Diagnostics May Have A Different Growth Trajectory, Says InCred's Aditya Khemka

Diagnostic companies’ earnings are likely to go up and the multiples will rerate, according to Aditya Khemka, fund manager at InCred Financial Services.

“Temporary fall in earnings and berated multiples make a perfect recipe for wealth creation,” Khemka told BQ Prime’s Niraj Shah.

Diagnostic companies' profit and loss statements came under pressure following a good performance over two years, as they hiked their operating expenses.

Khemka is betting on Thyrocare Technologies Ltd., the first listed company that was acquired by PharmEasy.

“During the Covid-19 period, the market swung to one extreme, where they thought that diagnostics was even better than FMCG. Today, the market is swinging to the other extreme, where they are saying that the business model is disrupted," he said.

Earnings of diagnostic companies are under pressure because they have spent a lot of money in expanding their footprint and adding capabilities, according to Khemka.

Historically, Thyrocare used to report an Ebitda margin of 38-40%. The margin is expected to come down to 25-26% levels, as the company has invested in workforce, increasing pincodes, sales and marketing.

The company’s non-Covid business did not grow for four years between FY18 and FY22, Rahul Guha, chief executive officer at Thyrocare, told BQ Prime.

PharmEasy acquired 66% stake in Thyrocare in June 2021. Guha joined as the CEO in June 2022.

“We took two calls on investment and that is largely where margin dilution has come from,” Guha said, while speaking about growth investing.

The company invested in workforce expansion and reducing the turnaround time for test reports. Thyrocare decentralised its operations and set up a number of regional labs. This led to a rise in their overhead costs and the rental expenditure increased.

InCred expects the margin to bounce back to to 30-32%, as the operating leverage kicks in. 

Digital players made Thyrocare relook at almost all the aspects of the company’s operations, Guha said.

The company made two big investments in bringing in more workforce. “We invested in pathologists in every lab which we never had, so today we have a staff of almost 40 pathologists who oversee the reporting and ensure that an accurate report is provided,” he said.

Thyrocare has 26 laboratories across India and 20 of them are accredited by the National Accreditation Board for Testing and Calibration Laboratories.

“You know, you can’t have 48 hours to be able to give the report on the same day or the next day. Nobody requires within six hours, but at least the same day or the next day is what is required," the CEO said on report turnaround time.

“Today, if you drop a pin anywhere in India, you will get a Thyrocare Lab within 200 km anywhere in India, which means that we can do the same-day reporting almost across the country … In 200 km, I can get the samples in six hours," Guha said.

“Second, we invested in the field team that could go out and talk to the doctors, talk to the different pathology labs and ensure that the Thyrocare brand is not just communicated from a call centre in Mumbai, but actually with feet on the street, on the ground,” he said.

There is a large opportunity in Tier-III and Tier-IV markets, according to Guha. “We will see some [margin] dilution as we invest in Tier-III and IV cities, which has been terribly underserved and at least for us is a huge opportunity.”

The Tier-III and IV market grows at twice the rate of metro cities and this has been helping Thyrocare demonstrate growth, Guha said.

InCred's Khemka highlighted that the last four years have been challenging for the rural population. Urban consumption surged because people had more money to spend, as compared with rural consumers, he said.

“Agriculture is only about one third of our rural income and two third of our rural income is non-agricultural. What happened during the Covid era was that the non-agricultural income completely went away. This non-agricultural income comes from government schemes, infrastructure, roads, etc," Khemka said.

Government spending on social schemes was significantly higher during the pandemic. “Now that Covid is behind us and if you look at the budget numbers this year, the social spending has dramatically dropped and the planned infra spending has gone up," he said.

This will give cash back to the rural income in Tier-III and IV cities. “Services like diagnostics, healthcare, discretionary and non-discretionary spending, which might have stopped because of lack of income over the past three to four years would have made a comeback. So, in that sense, Thyrocare has always been a player in diagnostics and healthcare consumption in India. But, it can actually be looked at as a player on rural recovery, rural consumption in India," according to Khemka.

This is the eighth report in a multi-part series called ‘Insight’, where BQ Prime's Niraj Shah talks to some of the leading investors and companies on the outlook for a particular theme every week.