnings for any businesses all PE will look low in a long run but very few businesses can do that. I think now markets are coming to realization Thyrocare can’t do that due to their B2B business model and that’s why it returns most of its owners earnings in the form of dividends and its dividend payout is almost 55% vs 20% for lal path lab, Means street believes Lal pathlab is able to re invest owners earnings into new geography and can generate higher incremental return on equity in comparison due to its B2C model and hence trades at much higher multiple Vs Thyrocare. If you see almost all 5% types dividend yielding stocks trades about 20’ish PE multiple in general be it BSE , Hero , Infratel , CARE etc. on the other hand CRISIL has better ability to generate incremental return on retained earnings ( due to their superior investments ) trades at multiple double of CARE.
coming back to Thyrocare as i have mentioned many times this business is not high Moat business and unorganized to organized is not easy it doesn’t look like to me a business which can grow > 10 % CAGR in a long run and hence current valuations are not looking cheap to me adding to that EOS doesn’t give any advantage over other as i debated earlier there is enough ROE to be made for everyone, EOS just helps you make bit better ROE over others.
I am the only and lonely guy in this who has been debating against the herd but i think it’s necessary and hope many others will join me.
. Here, it’s more of : 1. difference over how one manages buy n sell. Some do 1 big buy n 1 big sell transaction n some like to do in staggered manner. Personally, m open to both based on conviction of research n valuation. 2. My lack of conviction/ability to truly see those N numbers of future assumptions to clearly say this is the range 3. Expectations from investment might differ