Can sustain margins at 40%; a regulator is welcome: Thyrocare

Diagnostic company Thyrocare saw a spectacular initial public offering (IPO) and listed with over 30 percent premium. The biggest surprise in the IPO was retail interest where the company got nearly 8 lakh applications, says A Velumani, Chairman, CEO & MD of the company. “It means that ‘aam aadmi’ believes in it,” he adds. Velumani believes that Thyrocare can sustain its margins at its current 40 percent and can even improve it by another 1-2 percent. “Ever since I knew the spelling of EBITDA and its meaning, it have been 40 percent,” he says. The company has maintained its margin at the same level in the last 10 years. Discussing the idea of a regulatory body for labs, Velumani says that they are waiting for some control so that business can be fairly predicted and risks are mitigated. Difference between regulators for pharmaceutical and labs is that in pharma, substance is put inside the human body whereas in labs, only blood is taken out. Regulations, he says, will help costs and speed both.On pricing, he says he wouldn’t touch it if growth continues. Below is the transcript of A Velumani’s interview with Ekta Batra on CNBC-TV18.Q: Do you think you can maintain margins at current level?A: Ever since I knew the spelling of earnings before interest, taxes, depreciation and amortisation (EBITDA) and its meaning, it has been 40 percent. So, last 10 years, 42, plus or minus 2 percent, I think this industry has a potential for me to A] enhance it, one or two percent more and sustain it. So, this EBITDA is certainly not a shock in this industry, but it is too good to believe for investors and since I have a last five years numbers very much supporting it, people believe that it is actually number, otherwise, people would have doubted it.Q: But, you are planning to set up around four more regional processing labs. So, in that context, is it not going to be margin dilutive?A: If you look at it in this business, the capital expenditure (Capex) is too little. So, if I have a cash in hand and if I put Capex in place, why should margins get diluted, because instead of machine working in this floor, it will be working in another floor in another city. So, we do not take that as a truly cost centre. It is like banks opening more and more branches. It will not dilute its margin. It will give it a better topline and a bank may take 1-1.5 year for breakeven. Similarly for us also it is a six months breakeven and it should be in place.Q: TH other point of concern or maybe margin dilution would be competition in the industry. Right now, your tests are the lowest costing. Do you think that maybe you will have room to cut prices further in order to fuel up growth?A: The pricing aspect, I have done the best possible. Having some more room to still reduce the price, but I would not be touching that if my growth is in order. So, if by any chance, growth is going to be challenged which also is potentially possible if the competition is around. Recently, I made a price reduction, just 30 months back. That was by compulsion. the profits have gone up after price reduction. Now, what does that mean? If I need some more, I can do it again.Q: One of the reasons why Dr Lals as well as Thyrocare has got such a good reception in the equity markets is also because you do not have that risk that traditional pharmaceutical companies have because of low exposure to the US, low exposure to developed countries and hence you do not have that regulatory risk. Do you think that eventually, in India there might be a regulatory risk for diagnostic labs, something like accreditation from National Accreditation Board for Testing and Calibration Laboratories (NABL), sort of authority might become compulsory for you?A: There are two sides of it. When you want to earn in dollar, you will face an additional challenge. That is what all pharmaceutical companies had a good money and then a lot of regulations and today, they find that is painful as limitation. Laboratories will also got through the cycle because we also would not be not very happy only to earn in Indian rupees. All of us will venture out and majority of my competitors are also on the roads and we are also doing some experiments.Having said that, in pharmaceuticals, whatever product made is consumed. In the laboratory we only draw blood. So, I do not think regulations would trouble us to open that laboratory and close the laboratory and cancel the licences because we are not doing anything that gets into the body. Having said that, the regulations would come in terms of streamlining the quality and the cost and speed. That is good if it comes. In fact, once it comes, the unorganised segment will find it difficult to survive and the organised sectors will grow much better. We in fact are waiting for some kind of controls so that the business is fairly well predictable. Risks are mitigated. Otherwise, I do not see a risk.Q: You mentioned risks and one of the things that stood out is even in the analyst meet that Thyrocare had is that some of your tests are not accepted or your tests are not accepted by some hospitals as well as maybe some other doctors, etc. How do you deal with it and why is it not accepted?A: This is a past tense. I have managed this business and he first five years was very tough time, because it looked like everyone was against me. The country has got honest doctors and honest doctors have approved my quality. In fact, the biggest surprise came to me in this initial public offering (IPO) is the retail subscription mine was eight lakh applications which means ‘aam aadmi’ believes that this brand is trustworthy.