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Last Updated : Aug 22, 2016 09:49 AM IST | Source: CNBC-TV18

SRL likely to be valued 25 times FY18 operating profit:Macquarie

Singhal sees significant opportunity for diagnositics players such as Dr Lal Path Labs, Thyrocare and SRL. Organised players are already gaining market share and companies which maintain quality standards will definitely do well, he says.


The Fortis Healthcare board on Friday approved the demerger of its diagnostics business into another group firm Fortis Malar Hospitals. The move is aimed at ensuring independent growth of hospital as well as diagnostics business verticals.

Commenting on the development, Abhishek Singhal, Associate Director at Macquarie Capital Securities, says that SRL will be a valuable asset when it lists on the stock exchanges. He expects SRL to be valued around 25 times estimated operating profits (EBITDA) for FY18.

Singhal sees significant opportunity for diagnositics players such as Dr Lal Path Labs, Thyrocare and SRL. Organised players are already gaining market share and companies which maintain quality standards will definitely do well, he says.

Singhal pegs the share of diagnostic players in the USD 6 billion pharma space at roughly USD 900 million. Of this, organised players like Dr Lal Path Labs, Thyrocare and SRL account for around USD 450 million, and this share should grow in the days ahead, says Singhal.

Below is the transcript of Abhishek Singhal’s interview with Anuj Singhal, Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Anuj: Your first thoughts? Of course, on Friday, we saw a bit of profit taking on the stock, but from here on, what is your advice?

A: If you look at the scheme arrangements, what they have essentially done is they are using a listed subsidiary already, Foris Malar, to segregate their diagnostic business out here. Our sense is that their diagnostic business is close to around Rs 75 a share. So, on our Rs 250 target price that we have, Rs 75 is explained by this. And eventual listing over the next 9-12 months as this plays out should help unlock that kind of a value for the shareholders.

Sonia: So, going forward, what kind of an enterprise value do you see for the new entity and what kind of growth do you see given its peers?

A: If you look at the Fortis Malar entity which houses the entire diagnostic business, we have Rs 275 crore earnings before interest, taxes, depreciation and amortisation (EBITDA) for FY18 and largely the capital expenditure should be equated to the depreciation out there. So, after paying for 30 percent tax, this will be an entity which will be generating close to around Rs 180-200 crore of free cash. In that context, if you compare it will Dr Lals Pathlabs, it is up there. The current valuation multiples for Dr Lals is close to around 26 times FY18 EBITDA. Our valuation is also close to around that level around 25 times or so.

But if you look at SRL entity today, that is the largest diagnostic player in India and virtually on all measures, be it the topline, be it the collection centres, be it the geographical diversity, SRL stands out versus its peers. So, the only place where people contend against SRL is that their current margins are lower than what Dr Lal enjoys. But here you have to look at in a context that the far more diversified player with its current capacity utilisation of around 45-50 percent.

So, if you look three years out, as they are able to get the operating leverage, through their network, our sense is that the margins have tremendous scope to expand. And that is pretty much reflected in the last five years of its operations. If you look back in FY12-FY13, SRL’s EBITDA was close to around Rs 45-50 crore versus Rs 184 crore that they reported in FY17. So, that has been close to around 40 percent compounded annual growth rate (CAGR) in this business historically. It is a net cash entity. So eventually the entity will have close to around Rs 100 crore of cash and would be generating close to around Rs 180-200 crore of cash every year.

So, in that context, it will be a very valuable asset as and when it gets separately listed. To our benefit, you will have some reflection of what the markets thinks the value should be in today’s trading by Fortis Malar trades. But, what you will have to keep in mind is today equity is close to around Rs 1.8 crore of which 62 percent is held by Fortis. So, the liquidity there per se is low, close to around Rs 68 lakhs or so of free float. But that should start giving you a reflection of where eventually the SRL entity eventually goes and trades, because now the entire economics is pretty much out in public.

Latha: I wanted to ask you is the entire economics out, would you want to still know something more about how debt or cash is shared. Is there any more details you want to wait for from the management? And secondly, would you worry that the diagnostic space now – I would not say getting crowded, but there is a decent competition, Thyrocare, Dr Lal and now, the impending SRL. Will these three stocks continue to enjoy the kind of valuations that they have been given when there was a scarcity value?

A: You would have to look at this entire diagnostics space today. It is close to around USD 6 billion market opportunity of which 15 percent, close to around USD 900 million odd is the market that currently, the diagnostic chains enjoy. Even of that USD 900 million market, all the pan-Indian players like Dr Lal, Thyrocare, SRL, Metropolis put together will be 40-50 percent. So the current market share of these entities is fairly low as far as the opportunity is concerned. That too the USD 6 billion market has been growing at around 170-18 percent.

So in that context, my view is that as the patient specifically looks for quality in terms of diagnostic as well. Some of these players who have a significant band equity attached to them and do maintain high quality standards will tend to gain share versus the others. So, in that context as far as the space is concerned, there is significant growth ahead as we look 3-5 years out. As far as competition is concerned, it has always been very competitive. In fact, to some extent, as this place is getting far more organised, you seeing some of these organised players starting to gain share from the standalone entities.

So I am not too bothered about the valuation multiple corrections in the near-term. Whether you give it 25 times, 22 times or 20 times, the idea is that if you are going to hold these shares from a 5-10 view, given the market opportunity, it could be a significant compounder.

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First Published on Aug 22, 2016 09:24 am
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