Capacity expansion to provide impetus to growth
The company intends to grow their network across all states in India by leveraging their experience of deploying and operating diagnostic centers. The scale of their operations, presence in tier II and tier III locations, ability to offer competitive pricing to customers, accuracy of diagnostic test results and service delivery including through tele-reporting coupled with brand-building activities will aid them to grow their customer base. The company intends to enhance its capabilities in specialized diagnostic services such as molecular diagnostics and genomics. The company also intends to grow their focus on the private sector across both B2B and B2C by partnering with more private sector healthcare providers, establishing standalone diagnostic centers, integrated brand building campaigns, raising awareness among doctors on the quality and comprehensive nature of their service offerings and focusing on customer experience and improvement. The company’s major focus is to expand its capabilities at their existing diagnostic centers to provide a wide range of services including healthcare screening and chronic and lifestyle disease management services.
Unique business model with strong revenue visibility
The company’s business model of a diagnostic center within an existing medical facility has significant advantages that include lower marketing spend and a captive customer base. The company focuses on the public private partnership (“PPP”) diagnostics segment and have the largest presence in the diagnostic PPP segment. Their PPP agreements are typically long-term in nature and ensure predictability of their revenues from operations. Pursuant to the terms of their PPP agreements, the medical facility typically provides rent-free space and access to its utilities and other infrastructure for installation and operations of their diagnostic centers. Further the company does not spend on doctor referral fees and commissions which we believe is margin accretive for the company. This hospital partnership model of operations ensures captive customer, synergies in various costs as well as significant volumes that ensures cost structure to remain efficient. The company’s cost efficient operations aid them in bidding at competitive prices thereby allowing to convert more bids into projects.
Ability to maintain cost competitiveness through operating leverage
Due to hospital partnership model, the company benefits from the captive patient base of such facilities and the large volume of diagnostics tests undertaken for these patients. The volume of tests grew at a CAGR of 20% between FY18 to FY21, which was the highest amongst peer companies. Larger volumes help diagnostic chains achieve economies of scale, as equipment are optimally utilized and operating costs are spread over a larger number of centers, thus company’s high diagnostics volumes in-turn aid in economies of scale and thereby optimize their operational costs, resulting in price competitiveness. The company’s ability to competitively price their diagnostic services has enabled them to convert bids into actual contracts and is evident from their bid-win rate of 77.5% for tenders (by number) that they bid for since commencement of operations. These contract wins in turn, have further augmented their volume of diagnostic services and improved their operating leverage.
Extensive distribution network with robust infrastructure
The company’s network of diagnostic centers spans 13 states across India and as of June 30, 2021, were present in over 1,800 locations. The company commenced operations in FY11 with 2 radiology diagnostic centers and as of June 30, 2021, they have established 1,370 radiology diagnostic centers and 487 pathologies diagnostic centers including 443 collection centers. They operated 24 private diagnostics centers and 590 centers in collaboration with public health agencies across 36 districts in Maharashtra where they provide radiology, pathology and tele-radiology services as of June 30, 2021. They attribute the growth of their diagnostic centers across India primarily to their ability to understand and analyze new markets and to their project management and execution capabilities.
Strong brand equity with quality healthcare services at affordable prices
The company continues to focus on providing quality and reliable healthcare services at affordable prices. For example, the cost of radiology tests the company provides is 45% – 60% lower than market rates while the cost of their pathology tests are 40% – 80% lower than market rates (Source: CRISIL Report). The range of diagnostic services coupled with the scale of their operations allows them to achieve economies of scale and provide competitive pricing for their operations. A number of our diagnostic centers are accredited with NABL or NABH. The company ensures that the look and feel of their diagnostic centers is consistent which helps brand visibility and increase brand recall. Further this approach has enabled them to generate brand equity in the semi-urban and rural areas, where the presence of diagnostics chains is limited.
Incorporated in December 2010, Krsnaa Diagnostics Ltd is a large and differentiated diagnostic service provider. They provide a range of technology-enabled diagnostic services such as imaging (including radiology), pathology/clinical laboratory and tele-radiology services to public and private hospitals, medical colleges and community health centers across India. The company operate one of India’s largest tele-radiology reporting hubs in Pune that is able to process large volumes of X-rays, CT scans and MRI scans round the clock and 365 days a year. The company has public-private partnerships in 14 states. It has 1,823 diagnostic centers, with the largest presence in Maharashtra, Karnataka and Rajasthan. Krsnaa provides quality and inclusive diagnostic services at affordable rates. As of June 30, 2021, they had a team of 190 radiologists, 30 pathologists, 8 microbiologists and more than 2,800 qualified professionals including clinicians, technicians and operators.
Outlook & Valuation
The company’s growth prospects look promising, considering the i) comprehensive range of diagnostic services i.e. imaging, pathology etc ii) strong brand equity with quality healthcare services and iii) extensive market footprint across India. Further, its PPP agreements, to deploy diagnostic centers for its radiology and pathology services are typically long-term in nature that ensure predictability of their revenues from operations. At the upper price band of Rs 954, the IPO is valued at 77.8x of FY21 earnings (diluted), which is at par with peers. We believe the company has strong execution track record along with industry tailwinds due to pandemic, hence we recommend SUBSCRIBE to the IPO for long term perspective.
|FY21 Particulars||Revenue (Rs cr)||EBITDA (Rs cr)||Diluted EPS (Rs)||P/E||RONW|
Use of Proceeds:
The offer comprises fresh issue of Rs 400 crores and a Rs 813 crores offer for sale by private equities. Out of the fresh Issue of Rs 400 crores, the company plans to use Rs 150 crore to set up 29 diagnostic centers across Punjab, Maharashtra, Karnataka and Himachal Pradesh and also plans to repay/ pre-pay debt worth Rs 146 crore to the lenders in FY22.
Book running lead managers:
JM Financial, DAM Capital, Equirus Capital, IIFL Securities
Promoter and Chairman, Rajendra Mutha, is a first generation entrepreneur and has over 10 years of experience in the field of pharmacy and diagnostics. He has been instrumental in the company’s growth since its inception in 2010. Managing Director, Pallavi Bhatevara, is responsible for expansion and growth of their company and is involved in the tendering process and implementation and execution of projects. Whole-time Director, Yash Mutha, has over 12 years of experience in the field of audit and risk management and has been associated with multinational corporations and global audit firms.
|Yr End March (Rs Cr)||FY19||FY20||FY21|
|Depreciation & Amortization||26.00||32.00||37.00|
|Interest & Finance Charges||20.00||25.00||26.00|
|Gain/Loss on fair value movement of CCPS||-96.00||-177.00||253.00|
|Profit Before Tax||-77.00||-158.00||296.00|
|Effective Tax rate||25.00%||29.00%||37.00%|
|Net Profit Margin||-28.00%||-43.00%||47.00%|