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Right time for IPOs?

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201605ehm02As we go to press in end April, Dr A Velumani’s Thyrocare Technologies (Thyrocare) looks set to have a successful debut on the Indian stock exchange. More than half of the offered equity shares received bids by the end of the first day itself.

Whether this warm reception will continue is anyone’s guess. But an analysis of data from the stock exchange has put to rest one fear that the  retail investors might not be interested in the Thyrocare issue, as it followed the super-successful IPO by a competitor, Dr Lal Path Labs last December.

In fact, much of the charge on day one seems to have been led by retail investors, who bid for almost all the 3.76 million shares allocated to this category. In contrast, institutional and non-
institutional investors seemed warm to cool to the issue. While the former category had picked up a mere 11 per cent of their allocation, the latter mostly stayed away till end of day one but this could change in the remaining two days.

As our cover story in the May issue analyses, the preceding IPOs in the healthcare sector seem to have merely whetted the appetite of investors. And if retail investors missed the earlier IPOs, they might now want to jump on the bandwagon now. (See story: Will IPOs in healthcare sink or soar?, pages 24-27)

But market analysts are quick to point out the risks. In Thyrocare’s case, even though it has considerable competitor strengths, it could still be tripped up. A report from Motilal Oswal cites increasing competition from major diagnostic players like SRL Diagnostics, Metropolis and Dr Lal Pathlabs (DLP) as well as many small and independent clinical labs, and labs owned by hospitals and physicians as one of the risk factors. Secondly, the diagnostics business is technology-driven and players could face risks of the capital intensive technologies going obsolete faster.

Also, the point-of-care test market is bound to see a spike, which will dent the volumes that players like Thyrocare are projecting. These factors could lead investors to question the valuation of the Thyrocare IPO, which at a price band of Rs 420-446, is priced at 47.7- 50.7x price-earnings (PE) ratio for FY2015 consolidated earnings per share (EPS) of Rs 8.8 and 30-32x EV/EBIDTA for FY2015.

But this valuation is similar to DLP and as the Motilal Oswal report points out, after listing, the premium valuations of DLP expanded further due to its strong track record, healthy return ratios and high free cash flows despite the aggressive expansion and exponential growth in the business.

So, the jury is still out on the Thyrocare IPO but with healthcare seen as a defensive sector, most investors would be aware of the longer-than normal gestation periods. Thyrocare too is derisking its model by expanding to water and air testing, in order to create more revenue streams.

Viveka Roychowdhury
Editor

[email protected]

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