Could you juxtapose this with ‘known’ facts such as size (~US$ 6bn), annualised growth of 15-20%, and transition to regulated play? A market size of ~US$ 6.5bn for the Indian diagnostic market is grossly under-reported – this is because our country lacks any system of documentation for diagnostic or healthcare services, which is largely catered by the unorganised sector. Similarly, reported growth of 15-20% seems low, considering that India’s demographic is shifting towards a higher age from a predominantly younger one.
Ground realities of the Indian diagnostic services industry indicate accelerated growth. While the annual per capita spend in the US on diagnostics is around US$100, it is >US$6 in India, implying significant scope for growth led by increasing income levels. India is still a young country with average age of around 25 years – and the need for diagnostic services grows with age. So, as India’s demographic begins to move towards a higher age, its diagnostic market is set for 20-25% growth over the next 20 years.
Profit margins for diagnostics in India are certainly challenged due to the market’s nature. In the western world, this business is driven by hospitals while in India, it is driven by individual doctors. Since doctors drive healthcare/diagnostic, standalone laboratories become vital and such laboratories are non-accredited. These unorganised laboratories hurt the profitability of organised players. Even so, the scope of volume expansion in diagnostics services in India is enormous. Some efficiency in operations can weed out all margin pressure. All in all, I feel the unorganised market is not a big concern for organised players.
Healthcare and diagnostics are largely local subjects and domestic players understand the needs well and cater accordingly. No MNC can pose a threat to local diagnostic players. Few MNCs have tried their luck in India over the last two decades, but failed. Quest is the only MNC in India with some respectable presence. About FDI, I do not think that the Indian diagnostic industry requires it since this is not a very capital-intensive business, unlike hospitals.
Pricing of diagnostic tests will definitely fall, but this is unlikely to hurt profitability. Why should prices go down? Not because of competition – rather, this correction would be led by tremendous expansion of volumes and consolidation.
There are about 500 different types of tests in diagnostics and prices for about 50 have already fallen to optimal levels, but many players arrive at the pricing of most other tests after considering their patient pool (usually rich and upper middle class). There is robust scope for volume expansion in the lower middle class population and this will drive down prices.
Yes, I still emphasise the fact that volume-led benefits in the Indian diagnostics are enormous, as organised players still account for only about 15-20% of the total reported diagnostic market, which is grossly under reported.
Thyrocare already earns a margin of around 44% and I can dilute this a bit to enhance market penetration, hence growth momentum, and ultimate profitability.
In FY15, Thyrocare saw 20% revenue growth to Rs 1.8bn with an EBITDA of Rs 736mn (implying a margin of ~41%) and a PAT of Rs 458mn. We are closing FY16 with sales growth of around 28-30%. Over last three year, we have seen 20% CAGR and we are confident about similar growth over the next three.
The key to our success has been a price disruptive strategy with a focus on volume, and of course our differentiated business approach to tap preventive care diagnostic market compared to the competition’s focus on sick-care diagnostic services.
Thyrocare’s 100% subsidiary – Nueclear Healthcare – focuses on PET-CT test (used to detect cancer). The objective of the subsidiary is to address the huge unmet need in cancer care and to offer affordable PET-CT tests. Believing ‘scale/volume’ is the only principle for success. Thyrocare offers PET scan at Rs 9,999 per test against competitors’ prices of Rs 20,000-25,000. With such pricing, we have already initiated a disruptive pricing game in cancer diagnostics, but in India, volume is still too low for impactful disruption. Therefore, we are a bit slow on this business front.
SEBI has already cleared Thyrocare’s DRHP and we are likely to file our RHP before the end of March 2016 – our issue would be open for subscription by mid April 2016.
Thyrocare is one of the leading pan-India diagnostic chains and offers 192 tests and 54 profiles of tests to detect health disorders – such as thyroid, growth, metabolism, auto-immunity, diabetes, anaemia, cardiovascular, infertility and various infectious diseases. It profiles of tests are administered under the brand name ‘Aarogyam’.
It has been operating from its central processing laboratories in Navi Mumbai and setup four regional centres in New Delhi, Coimbatore, Hyderabad, and Kolkata in 2014. As a result, Thyrocare’s daily average test volumes jumped 37% (to 131,073 in FY15 (from 95,610 FY14) and by 26% to 165,672 until September 2015. However, the diagnostic services offered at the regional processing labs primarily constitute routine tests.
Through its subsidiary NHL’s network of molecular imaging centers (in Mumbai, New Delhi and Hyderabad), Thyrocare offers PET-CT scan services to assist in cancer diagnosis, staging, monitoring of treatment, and efficacy and evaluation of disease recurrence. On a low base, PET-CT scan volume has jumped 5-fold to 11,173 scans in FY15.
As per the annualised H1FY16 performance, Thyrocar is likely to report 30% growth in consolidated sales (to Rs 2.38bn) in FY16 with EBITDA margins of 44%, which are the highest in the industry. Its annualised PAT of Rs 600mn implies a PAT margin of 25%. Thyrocare is a debt-free company.
Proposed IPO: At the end of February 2016, the Securities and Exchange Board of India approved Thyrocare’s draft initial public offering (IPO) proposal of 10.7mn shares. Thyrocare’s IPO is an offer for sale by private equity investor CX Partners and the firm’s promoters. CX Partners holds 21% stake in the company, of which it plans to sell almost 90% in the public issue. Other PE investors in the company include Norwest Venture Partners (9.43%) and Samara Capital (2%), who are not selling their stakes in the IPO. The promoter’s holding will dilute to 63.96% (from 64.96%) after the IPO.
Subscribe to enjoy uninterrupted access
