Largest and one of the fastest-growing diagnostic chain in Southern India.
VDC is the largest integrated diagnostic chain, by operating revenue, and also one
of the fastest-growing diagnostic chains in Southern India. They have built an extensive
operational network consisting of 81 diagnostic centres including a flagship centre
located at Hyderabad, and 11 co-located reference laboratories, including a national
reference laboratory at its flagship diagnostic centre, across 13 cities and towns
in the states of Telangana and Andhra Pradesh and in National Capital Region and
Kolkata, as of June 30, 2021. VDC also intends to grow inorganically by acquiring
standalone diagnostic centers and laboratories.
One-stop solution diagnostics service provider
VDC offers a comprehensive range of approximately 1,610 pathology tests, which are
organized into approximately 740 routine tests and 870 specialized tests, as well
as approximately 220 basic and 320 advanced radiology tests that cover a range of
specialties and disciplines. Their test menu includes (i) pathology tests ranging
from basic biochemistry and clinical pathology to cytogenetics and high-end molecular
diagnostic tests, including protein chemistry, cellular immunology, flow cytometry,
genetics, cytogenetics, immunohistochemistry and advanced microbiology tests, and
(ii) radiology tests ranging from basic echocardiograms, X-rays and ultrasounds
to advanced radiology tests such as MRI, HRCT, SPECT and PET CT. The company also
offers RT-PCR testing and/or CT scan for COVID-19 diagnosis across 33 diagnostic
centres in 11 cities and towns.
Strong technical capabilities & cutting-edge diagnostic testing technology
Vijaya Diagnostic Centre’s strong technical capability and ability to adopt
latest technologies in the diagnostic industry allows them to provide high quality
and reliable diagnostic services to their customers. As of June 30, 2021, their
radiology testing operations are supported by radiology equipment including 15 CT
machines, 18 MRI machines and five PET CT/Gamma machines, which they believe represent
the leading technology used in the field, and a team of 105 radiologists across
diagnostic centres.
High brand recall driving business
A substantial majority of the company’s customers are individual customers,
with over 92.09% of the revenue from operations for FY21 directly attributed to
individual consumer business, as a result of their trusted and quality diagnostic
services built over decades of experience. They focus on a customer centric approach
to deliver best services that leads to high customer satisfaction and increasing
customer stickiness.
Future growth challenges:
The entire issue is offer for sale due to which the company will not receive any
proceeds. VDC is targeting inorganic growth by acquiring standalone diagnostic centres.
If VDC is unable to generate enough cash flows, growth will get hampered.
Related party transactions:
In FY17, one of VDC’s subsidiaries, Medinova Diagnostic Services LTD (MDSL),
defaulted on certain equipment loans availed from its lenders. Also, VDC had written-off
trade receivables worth ~Rs 2 cr from MDSL and made investments and loans to other
loss making subsidiaries as well. Such transactions in future can have an adverse
effect on VDC’s business and financial condition.
Inability to maintain the brand image:
Since VDC primarily derives almost all of its revenues from walk-in customers, VDC
brand and reputation are critical for the success of business and operations. Ability
to maintain and improve the brand name and brand image is dependent on factors such
as quality, accuracy and efficiency of diagnostic tests, turnaround time and patient
satisfaction and services. Any delays or inaccuracies in the test results may induce
negative publicity and cause harm to the brand which may affect the business.
Geographically concentrated business operations:
Although the company has presence across 13 cities and towns in India, 96% of revenues
in FY21 were contributed by operations in just two states of Telangana and Andhra
Pradesh. Any negative event in these states could affect business operations of
VDC.
Highly competitive space with low entry barriers:
The diagnostics industry in India is highly competitive with the presence of diagnostic
healthcare service providers, hospital-based laboratories, independent clinical
laboratories, other smaller-scale providers of diagnostic services. Increase in
the number of comparable diagnostic healthcare facilities may exert pricing pressure
on some or all of VDC’s services. The manufacturers of laboratory equipment
and test kits may also enter the diagnostic industry by marketing point-of-care
laboratory equipment to physicians and by selling self-test kits, which may be more
convenient to the patients and cheaper than the company services. Further, the lack
of regulations allows a multitude of organized and unorganized players to compete
in the market.
Vijaya Diagnostic Centre (VDC) is India’s largest comprehensive diagnostic network with over 80 state-of-the-art centres spread across 13 cities. Vijaya Diagnostic Centre has a qualified team of over 2200 professionals consisting of some of the country’s top radiologists, pathologists and healthcare professionals. It is one of the fastest-growing diagnostic chains in Southern India. The company offers a one-stop solution for pathology and radiology testing services. The company offers around 740 routine tests, 870 specialized pathology tests, 220 basic tests, and 320 advanced radiology tests. The company also offers a broad spectrum of customized health and wellness packages to its customers.
The diagnostic market in India is under-penetrated relative to its potential demand. VDC intends to strengthen its presence in regions in which they operate by (i) expanding service network by opening additional diagnostic centres; (ii) enhancing laboratory capacity and test menu by adding latest technologies; (iii) increasing business from individual customers by offering a portfolio of additional services. However, at the upper price band of Rs 531, the IPO is valued at ~63x FY21 earnings which is in line with its peers such as Thyrocare & Metropolis. However, since the entire issue is OFS, no proceeds will come to the company & the operations are majorly limited to only 2 states. We do not expect any significant growth opportunities for the company. Hence, we recommend investors to avoid subscribing to the IPO.
Peer comparison (Rs crore) | FY19 | FY20 | FY21 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Company | Revenues | EPS | ROE (%) | Revenues | EPS | ROE (%) | Revenues | EPS | ROE (%) | P/E |
Vijaya Diagnostic | 293 | 5 | 22% | 339 | 6 | 23% | 377 | 8 | 24% | 63 |
Metropolis Healthcare | 761 | 24 | 26% | 856 | 25 | 24% | 998 | 36 | 32% | 78 |
Thyrocare Technologies | 370 | 18 | 21% | 401 | 15 | 19% | 474 | 23 | 29% | 57 |
Use of Proceeds:
The total issue size of Rs. 1,895 crore is fully an OFS constituting offer for sale
of up to 3.57 crore equity shares by promoters & investors. Company will not
get any capital from this issue. All proceeds will go to such selling investors.
Book running lead managers:
ICICI Securities, Edelweiss Financial, Kotak Mahindra Capital
Management:
The company was founded and promoted by Dr. S. Surendranath Reddy, the executive
Chairman, who is a first generation entrepreneur and has more than 4 decades of
experience in integrated diagnostics business and is a radiologist. Their CEO, Sura
Suprita Reddy, and executive director, Sunil Chandra Kondapally, have been involved
in their business and operations since 2003 and 2002, respectively.
Yr End March (Rs Cr) | FY19 | FY20 | FY21 |
---|---|---|---|
Net Sales | 293.00 | 339.00 | 377.00 |
Material Cost | 40.00 | 44.00 | 58.00 |
Employee Cost | 54.00 | 62.00 | 57.00 |
Other Expenses | 90.00 | 100.00 | 96.00 |
EBITDA | 109.00 | 133.00 | 166.00 |
EBITDA Margin | 37.00% | 39.00% | 44.00% |
Depreciation & Amortization | 40.00 | 49.00 | 51.00 |
EBIT | 69.00 | 84.00 | 115.00 |
Other Income | 10.00 | 15.00 | 12.00 |
Interest & Finance Charges | 14.00 | 15.00 | 15.00 |
Profit Before Tax - Before Exceptional | 65.00 | 84.00 | 112.00 |
Tax Expense | 19.00 | 21.00 | 27.00 |
Effective Tax rate | 29.00% | 25.00% | 24.00% |
Net Profit | 46.00 | 63.00 | 85.00 |
Net Profit Margin | 16.00% | 19.00% | 23.00% |