I don’t think having only one lab is an advantage. Incidentally Dr Lal had until two year ago a single REFERENCE lab as well. But that was for specialized tests while local labs did routine ones.
Please let’s remember that we live In a country where Cadbury and Nestlé of the world have to put cameras and sensors in the transportation vehicles so that drivers don’t switch off ACs; where 50% fruits get spoilt in supply chain ; where enough research exists on how poor cold chain renders vaccines ineffective ; and country where last mile is connectivity is 100% in unorganized sector.
I for one would never get test done from a lab that takes 48 hours of sample on road.
Personal view, quite biased and not invested in Thyrocare. Have a small holding in Dr lal
One lab is sufficient for Thyrocare at present (other small labs are only processing centres - that is my understanding). Not sure about the capacity utilisation of that lab - need to find out.
Transportation of samples is by air, they have deals with most airlines.
I was just going through my thought process about the moat my holdings have and i am trying to put them here for this company as i hold it as my core portfolio of long term. My thoughts on moat for this are:
- The cash flow it generates, which it decide to distribute or whenever needed
invested in business as per will. It does not shy away or compel to give
dividend which i like.
- The promoter it has. I know selling this company as an IPO would be the
easiest thing he must have done in his life. He has been an outstanding
decision maker for his own life or for the company. He accepts and clarify his
stands on bad decision or successful venture.
- The process company follows, unlike every other listed or unorganized player
company does not take serious to daily life or normal pathology testings.
Investing in preventive care is a moat.
- Does not go to the Doctors to promote or bribe them.
Please respond to these thoughts i have.
PAT margins have come down from 38% in 2010 to 24% which is due to low barrier to entry. A high Return on capital but low barrier to entry business need to dealt with caution when valuations are optimistic as situation is like bees hovering around flower (read lot of PE money flowing ) . Disc : Small exposure with strong faith in management but still waiting for right valuation from last 2 years to take bigger position
Most important thing to track with this investment is the disruption threat. Medical testing space is thriving with innovation.
Mr.Velumani has always welcomed all these innovation and does not think them as a threat. Innovation is happening for diagnosis of viral and bacterial diseases which are very tough to handle once the detection deadline passes some time and they spread to millions. I think he is not bothered about all these but more for not reaching to the target he set for his ventures. For me being in my Thirty’s and hearing bad news about my known persons, i go for preventive check up in a year or so, which gives me some relief and areas to work upon to maintain my fitness. This trend which is predominant in metros will spread very fast to 2 and 3 tier cities because they have started to eat what we are eating here in any metro city for past many years. We have to accept that the food we are having and the lifestyle we are living is not what our previous generations had. The nutrition value per gram has been on declined despite increase in size of the crop or fruit. We will have more and more hormonal diseases, more stress related diseases and once we have one we will be in cage to face another. I see that this company gives u very clear picture about their business status which is very good for an investor. We just have to track the management to make good money or to change the investment.
In case where the barrier to entry is low, company has to keep on spending money to acquire newer customers and also aggressively make efforts to keep old customers.
Few metrics such as customer retention ratio, cost of acquisition for new customers will throw lot of details.
If Thyrocare has been able to win new customer even at cost of aggressive marketing, than it is good. Brand loyalty is playing well here and newer players will find it tough to compete for long and might wind up.
Interesting read for Thyrocare investors:
Can’t agree more on article . Low barrier to entry ,PE money n ramp up of diagnostic by hospitals like Max leading to margins fall for core players. All said n done , I think , thyrocare ll emerge as leader,however, how much price we r willing to pay is key. Something like Infosys of 2000 situation. PE already fallen from 54 to 34. Disc : hold 1% position at 596
Metropolis Healthcare plans Rs 1,500-cr IPO!
Reminds me of the funding all those food startups raised few years back. How many of those are left now? In the logistics space only Zomato and Swiggy are left. Jubilant Foods (Dominos Pizza) faced immense pressure in 2016 and 2017 from food startups (look at the numbers) with SSSG and margins. Now that the funding has dried up, Jubilant has reinvented themselves with newer pizzas that are cheaper, lighter, tastier and has better margins as well. Same story happened in real-estate classifieds - Housing.com and Commonfloor were expected to be the next big thing as funds were flowing into the space. Now only 99acres and magicbricks remain with big marketshare. Quality companies will reinvent themselves and survive even if they face margin pressures temporarily due to new players in the ecosystem.
There have been quite a few posts above questioning the quality of Thyrocare’s tests. My mother is a pathologist who has her own lab for nearly 2 decades now and has been collecting/referring samples for Thyrocare for a few years. I have had conversations with her about Thyrocare and as such feel I can fill up on some of the above concerns.
Her lab is in Goa. The nearest Thyrocare lab is Mumbai. Everyday a person from the Thyrocare facility(owned by a franchise) closest to her collects the samples and they are transferred to Mumbai via the airport. The samples are properly stored before transportation. The QC is very good, with even test tubes being provided to her by Thyrocare. The testing is done overnight and the reports are available the next day. She pays a fixed cost to Thyrocare for the tests and she is free to charge the patient whatever she likes. Typically complicated tests are referred to Thyrocare, while the easier ones are done by small labs like hers. According to her, the test results are very accurate and she really likes the model. She said before Thyrocare, more complicated tests would have to be referred to local labs; which take a long time for tests, the patient has to travel a lot to get the tests done/get the reports and the accuracy could be questionable.
It is easy to be negative about something in a field that you yourself are involved in heavily. If you have any more questions that you would like to address to her, please let me know.
Disclosure: Hold a small quantity. Waiting for valuations to get cheaper.
Thank u @RedEPS, This kind of feedback from people in the profession is very helpful and important.
why becos these days the data(mostly noise) available in ones hand (smart phone), everybody interprets in their own way. segregating the data (noise) systematically to collect information and put in use is very important.
What is the long term PAT margins you r considering ? It has fallen from high 30s to mid 20s n mid 20s is also super lucrative My worst case scenario is 20% n then once bloodbath n consolidation happens should stabilize because if they r already cheapest ,considering PEs try to survive for 2-3 years , it should not go below 20. Also more than PE, what’s your view on hospitals getting in diagnostic like Max?? It’s a related diversification in an attractive industry where some scale can be built in-house if the mgmt is able one. One big reason despite of liking thyrocare from all angles ,my tone is cautious because while chasing growth ,even if we are wrong by 10%, a de-rating can hinder value creation. 54 to 34 PE , huge market size opportunity, above average div yield with growth which means 10 years down the line yield itself will give high return if growth in rps continues ,a very trustworthy promoter n above all being lowest cost player (ve never validated ) gives lot of positivity
One more thing I would like to look at is competition really is brutal when market is not growing and everyone fighting for same pie. But I think the diagnostics market is growing in India. There is severe pressure to poach from existing customers, but also new customers are getting added. In a growing marketing, the price erosion will not happen so much even if new players are added.
Disc: Invested with 2% of my portfolio
PAT margins in the 20s would be a dream for most businesses. I believe that once the market size becomes bigger, their asset turns would be higher than it is now and that will ensure good RoCE even if OPM drops. I can visibly see preventive care tests sold under Arogyam going up in my circle. In an expanding market, there might actually be space for everyone but I think some of these funds have come in a bit early and going by the spray and pray approach of most of these, I am certain most will be packing their bags before the avg. Indian age goes over 35. No matter your spend, unlike in food logistics or e-commerce, you cannot make the avg age for onset of ailments to change. The market is simply not ready for so many players right now. I think it will allow for Thyrocare to tweak its processes and continue to remain the quality low-cost player that they have been. If there are near-term headwinds, it would be a good test to see how the company responds. I am still quite amazed by the way Jubilant Foodworks managed to make so many changes in such a short span of time to fend its turf from Faasos, Freshmenu and Box8s of the world.
Disc: Invested last month during the dip (6% of portfolio - Plan to increase/decrease 2-3% after I see how things turn out)
The question I’m about to ask might seem silly. I’ve been thinking about it for some time now.
Over the past few years some people I know have started ordering medicines online- Partly because of the discounting and partly because of the convenience.
Also, booking of diagnostic tests is processed by online aggregators. It offers free collection by phlebotomists.
Companies like Pharmeasy, 1mg have been growing rapidly and have been able to achieve mindshare. They’re also well funded.
With the passage of time, is it possible that along with offering diagnostic services of companies like Thyrocare, SRL, Suburban, etc online aggregators establish their own diagnostics brand and offer their services at a steep discount?
A parallel being the launch of Flipkart’s brand SmartBuy which is sold alongside other brands.
Now, the obvious question may be reliability on results. But, our inclination to rely on other popular brands probably stems from the positive word of mouth.
Today, it may seem totally implausible that such a development is possible.
But, it isn’t as distant as it might seem.
Everything is in the realm of possibility. For someone who has just bought a lottery ticket, a million dollars is a possibility. We cannot base investment decisions on possibility but probability. As the odds for such a possibility (aggregators competing) increase, the position size should reduce to reflect that and so on. Otherwise this will just lead to endless speculation and indecision.