When it rains, it pours, goes the old saying. This is certainly true for this IPO season. Following Krsnaa Diagnostics and Krishna Institute of Medical Sciences’ (KIMS) stellar subscription and listing, another healthcare services company is set to launch its initial public offering (IPO) — Vijaya Diagnostic Center (Vijaya Diagnostic).

Vijaya Diagnostic is an integrated diagnostic services provider. It provides diagnostic tests for specialized and routine pathology and basic and advanced radiology. Pathology services include basic biochemistry tests, clinical pathology tests, cytogenetics, and molecular diagnostic tests. Radiology services include X-rays, ultrasounds, magnetic resonance imaging (MRI) scans, etc.

The Telangana-based pathology and radiology services provider’s IPO is a complete offer for sale in which its only institutional investor will sell two-thirds of its stake. Prospective investors will be inclined to look at Vijaya Diagnostic for its B2C approach to the diagnostics market. This different business model comes with healthy growth in revenue and profits, high margins, and cheap valuations. Can Vijaya Diagnostic stand out in the increasingly competitive healthcare services market?

Kedaara Capital sells two-thirds of its stake

Vijaya Diagnostic is a family-run business with Dr. Surendranath Reddy as its promoter. The promoter group consists of members of Reddy’s family. The company counts Mumbai-based Kedaara Capital as an institutional investor through its investment vehicle Karakoram Capital. In 2016, Kedaara invested Rs 350 crore in Vijaya Diagnostic. 

The diagnostic chain’s IPO is worth up to Rs 1,895 crore and is a complete offer for sale (OFS). Through the OFS, the promoter will sell 50.9 lakh shares for up to Rs 270 crore and Kedaara Capital will sell 3 crore shares for up to Rs 1,624 crore.

Together, the promoter and promoter group hold 59.8% and Kedaara Capital holds 40% of the company before the IPO. Post the IPO, the promoters and the promoter group will hold 54.9% and Kedaara Capital will hold only 10% of the company. The IPO price band is Rs 522-531 per share. Post the issue, at the upper end of the price band, Vijaya Diagnostic will be valued at nearly Rs 5,400 crore.

The healthcare services market boasts of companies with high valuations. Vijaya Diagnostic is valued at 64.3 times its FY21 earnings, which is higher than Thyrocare Technologies (Thyrocare). However, its valuation remains below Dr. Lal Pathlabs and Krsnaa Diagnostics.

B2C business contributes 93% of revenue

Vijaya Diagnostic provides both pathology and radiology tests through its 81 centres as of June 2021. Between FY19-21, it increased its total centres by 31% to 80 centres in 13 states. Most of its centres are located in Telangana, contributing nearly 86% of FY21 revenue. Beyond Telangana and Andhra Pradesh, the company has a smaller presence in Kolkata through its subsidiary Medinova Diagnostic Services (Medinova). During the pre-IPO discussion call with analysts, the management said it plans to expand into eastern India using Kolkata as a hub through Medinova.

Its main diagnostic hub is located in Hyderabad which conducts over 50% of its tests contributing 17% of FY21 revenue. The company also has 20 collection centers for pathology tests and conducts basic and advanced radiology tests. These centers contributed 46% of FY21 revenue.

The company offers B2C diagnostic services to individual and corporate clients, which accounted for over 93% of FY21 revenues. This is unlike Krsnaa Diagnostics which operates a public-private partnership (PPP) with state government agencies and Thyrocare which operates a B2B model.

Being a B2C company (93% of revenue from individual clients in FY21), the company records higher tests and realizations per client. However, there is a threat of competition from PPP diagnostic services providers. During the pre-IPO call, the management said, its B2C model does not expect any demand reduction due to PPP companies. This is because of Vijaya Diagnostic’s higher income per patient (Rs 1,214) compared to industry peers like Metropolis Healthcare (Rs 857), SRL Diagnostics (Rs 797), and Dr. Lal Path Labs (686).

Consistent revenue growth with healthy margins

In FY21, Vijaya Diagnostic’s revenue was Rs 377 crore, an 11% growth YoY due to a higher number of Covid-19 RT-PCR (reverse transcription-polymerase chain reaction) tests conducted. Between FY19 to FY21, revenue rose by 29%. In Q1FY22, revenue was Rs 123 crore, a 2.3X growth YoY due to a low base in the year ago period as many of its diagnostic clinics were closed during the national lockdown. 

Net profits were Rs 85 crore in FY21, up 36%. This was because Vijaya Diagnostics’ rental expenses and advertising expenses halved, and staff costs were down by 8%. Staff costs were lower in FY21 as the company did not conduct Covid-19 tests or carry on its regular operations till Q1FY21.

In FY21, the company’s EBITDA grew by 17% YoY to Rs 177.8 crore, with margins of 47.2%, a 3.5 percentage points increase YoY. Between FY19-21, the company’s EBITDA margins were in the 40-47% range, which is higher than its listed healthcare services peers. In Q1FY22, EBITDA rose by nearly 73% YoY to Rs 60 crore due to a low base.

Vijaya Diagnostic’s return on equity (ROE) in FY21 was 23.6%, a rise of 80 basis points YoY. Only two other healthcare services companies’ ROE rose in FY21 — Artemis Medicare Services and Aster DM Healthcare.

High lease liabilities and steady cash flows

In FY21, Vijaya Diagnostic’s total debt was Rs 4.4 crore, a fall of 86% YoY. Its debt-to-equity was 0.01 in FY21, down from debt-to-equity 0.1 in FY20. 

While the company’s debt levels are low, its long-term lease liabilities are high, forming nearly 92% of non-current liabilities in FY21. In FY21, Vijaya Diagnostic’s long-term lease liabilities were Rs 126 crore, a 6% increase YoY. By June 30, 2021, lease liabilities increased by another 16%.

Vijaya Diagnostic’s operating cash flows in FY21 were Rs 129.6 crore, a 22% growth YoY. Capital expenditure (capex) during the year was Rs 32 crore, 32% less than the previous year, as the company purchased additional medical equipment. The company’s free cash flows in FY21 were Rs 97.5 crore, a 66% growth YoY. In Q1FY22, free cash flows were Rs 42.7 crore, a 23X increase from the previous year due to a low base.

B2C model offers a different investment theme

In FY21, the Indian diagnostic services market was worth Rs 73,000 crore. Due to higher expenditure on healthcare infrastructure (particularly in rural areas), rising income levels, and government programs (like the Ayushman Bharat Pradhan Mantri Jan Arogya Yojana) the market is expected to grow at a CAGR of 15% to reach Rs 98,000 crore by FY23, according to a report by Crisil Ratings. 

Vijaya Diagnostic will bank on higher expenditure by Indians, particularly those in South India, on healthcare. The states of Telangana, Andhra Pradesh, Karnataka, and Tamil Nadu’s per capita expenditure on healthcare between FY15-21 grew at a CAGR of 6-8%, against an average of 5.4% for the entire country. Nearly 97% of Vijaya Diagnostic’s revenues come from south Indian states, the most by any listed diagnostic company.

The company’s main play is its B2C model, which is vastly different from other diagnostic services providers, which are either B2B focused or with governments under a PPP model. Vijaya Diagnostic offers a slightly different investment theme to investors. This theme is coupled with healthy margins, consistent revenue growth, growing ROE, free cash flows, and relatively cheap valuations. In a competitive healthcare market, Vijaya Diagnostic is worth looking at.