Krsnaa Diagnostics

Dependent on government business

The company is focused on the price-sensitive public private partnership diagnostic segment

Krsnaa Diagnostics offers 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 centres pan-India.

The company also offers a range of diagnostics imaging services and clinical laboratory tests that include both routine and specialized tests / studies and profiles, which are used for prediction, early detection, diagnostic screening, confirmation, and monitoring of diseases.

The company has an extensive network of integrated diagnostic centres across India primarily in non-metro and lower tier cities and towns. As of June 30, 2021, company operated 1,823 diagnostic centres offering radiology and pathology services in 13 states across India.

In FY 2021 and in the three months ended June 30, 2021, the company served 51.8 lakh patients and 18.8 lakh patients, respectively. Company's radiology tests are priced 45% - 60% lower than market rates while pathology tests are 40% - 80% lower than market rates.

In FY 2021, revenue from contracts with Public Health Agencies contributed 67.49% of total revenue, contracts with Private Healthcare Providers contributed 32.51% as compared to 72.92% and 27.08%, respectively, in FY 2020.

As of June 30, 2021, the company had a team of 190 radiologists, 30 pathologists, eight microbiologists and more than 2,800 qualified professionals including clinicians, technicians, and operators.

The management intends to continue to expand network of diagnostic centres, and services within India, which is to grow the network across all states in India by leveraging its experience of deploying and operating diagnostic centres.

The company believes there is huge potential for PPP (public private partnership) model diagnostics in an underpenetrated rural India.In PPP model, the government contributions can vary from providing land lease, upfront capital infusion, to giving financial concessions on the capital infused by the private players. Players with established track records and most competitive prices have the chances of winning such PPP tenders. Krsnaa Diagnostics operates primarily on the PPP model.

Going forward, the growth drivers for diagnostics industry will be driven by rising income levels, Increasing health awareness and increased government focus on healthcare.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 400 crore and an offer for sale of Rs 813.33 crore by existing shareholders Phi Capita, Kitara, Somerset and Lotus Management Solutions.

The price band for the IPO is Rs 933 to Rs 954 per equity share of face value Rs 5 each.

The offer also includes a reservation of shares worth Rs 20 crore for employees, at a discount of Rs 93 per share to the final issue price.

Objectives for the fresh issue are Rs 150.8 crore will be used to finance the cost of establishing diagnostics centres in Punjab, Karnataka, Himachal Pradesh and Maharashtra, Rs 146.08 crore will be used for repayment/pre-payment of certain borrowings availed by the company and remaining proceeds will be used for general corporate purposes.

Rajendra Mutha is the promoter of the company. Promoters and promoter group holds an aggregate of 8,597,676 Equity Shares, aggregating to 31.62% of the pre-offer issued and paid-up Equity Share capital.The post IPO shareholding for the same is expected to be around 27.38%.

The issue, through the book-building process, will open on 4 August 2021 and will close on 6 August 2021.

Strengths

The company operates one of India's largest teleradiology reporting hubs in Pune that has ability to process large volumes of X-rays, CT scans and MRI scans round the clock and 365 days a year and allows the company to serve patients in remote locations where diagnostic facilities are limited.

The company has extensive footprint around the nation with robust infrastructure. Its network of diagnostic centres spans 13 states across India with presence over 1,823 locations as of June 30, 2021.

The company is focused on the public private partnership (PPP) diagnostics segment, therefore 77.59% of all tenders (by number) company bid foris granted to it. Company has largest presence in the diagnostic PPP segment.

The company’s business model is designed such that, it does not pay any referral commissions to independent practitioners and private clinics resulting in cost efficiency.

The company is well positioned to capitalize on healthcare spending around public and private industries.

The company has a track record of improving top line performance. Its total revenue from operations for FYs 2021, 2020 and 2019 was Rs 396.46 crore, Rs 258.43 crore and R 209.24 crore, respectively. Revenue grew at a CAGR rate of 37.5% from FY2019 to FY2021.

The cost of radiology tests provided by the company is 45% - 60% lower than market rates, while the cost of pathology tests provided by the company is 40% - 80% lower than market rates.

Weaknesses

Over the last few years, a significant majority of the company's revenue has been generated from contracts with public health agencies representing d 72.01%, 72.92% and 67.49% in FYs 2019, 2020 and 2021, respectively. Any failure to renew such agreements could materially impact the company.

It is exposed to the risk that certain entities, especially public health agencies, may reject, delay, or fail to make payment for services rendered. This risk may arise from financial difficulties such as liquidity constraints or on account of human or computer error or gaps in system. In FYs 2019, 2020 and 2021, the company’s trade receivables were 26.87%, 23.77%, 18.28%, respectively, of total revenues Trade receivables due for more than 60 days as of March 31, 2021, was Rs 22.59 crore (31.17 % of total trade receivables) on account of payment delays.

The diagnostics industry in India is highly competitive and fragmented with several companies present in the market, and therefore it is challenging for the company to improve market share and profitability.

The company experienced heavy demand for RT-PCR testing due to the COVID-19 pandemic, which has had a positive impact on its overall testing volume, level of the demand for covid related tests in the future remains uncertain.

The diagnostic business has a high amount of working capital requirement for maintenance and development of business network and infrastructure.

The company derives substantial portion of revenue from the states of Maharashtra, Rajasthan, and Karnataka. Revenue from the above states represented 74.21%, 65.74% and 70.42% of total revenue in FYs 2019, 2020 and 2021, respectively.

The company has recorded restated losses and negative net worth in FY 2019 and FY 2020.

The prices that the company charge for its services are fixed under the contracts with public and private healthcare service providers. Pricing limits imposed by the government and any government linked insurance schemes may limit the company's ability to determine or revise the prices of the services offered.

Valuation

For FY 2021, consolidated sales were up by 53.41% to Rs 396.46 crore to some extent due to covid related testing volume compared to FY 2020. OPM decreased by 65 bps to 23.66% which led to 49.33% increase in operating profit to Rs 93.81 crore. Other income decreased 5.53% to Rs 12.24 crore, while interest cost rose 5.17% to Rs 25.94 crore and depreciation increased 15.51% to Rs 37.44 crore. PBT before extraordinary items increased 128.22% to Rs 42.66 crore.

There was extraordinary gain of Rs 252.78 crore on account of fair value movement of Compulsory Convertible Preference Shares in FY 2021 compared to extraordinary loss of Rs 177.03 crore on account of fair value movement of Compulsory Convertible Preference Share in FY 2020. Tax expenses for FY2021 was of Rs 110.52 crore compared to tax credit of Rs 46.38 crore in FY2020. Net profit stood at Rs 184.92 crore for FY2021 compared to loss of Rs 111.96 crore in FY2020.

The annualized EPS (excluding extraordinary items and relevant tax) on post-issue equity works out to Rs 8.51 for FY2021. On the upper price band of Rs 954, P/E works out to 112.10 for FY2021.

In terms of P/E ratio, among the other listed peers, Dr. Lal Path Labs trades at P/E of 106.25,Metropolis Healthcare at P/E of 80.60 and Thyrocare at P/E of 61.86. FY2021 annualized EPS is used in the calculations, with the share price being used as of 2 August 2021.  Krsnaa's business model, dependent on price-competitive government contracts, is inferior to these listed peers' business models, dependent on their brands, technology, and service level.