Eris Lifesciences (IPO) is Strong on B2D

  • Date 15th June; IPO Open 16-20th June at Rs. 600-603
  • Valuations: P/E 34.3 times TTM, P/B 15.4 times
  • Mid Cap: Rs. 8,300 crore Mkt cap
  • Industry – Pharma sector
  • Advice: Investors can BUY with a 2 year perspective

Overview: Eris is an Ahmedabad based firm that develops, manufactures and sells branded pharma products from the chronic and acute categories in the Indian pharma market. Revenues for FY17 were Rs. 725 cr. and profit Rs. 242 cr. ERIS’s revenues, EBITDA and PAT grew at 16.6%, 34.7% and 42.8% CAGR in 5 years. Within the growing industry, Eris has a market share of 0.7% achieved in just 10 years of existence. There is certainly ample scope for Eris to grow both market share and absolute revenues. Eris is already growing fast and stands out for the domestic focus, strong marketing & sales, good business relationships with doctors (B2D) and efficient mfg. & procurement giving high margins. At a P/E of 34.25 TTM the valuations in the IPO are high but not aggressive, and justified by Eris’ growth rates.

Key risks: 1) Pending complaints with the Medical Council of India 2) Adherence to voluntary code of UCPMP 3) We are unsure that Eris will be able to maintain its high growth rates, high procurement of products and subsequently margins

Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on Eris Lifesciences Ltd. (Eris) IPO.

IPO highlights

  • The IPO opens: 16-20th June 2017 with the Price band: Rs. 600-603 per share.
  • Shares offered to public number 2.87 cr. The FV of each is Rs. 1 and market Lot is 24.
  • The IPO in total will collect Rs 1,741 cr. while selling 21% of equity. The offer is a complete OFS and the selling shareholders will receive the entire sum. ChrysCapital’s investment arm Botticelli would be exiting by selling its current 16.3% stake. Botticelli’s average cost of acquisition in Eris was Rs 87.27/share giving them 6.9x on their investment in 6 years. The other selling shareholders are individuals who hold around 4-9% stake individually in the company. The promoter & promoter group owns 59.18% in ERIS which will fall to 55.9% post-IPO.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 75:15:10.
  • The unofficial/ grey market premium for this IPO is Rs. 86/share. This is a positive.

Introduction

  • Eris is an Ahmedabad based firm that develops, manufactures and sells branded pharma products from the chronic and acute categories in the Indian pharma market.
  • Revenues and profit for FY17 were Rs. 725 cr. and Rs. 242 cr. It has 2,645 full time employees out of which over half – 1,501 are sales reps.
  • So Eris has strong sales, marketing and distribution capabilities with 7 sales divisions focused on developing and growing engagement with doctors.
  • Eris products are cardiovascular, anti-diabetics, vitamins, gastroenterology and anti-infectives from the chronic and acute category which are linked to lifestyle disorders. The chronic category contributed 65.6% of its revenues in FY17. The product portfolio has 80 mother brand groups (FY17) and is focused on therapeutic areas which are handled by specialists and super specialists such as cardiologists, diabetologists, endocrinologists and gastroenterologists. See Exhibit 1.

JainMatrix Investments, Eris Lifesciences

Exhibit 1 – Eris products, therapeutic areas, revenues and brands, Source RHP

  • Between FY13 and FY17, there has been an increase in the no. of doctors prescribing their products from 37,842 (about 13.8% of doctors in metros and class 1 towns in India) to 50,282 (15.7% of doctors in metro and class 1 towns) with a prescription share of 1.3% for FY17.
  • Eris owns and operates a mfg. facility in Guwahati, Assam. They also outsource the mfg. of some products, and currently have 20 third party mfg. vendors.

JainMatrix Investments, Eris Lifesciences

Fig 2 – ERIS Segment revenue and Fig 3 Post IPO Shareholding Pattern

  • Eris has 3 subsidiaries namely Eris Therapeutics Pvt. Ltd (wholly owned), Aprica Health (wholly owned) and Kinedex. As of June 2017, Eris and subsidiaries have registered 138 trademarks for various brand names. It has a team of 32 personnel working in its IP and R&D department.
  • In July 2016, Eris acquired trademarks in relation to 40 brands, from Amay Pharma for Rs.32.8 cr., in order to grow their product portfolio in the cardiovascular and anti-diabetics therapeutic areas. Amay Pharma’s revenues, from these brands were Rs. 19.3 cr.
  • In Nov 2016, ERIS acquired 75.48% share of Kinedex for Rs. 77.2 cr.
  • It focuses on products for mobility related disorders in the musculoskeletal therapeutic area, within the acute pain-analgesics therapeutic area. Kinedex’s revenues were Rs. 83 cr. for FY17.
  • Eris’s facility in Guwahati had a capacity utilization for tablets, capsules and sachets of 76%, 57.6% and 19.6% resp. It enjoys tax break under Income Tax Act, which will continue post GST till FY24.
  • For FY16 and FY17, the products made at Guwahati contributed to 51.6% and 59.3% of their revenues. An additional 28.2% and 18.7% of revenues for the same periods was mfg. in partnership with Sozin Flora Pharma. Eris was a partner in Sozin up to Aug 2016, and then transferred their stake to the other partners of Sozin, to enhance operational efficiency and productivity.
  • Leadership is Amit Bakshi (CMD), Kaushal Shah (Head mfg. & dist.) Sachin Shah (CFO), Rajendra Patel (Head procurement)

News, Updates and Strategies of ERIS

  • Eris with Indian Medical Association and Heart Care Foundation of India conducted a national study for ambulatory blood pressure readings amongst medical fraternity in May 2017. It was found that 50% physicians were suffering from hypertension despite taking hypertensive medicines; 56% from irregular BP at night and 21% from masked hypertension.
  • Eris will consolidate its position in therapeutic areas in which they have good presence including:
  • Targeting new categories within its existing therapeutic areas, e.g. strengthening its position in the anti-diabetes therapeutic area by launching new products.
  • Continuing to expand its network of key opinion leaders (KOL) in existing therapeutic areas and increase its coverage of specialists to drive growth in prescriptions.
  • Continuing to execute on its doctor-patient engagement model by leveraging diagnostics and technology to aid better outcomes and enhance patient compliance.
  • Eris will explore in-licensing and co-development opportunities with other pharma firms. It will also utilize its R&D efforts to target select products which are currently under patent protection in India.

Indian Pharma Market Outlook

  • India is one of the largest pharma markets in the world. Between FY13-17, revenues grew at 11.8% CAGR to reach Rs. 1,14,326 lakh cr. The IPM is the 13th largest market globally in terms of value and 3rd largest in terms of volume.
  • The IPM is expected to grow at a CAGR of 11.6% between CY16-21. The underlying growth is driven by: 1) Favorable demographics and macro-economic developments 2) Rising prevalence of chronic diseases and 3) Medical talent including specialists and super specialists 4) increasing insurance coverage and 5) the under-penetration of medical infrastructure and talent.
  • The IPM can be classified into acute and chronic The acute category comprises therapies intended for diseases of short duration and recent onset, including anti-infectives, gastro intestinal medication, vitamins and gynecology. The chronic category caters to non-communicable diseases that are prolonged in duration like heart disease, diabetes, cancer and arthritis.
  • Eris has a 0.7% market share in IPM. It was ranked 20th out of the 377 domestic and MNC firms in the chronic category, in terms of revenues, for FY17, compared to 26th in FY13.
  • Market share by revenue in the chronic category increased from 0.9% in FY13 to 1.4% in FY17.

Financials of ERIS

  • ERIS’s revenues, EBITDA and PAT grew at 16.6%, 34.7% and 42.8% CAGR in 5 years, see Fig 4.
  • The EPS has risen sharply in 5 years. This is excellent.
  • Eris has positive cash from operations and FCF all the last 5 years, Fig 5. This is a positive.

JainMatrix Investments, Eris Lifesciences

Fig 4 – ERIS Financials

JainMatrix Investments, Eris Lifesciences

Fig 5 – ERIS Cash Flow

  • Eris has declared dividend an interim dividend for FY16 amounting to Rs. 83 cr. (62.2% of FY16 PAT). Apart from this, the company hasn’t declared any dividend in the last 5 years including FY17.
  • Eris had a RoE of 44.8% in FY17 while the 3 year avg. RoE stood at 42.9% (FY15-FY17). The RoCE stands at 50.9%. These are high, healthy and consistent return ratios.
  • EBITDA margins jumped from 29.3% (FY16) to 39.7% (FY17), whereas the PAT margin increased from 22.4% (FY16) to 33.4% (FY17), reflecting a massive positive change. Such high margins were on account of low input costs, low interest costs and low effective tax rate (tax benefit at mfg. facility).
  • Eris has a reserves and surplus balance of Rs. 526 cr. which is Rs. 38.26/share.

Benchmarking

We benchmark Eris against peers from pharma sector. See Exhibit 6.

  • PE appears high at 34.25 compared to peers, but not a worry. The D/E ratio at 0.19 is comfortable.
  • The P/B ratio is high at 15.36 times, but this is because just 52% of products are mfg. in-house, and the rest is procured. As long as vendor-partners can adhere to the quality norms, it’s good.

JainMatrix Investments, Eris Lifesciences

Exhibit 6 – Benchmarking

  • Eris has witnessed fair sales but good profit growth recently. The 3 year PAT growth, EBITDA and PAT margins are high, coming in second highest of this group.
  • The return ratios are excellent and highest in the group at 45-51% each. This is a positive, and allows Eris to command premium valuations as returns are on a small equity base of Rs. 13.75 cr.
  • The company has not declared any dividend in FY17 unlike other pharma companies.

Positives for ERIS and the IPO

  • Eris is a fast growing pharma company with a portfolio of complementary products. In the chronic category, they were the fastest growing, among the top 25 in terms of revenues.
  • Eris has a portfolio of high volume and leading brands. Its focus is on metro cities and class 1 towns which have higher incidence of lifestyle disorders.
  • Eris has strong sales, marketing and distribution capabilities and good engagement with doctors.
  • The product range does not contain OTC products, so Eris has avoided the investment heavy consumer space. Instead it focuses on the B2D or Business to Doctor marketing. This we feel entails lower costs and helps maintain margins.
  • The financial health of the company is good, and the company has grown rapidly under the leadership of Amit Bakshi. He was a pharma salesman who worked in companies like Torrent, Eli Lilly and Intas and had many years of experience in the pharma industry before starting Eris.
  • Eris is immune to the global approvals/ USFDA risks as they have a domestic focused business.
  • Leadership appears to be dynamic and aggressive, and using strategies that play to their strengths.

Risks and Negatives for ERIS and the IPO

  • Eris has received letters from the Medical Council of India and certain state medical councils in connection with anonymous complaints, which allege that they have provided special benefits to several doctors. In the event the allegations are found to be true and in violation of applicable regulations and statutes, their reputation and business may be adversely affected.
  • Stricter norms in India for companies doing business in the pharma industry could affect their ability to effectively market its products. The Dept. of Pharma announced details of the UCPMP, which became effective across India from Jan 1, 2015. The UCPMP is a voluntary code which, among other things, provides detailed guidelines about promotional materials, conduct of medical reps, physician samples, gifts and relationships with healthcare professionals. Although these guidelines are voluntary in nature, they may be made mandatory in the future.
  • Will Eris be able to sustain the high growth rates and margins as it grows larger? While Eris still has a small market share in a growing market, typically pre IPO and small cap growth rates are difficult to sustain as a mid-cap firm. Competition too is intensifying in Eris’ key segments, and they will have to envision new strategies to continue on the growth path.
  • By procuring 48% of products from vendors, Eris has kept investments low and got high margins. Will this strategy be suitable in future? Any quality control problems at their mfg. facility or those of their third party mfg. may damage their reputation and expose them to litigation or other liabilities.
  • Some generic pharma sector risks: 1) If any of their products cause, or are perceived to cause, severe side effects, their reputation, revenues and profitability could be adversely affected. 2) The availability of counterfeit drugs, such as drugs passed off by others as their products, could adversely affect their brands.

Overall Opinion and Recommendation

  • As India accelerates its per capita income from a low base, a lot of the individual income gains are directed to the pharma sector for better healthcare.
  • Within the growing industry, Eris has a market share of 0.7% achieved in just 10 years of existence. There is certainly ample scope for Eris to grow both market share and absolute revenues.
  • Eris is already growing fast and stands out for the domestic focus, strong marketing & sales, good connect with doctors & medical ecosystems, and efficient mfg. & procurement giving high margins.
  • While the IPO is an exit opportunity for some investors, it empowers Eris for the next phase of growth by providing visibility and prestige, and the ability to raise fresh funds at low cost.
  • At a P/E of 34.25 TTM the valuations in the IPO are high but not aggressive, and justified by Eris’ growth rates.

Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

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DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or known financial interests in Eris Lifesciences or any group company. Punit Jain may choose to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Adviser. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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Thyrocare IPO – Wellness for your Wealth

  • Date 26th April 2016
  • Price range: Rs. 420-446 and application period: 27-29th April 2016
  • Industry: Healthcare – Diagnostics
  • Mid Cap with Rs 2400 cr Mkt Cap
  • Advice: BUY with a 2-3 year perspective 

Summary

  • Overview: Thyrocare is a top 4 player in the pan-India diagnostic lab companies.
  • Revenue, EBITDA and PAT have grown 23.7%, 19.4% and 15.7% CAGR over 4 years.
  • The key strengths of Thyrocare are – 1) strong hub and spoke model for diagnostics collections and testing; 2) good growth visible in domestic diagnostics, in foreign diagnostics, and the Nueclear Healthcare – NHL and water testing businesses 3) Strong franchisee network 4) Positive free cash flow, and growth to be funded from internal accruals 5) Good management team.
  • Thyrocare has an asking PE of 44.9 times FY16 (P) which seems expensive. However comparing with Dr Lal Pathlabs, and retail food service firms, the valuations look reasonable.
  • Opinion: Investors can subscribe to this IPO with a 2 year perspective

Here is the investment note on Thyrocare Technologies Ltd. (Thyrocare).

IPO highlights

  • IPO is open from 27-29th April 2016 with Issue Price band: Rs 420-446 per share
  • Shares offered to public: 1.07 cr of FV Rs.10 which is 20% of equity. The sellers and offered shares are: shown in Exhibit 1 – Selling Shareholders.
  • Amount proposed to be raised: Rs.480 cr. by Offer for Sale OFS route.
  • Market Lot: 33 shares and in multiples of 33 shares there off.
  • The issue is mostly a sale by PE investor Agalia Pvt Ltd., which holds 22% and is selling 90.4% of this.
  • There is no fresh issue. The promoter stake would reduce to 64% from 65% post IPO. See Fig 2b.
Fig 2a – Revenue Segments and Fig 2b – Shareholding Post IPO, JainMatrix Investments

Fig 2a – Revenue Segments and Fig 2b – Shareholding Post IPO, JainMatrix Investments

Introduction

  • Thyrocare is a Mumbai based diagnostic lab company with services in India and a few other countries.
  • Thyrocare had revenues, EBITDA and profits of Rs 190.3 cr., Rs 79.2 cr. and Rs 44.4 cr. resp. in FY15.
  • It operates its testing services through a fully-automated Central Processing Lab (CPL) in Navi Mumbai and 5 Regional Processing Labs (RPLs) in New Delhi, Coimbatore, Hyderabad, Kolkata, and Bhopal.
  • Thyrocare collects samples through a pan-India network of franchisees of TAGs (Thyrocare Aggregators) and TSPs (Thyrocare Service Providers). It has a network of 1,041 franchisees, comprising of 687 TAGs and 354 TSPs spread across 466 cities and 24 states and UTs.
  • Thyrocare offers 198 tests and 59 profiles of tests to detect a number of disorders, infertility and infectious diseases. Their profiles of tests include 16 profiles of tests administered under their “Aarogyam” brand, which offers patients a suite of wellness and preventive health care tests. Fig 3a.
  • A wholly owned subsidiary, NHL (Nueclear Healthcare Ltd) operates a network of molecular imaging centers focused on early and effective cancer monitoring. It merged with Thyrocare in Dec 2015.
  • In order to further expand their offering of tests, they are now using the CPL to test new technology and develop innovative testing. In FY15, they explored new specialized testing techniques such as cytogenetic testing, water testing and the development of new tests based on mass spectrometry.
  • Thyrocare obtains its machinery, instruments and other equipment from international and Indian vendors. Siemens Ltd. is their largest supplier.
Fig 3a – Thyrocare’s Brands and Service Offerings

Fig 3a – Thyrocare’s Brands and Service Offerings

Fig 3b – Thyrocare’s Geographic Presence

Fig 3b – Thyrocare’s Geographic Presence

Business Model, News and Updates

  • Thyrocare operates with a hub-and-spoke model. The chain is of CPL-RPL-Satellite Labs – Collection Centers (CC). The CCs are located in hospitals, nursing homes, pathology labs, doctors’ clinics, prime commercial properties and retail spaces among other places. CCs may be company-owned or franchised. A franchisee usually pays a fee, Rs 30-50,000 to sign up. CCs do not carry out any testing, and are involved only in the collection/ forwarding of patient samples to a satellite or reference lab.
  • The TAGs and TSPs franchisee model reduces last mile costs and efforts of Thyrocare. This is a nimble and efficient model that can scale up rapidly too.
  • In the CPL, Thyrocare enters into equipment leasing arrangements, which vendors provide for a purchase commitment of reagents and consumables. This helps reduce capital equipment costs.
  • Since opening the RPLs in 2015, the volumes growth has been excellent: The diagnostic tests daily volume grew from 95,610 (FY14) to 159,350 (9m FY16). The annual data is a CAGR of close to 38% over the past 3 years from 2.5 crore tests (in FY13) to 5.38 cr. tests (11 mths of FY16). The PET-CT scans performed by NHL grew from 34 scans (FY13) to 11,173 scans (FY15).
  • To grow their business and volumes of samples processed, they plan to expand their network of RPLs and have a lab in every Indian city with an airport, to reduce the turnaround time to deliver the reports to the end customer. The firm has opened labs in Coimbatore, Bengaluru, Hyderabad, Delhi and Bhopal.
  • Outside India, Thyrocare appears to be present in Afganistan, Bahrain, Bangladesh, Egypt, Iraq, Kuwait, Nepal, Oman, Qatar, Saudi Arabia and United Arab Emirates.
  • Thyrocare was looking to list its shares last year, but the issue was stuck on a minor technical issue with the Companies Act, 1956. The clause was relaxed in the 2013 Act and Thyrocare could proceed.
  • The Thyrocare staff includes medical doctors, PhDs and postgraduates in biochemistry, pathology, microbiology and other related disciplines. The company has 718 employees (including consultants, nuclear medical professionals, trainees and contractual employees).
  • Thyrocare Bangladesh Ltd had recently started offering a service where blood tests could be done at home and reports were delivered to the customers.
  • Thyrocare developed a new automation track in Mumbai in 2014, Aptio Automation, which was able to reduce the turnaround time on a blood sample from 4.5 hours to 2.5 hours.
  • Thyrocare has an experienced management team. Dr. A. Velumani is the promoter, MD & CEO and has 19 years of experience in the diagnostics business. Prior to this, he worked for 12 years as a scientific officer in immunodiagnostics and radioimmunoarrays, at BARC Mumbai. Mr. A. Sundararaju, Director & CFO is a graduate in law from the Univ. of Bombay with 18 years of experience in finance, legal and administrative activities. Mr. Sohil Chand, Director holds a PG in Accounting & Finance from the Univ. of London and an MBA (Univ. of Chicago). His 14 years of experience is in financial services industry, including PE, VC and I-banking.
  • A personal visit: We visited a Thyrocare franchisee to better understand their business and get personal impressions. The Thyrocare franchisee is well located and has a small office with simple furniture and décor. The staff was hospitable and courteous, explained the services, handed over a brochure, and was willing to give better services/ home delivery and pick up at reasonable rates. We also noted that Thyrocare services were 20-30% cheaper than Dr Lal Pathlabs for similar services.

Industry Outlook

  • According to the Global Health Expenditure Database compiled by WHO, India’s total expenditure on healthcare was 4% of India’s GDP as of 2013. India trails not just developed countries such as the USA and UK, but also developing countries like Brazil, Russia, China and Thailand, in healthcare spending to GDP. This is due to the under penetration of healthcare and lower consumer spending.
  • Industry estimates show there are over 100,000 diagnostic laboratories across the country. Pathology labs represent around 70% of this, and Radiology and high end imaging is 30% of the industry.
  • Size of diagnostic industry pegged at around Rs 33,000 cr. ($5 b), growing at 15-16% annually.
  • National chains like Dr Lal Pathlabs, Metropolis, SRL Diagnostics, and Thyrocare are present. But Unorganised players dominate 88-90% of the industry.
  • Demand drivers for the Indian diagnostic industry include: Increase in evidence-based treatments; Huge demand-supply gap, Increase in lifestyle related diseases; Changing disease profiles; Increase in health insurance coverage; Need for greater health coverage as population and life expectancy increase; Rising income levels make quality healthcare services more affordable
  • Urban areas account for higher revenues in diagnostics. According to CRISIL Research, India’s urban population (28%) contributes up to 67% of revenues in diagnostics.
  • The Govt. accounted for 32.2% of healthcare spends in India (2013), a small increase in 10 yrs.

Financials of thyrocare

  • Thyrocare Revenue, EBITDA and PAT have grown 23.7%, 19.4% and 15.7% CAGR over 4 years. Fig 4.
  • For 9 months of FY16 the EPS stood at Rs 7.45 and the projection for FY16 is Rs 9.93. The EPS growth is 20.1% over FY15. Note FY16P data is a simple projection of 9 months of FY16 data.
  • The operating margin has decreased slightly from 47.9% in 2011 to 41.6% in 2015. However for the first three quarters of FY16 the figure stands at 42.2%, a small gain.
  • Thyrocare is the leader amongst the pan India diagnostic players in terms of margins.
Five Year Financials, JainMatrix Investments

Fig 4 – Five Year Thyrocare Financials, JainMatrix Investments

  • The company did not have any free cash flows in two of the last 5 years. See Fig 5. Heavy investments were made during that period. The projected free cash flows for FY16 are excellent.
  • It’s a zero debt company.
Fig 5 – Thyrocare Cash Flows, JainMatrix Investments

Fig 5 – Thyrocare Cash Flows

Benchmarking

We compare Thyrocare with healthcare peers and retail focused service companies:

Exhibit 6 – Benchmarking, JainMatrix Investments

Exhibit 6 – Benchmarking

  • Thyrocare appears to be the smallest of this group. However, since most of the front end is outsourced to franchisees, the gross revenues may be much higher than this.
  • Thyrocare appears to be available at a discount to Dr Lal Pathlabs, the closest peer.
  • Margins are high for Thyrocare. This is a big plus. On the other hand, growth while high, is lower than the leaders here. With the building of the hub and spoke model, growth can improve in the next few years. But it may come at the cost of high margins.
  • Debt is zero, which is good. RoE is low but this is due to a number of recent growth initiatives – NHL as well as international.

Positives for the IPO

  • It appears that the diagnostics sector is underpenetrated, so there is a massive room to grow.
  • It’s a high growth business with initiatives like the core diagnostics in India and abroad, the NHL and water testing. These are being funded from internal accruals, and can be very profitable soon. The financials have seen robust growth over 4 years. This may continue with their strong all India footprint.
  • The IPO valuations are attractive on a relative basis.
  • Their hub and spoke & franchisee model is profitable for Thyrocare as it reduces the cost of expansion, and the last mile and customer acquisition is done by the partners. It has the best EBITDA and Profit margins among pan India diagnostic firms. Debt is also zero. Also Thyrocare is very asset light.
  • Thyrocare has an experienced management team. The firm, and most of the new initiatives are the brain-child of CMD Dr. A. Velumani. He has sharply defined testing and diagnostics as his focus area.
  • Promoters are retaining control of the firm at 64% ownership, this is a good sign.
  • The recent success of Dr Lal Pathlabs IPO, Alkem Labs and Narayana Hrudalayala, and the appreciation thereafter are positives. We must note the optimism around healthcare and diagnostics industry.
  • With so many positives, we feel that this IPO offer is going to provide Wellness for your Wealth !!

Internal Risks

  • Thyrocare’s business depends on their reputation and brand, and any negative publicity or other harm may materially and adversely affect their business, financial condition and results of operations.
  • Thyrocare’s business is more dependent on a few tests. So wellness and preventive care (51%) and thyroid (17%) dominate the diagnostic services for FY15. There is product concentration risk.
  • Their subsidiary, NHL, operates a molecular imaging business that presents significant operational risks, and is loss making since 3 years. This could have an adverse effect on Thyrocare financials. Similarly, the Gulf and Mauritius subsidiaries, set up recently, are also loss making companies.
  • The land and premises on which the CPL and the RPLs are located are held by them on a leasehold basis or on a leave and license basis, which subjects them to certain risks.
  • Their business is subject to seasonality, so revenues can be lumpy.

External Risks

  • Thyrocare operates in a competitive business environment which has low barriers to entry, from local /unorganized sector outlets and even city/ regional chains.
  • There are a lot of grey areas policy wise in this sector. Regulatory frameworks include Clinical Establishment (Registration and Regulation) Act 2010, but it has been adopted only by a few states. It does seem to be a largely unregulated sector without norms or necessary standards.
  • Political instability or disruptions at locations where they operate can affect business.

Overall Opinion

  • India with its large and growing population is stretched in terms of available healthcare facilities. Expenditure in this sector will trend upwards as the economy develops. The Govt’s free facilities are in low supply and cater to the low end of market.
  • In this space, Thyrocare’s diagnostic and testing services provide an essential, high demand service. It is a wellness/ preventive as well as an essential service.
  • The business model is robust and scalable, and there are clear benefits of a national chain over small and local service providers. Thyrocare is in 3-4 high growth areas, and is now generating enough cash to invest in them. We expect the financials to grow faster in future.
  • In terms of valuations, Thyrocare has an asking PE of 44.9 times FY16 (P) which looks expensive. However looking at the valuations of Dr Lal Pathlabs as well as those of retail food services (a business model comparable), then the valuations do not look expensive.
  • As an investment, the Thyrocare IPO is rated a medium risk, high return type of offering.
  • Retail Investors can BUY this IPO with a 2 year perspective.

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Here is a note on the Thyrocare IPO in PDF format.

JainMatrix Investments_Thyrocare IPO_Apr2016

Click the link above to open/ download the PDF document.

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  11. Syngene IPO: Good Pharma R&D spinoff from Biocon.
  12. JainMatrix IPO Reports deliver 60.5% returns

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Thyrocare or any related group. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst (SEBI Registration No. INH200002747) under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Dr Lal Pathlabs IPO – Essential Services are an Essential Buy

  • Date 9th Dec 2015
  • Price range: Rs. 540-550 and application period: 8-10th Dec
  • Industry: Pharma – Diagnostic services
  • Mid Cap – Rs 4550 cr Mkt Cap 
  • Advice: Retail Investors can BUY with a 2-3 year perspective

Summary

  • Overview: DLP is provider of diagnostic and related healthcare tests and services.
  • DLP’s Revenue, EBITDA and EPS have grown at 29.2%, 29% and 33.9% CAGR over 4 years.
  • Key strengths are a proven, robust ‘hub and spoke’ model which allows consistent service levels and rapid growth. It is the #2 player in this space, with a strong North India presence. It has a good brand in this niche, which can be leveraged. DLP’s model is scalable; its reach can be expanded rapidly. Also it’s not a discretionary service, more like an essential service.
  • In terms of valuations, DLP has an asking PE of 54.5 times FY16 (P) which looks expensive. However we feel that the business can be valued closer to retail food services than hospitals.
  • As an investment, the DLP IPO is rated a medium risk, high return type of offering.
  • Opinion: Investors can subscribe to this IPO for a 2-3 year perspective.

Here is the investment note on Dr Lal Pathlabs (DLP).

IPO highlights

  • IPO is open from 8-10th Dec 2015 with Issue Price band: Rs.540-550 per share
  • Shares offered are 1.16 cr. of FV: Rs. 10 per share, and amount to be raised: Rs.638 cr. via OFS route. Shares offered as portion of equity post issue: 14.1%.
  • Market Lot: 20 shares and in multiples of 20 shares thereof.
  • There is a Rs 15 discount for Retail.
  • Objects of the issue: Promoters, promoter group and investors are exiting partially from their investments. No funds raised in IPO will benefit the company directly.
  • The promoter stake will reduce from 63.7% to 58.7% post IPO. Also the Pre IPO shareholding of the private investors/ VCs was 32.2% which would get reduced to 23.2% once the shares get listed.

Introduction

  • DLP is a Delhi based provider of diagnostic and related healthcare tests and services.
  • DLP had revenues, EBITDA and profits of Rs 662 cr, Rs 158.9 cr and Rs 95 cr. in FY15.
  • DLP’s network includes National Reference Lab in New Delhi, 171 clinical labs, 1,554 patient service centers and 7,000 pickup points. Network is all India, but unevenly spread, see Fig 1-2.
  • Customers include individual patients, hospitals, other healthcare providers and corporates.
  • DLP is staffed with 3,253 full-time employees and 83 full-time consultants (contractual).
  • DLP has built a national, “hub and spoke” network. Specimens are collected across multiple locations in a region for delivery to a designated clinical laboratory for centralized diagnostic It provides them with greater economies of scale and is the platform for good growth.
  • DLP provides has over 3,495 diagnostic and related healthcare tests and services including – Routine clinical lab tests (blood chemistry analyses and blood cell count), Specialized testing (histopathology, genetic marker, viral and bacterial cultures and infectious disease); and Preventive testing services (screenings for hypertension, heart disease and diabetes).
  • DLP was started by late Dr. Major S.K. Lal in 1949, by providing pathology services and maintaining a blood bank. The current leadership is Brig. Dr. Arvind Lal (CMD), Dr. Vandana Lal (Dir.), Dr. Om Prakash Manchanda (Dir & CEO) and Mr. Dilip Bidani (CFO).
  • The Pre IPO shareholding of private investor/ shareholders was 32.2% which would get reduced to 23.2% post IPO. Private equity/ VC investors like Wagner Ltd., WestBridge Crossover Fund, LLC and Sanjeevini Investment Holdings are associated with DLP.
  • The key strategy of DLP is to continue to expand their presence in the markets in which they operate and also into other markets in India through strategic acquisitions and partnerships.
  • For FY15, 72% of the revenues were from the Northern region. Currently the focus of the company is to strengthen and expand their presence in Central and Eastern India. A new large, regional reference laboratory is under construction in Kolkata.
Fig 1 - Revenue Segments, JainMatrix Investments

Fig 1 – Revenue Segments, JainMatrix Investments

Fig 2 – Service Network, Source DRHP

Business News and Updates

  • DLP had announced its plan to expand operations in Bengaluru through new centers and labs to reach a total number of 50 centers (from current 20) by Dec 2015.
  • BD India and DLP inaugurated a Centre of Excellence in Phlebotomy (blood collection, sampling) in June 2015. This center was launched to provide certified phlebotomy courses to healthcare professionals, and improving best practices for accurate and reliable diagnosis.
  • DLP had acquired Ashish Pathology Labs, a lab in Ahmedabad as part of its acquisition strategy to expand inorganically last year. It has been growing mainly through organic expansion. In northern, eastern and central India it has been adding 20-25 labs year on year.
  • As per DLP, “each lab costs around Rs 1 crore and there are additional investments in facilities like IT among others. Overall, we invest Rs 40-50 crore for our expansion every year”.
  • DLP has sample collection centers in 9 countries and plans to start in Africa with Nigeria.
  • Per latest data, DLP on day 2 of IPO is 2.65 times subscribed a sign of good success.

Industry Outlook

  • According to the World Health Organization (WHO), India’s total expenditure on healthcare was 4% of the GDP as of 2013. India trails both developed countries (USA, UK) and also developing countries (Brazil, Russia, China and Thailand) in healthcare spending % of GDP. This is due to the under penetration of healthcare services as well as partial govt. ownership.
  • As per CRISIL Research, the Indian diagnostics industry is at Rs 37,700 cr. in FY15. It will continue to grow by 16-17% CAGR over the next three years to over 60,000 cr. by FY18.
  • Demand drivers for the Indian diagnostic industry include:
    • Increase in evidence-based treatments; Changing disease profiles; big demand-supply gap;
    • Increase in health insurance coverage; Need for greater health coverage as population and life expectancy increase; Rising income levels make quality healthcare services affordable
    • Growing demand for lifestyle diseases-related healthcare services
  • Urban areas account for a higher proportion of revenues in diagnostics industry, as the urban population (28% of population) contributes 67% of revenues (CRISIL Research).
  • DLP trails only Fortis Healthcare controlled SRL in the diagnostics business. SRL had acquired Piramal Diagnostics to become the top player in the industry four years ago.
  • The Govt. accounted for 32.2% of healthcare spends in India (2013), a small increase in 10 yrs.

Financials of DLP

  • DLP’s Revenue, EBITDA and EPS have grown at 29.2%, 29% and 33.9% CAGR over 4 years.
  • This is excellent as it indicates that the business is in high growth mode. Even with increasing competition and declining margins, the performance looks good. See Fig 3.
Fig 3 - Pathlabs Financials, JainMatrix Investments

Fig 3 – Pathlabs Financials, JainMatrix Investments

  • However H1FY16 results were disappointing and the projected EPS for FY16 is Rs 10.1, whereas it was Rs 11.5 for FY15. This is a negative sign. Note FY16P data is a simple doubling of H1 data, also accounting for one time/ exceptional charges related to IPO.
  • Currently DLP has zero outstanding borrowings as well as term loans. This is a big plus from the financial perspective. DLP has the option to raise funds in future if required.
  • The operating margins have declined to 24% from 25.5% in 2012. However the profit margins have improved from 12.4% in 2011 to 14.3%. But Profit margins fell in H1FY16 to 9.2%.
  • DLP’s operations have been both operating and free cash flow positive since 5 years. This is positive. But there is a declining trend due to increasing investments in the business. Fig 4.
Fig 4 - Cash Flow, JainMatrix Investments

Fig 4 – Cash Flow, JainMatrix Investments

Positives for Dr Lal Pathlabs and IPO:

  • DLP financials have shown strong growth in 4 years. DLP has been acquiring small medical labs to grow inorganically. Such growth is also sustainable.
  • DLP has a strong footprint in the North. Expansion in South & East will give a further impetus.
  • They have built a good brand in diagnostics which is likely to strengthen in the near future.
  • DLP uses a ‘Hub and Spoke’ business model, which allows consistent service levels and rapid growth.
  • Experienced leadership team includes professionals with strong industry expertise and track record.

Internal Risks

  • The Dr Lal PathLabs brand is fundamental to their business, and any failure to maintain the quality of their diagnostic healthcare services provided could affect their business.
  • Business interruptions at DLP’s National Reference Laboratory may also affect operations.
  • DLP’s business depends on franchisees and business partners. Any non-performance by them may adversely affect DLP. Some of their lab operations are undertaken jointly with third parties, whose interests may differ from DLP’s, and such arrangements entail certain risks.
  • DLP leases the majority of its laboratories and other business premises. They might not be able to renew any such leases on favorable terms, and costs will rise.
  • DLP is subject to seasonal fluctuations in operating results and cash flows. Diagnostic healthcare testing volumes typically increase during the monsoon season and experiences slower business during Dec-Jan, when the temperature and humidity are lower.
  • For DLP, the employee benefit expenses have risen sharply over the last 5 year reflecting shortages in medical / doctor staff. If this accelerates, it can impact profitability.

External Risks

  • DLP operates in a competitive business environment which has low barriers to entry.
  • Diagnostics business is still dominated by unorganized local centers rather than large chains.
  • The business is subject to a variety of central and state govt taxes and surcharges, and any increase in tax rates — such as GST, could adversely affect their financials.
  • Political instability or disruptions at locations where they operate can affect business.

Benchmarking

Exhibit 5 - Benchmarking, JainMatrix Investments

Exhibit 5 – Benchmarking, JainMatrix Investments

We compare DLP with hospital chains as well as retail focused service companies:

  • DLP emerges quite strongly across parameters like margins, growth, and return ratios.
  • It does not lead the pack on the valuation parameters.
  • Based on this it appears that the valuations of DLP may fall somewhere between established hospital chains and the leading retail service business.

Overall Opinion

  • India with its large and growing population is stretched in terms of available healthcare facilities. Expenditure in this sector will trend upwards. Govt’s (free) facilities cater to the low end of market.
  • In this space, DLP’s diagnostic and healthcare services provide an essential, high demand service. Its not a discretionary service, more like an essential service.
  • The business model is robust and scalable, and there are clear benefits of a national chain over small and local service providers.
  • DLP has a good brand and solid service delivery in the North, where it is established. We believe that DLP will be able to grow and roll out a national (urban) footprint. The next target would be semi urban and rural areas. There is massive potential to grow over the next 10 years.
  • In terms of valuations, DLP has an asking PE of 54.5 times FY16 (P) which looks expensive. However we feel that the business can be valued closer to a retail food service than a hospital. DLP’s model is scalable; its reach can be expanded rapidly.
  • As an investment, the DLP IPO is rated a medium risk, high return type of offering.
  • Retail Investors can BUY this IPO with a 2-3 year perspective.

READ AND DOWNLOAD THE ENTIRE REPORT

Here is a note on the Dr Lal Pathlabs IPO in PDF format.

JainMatrix Investments_Dr Lal PathLabs IPO_Dec 2015

Click the link above to open/ download the PDF document.

JAINMATRIX KNOWLEDGE BASE 

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Dr Lal Pathlabs Ltd. or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Alkem Labs IPO

Dear Reader,

The IPO season in India continues with another bunch of offerings planned in December 2015.
We have created a new IPO report on Alkem Labs.
It is the first large pharma company IPO in over 10 years.
Its got a lot going for it. At the same time, the criticism can be on the grounds of high valuations, litigation, low exports proportions, etc.

We’ve had good success with our IPO reports, and at one time provided readers 60.5% returns within one year on our recommended IPOs.

Starting this IPO, we will restrict some of our IPO reports to our Subscribers for the Investments Service. However we share with you the IPO highlights:

IPO highlights

alkem labs, jainmatrix investments

  • IPO is open from 8-10th Dec 2015 with Issue Price band: Rs.1020 -1050 per share
  • Shares offered in IPO are 1.29 crores of Face Value: Rs.2 per share
  • Minimum lot size: 14 shares and multiples of 14 thereof.
  • Shares offered as portion of equity post issue: 10.75% approx.
  • Amount proposed to be raised: Rs.1350 crores via OFS route.
  • There is no fresh issue. The promoter stake would reduce from the existing 70.9% to 66.2% post IPO.
  • Objects of the issue: Promoters, promoter group and investors are exiting partially from their investments. No funds raised in IPO will benefit the company directly.

Good luck and happy investing,

Punit Jain

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  • Register Now to get our Free reports and much more, on the top right of this page, or by filling this Signup Form CLICK.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Alkem Laboratories or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com