Hyderabad-based diagnostics operator Vijaya Diagnostic Centre (VDC) had a flat listing in the markets today at ₹542.30 — a premium of 2 per cent to the issue price. It, however, managed to build some gains from there and at the time of writing this was trading at ₹620.50 — a premium of around 17 per cent to the issue price. It now trades at around 39 times EV/EBITDA (34 times at IPO).
While this might appear reasonable compared to peer group range of 37 to 73 times, it does not adequately reflect the geographic concentration risk that VDC faces. We hold on to our wait and watch call on the stock of VDC.
The company has strong fundamentals in its core markets in Hyderabad, but has to establish presence in other markets to sustain long-term growth. The company’s geographical concentration risks and its typical full-service offering at company-owned locations can hinder faster expansion, which other franchisee-based models offer. More clarity is required on how margins will fare when the company expands into other geographies or when competitors up the ante where VDC has strong presence now.
VDC provides integrated diagnostics services across pathology and radiology (65/35 per cent revenue split) primarily to walk-in/individual consumers (93 per cent B2C vs 40-60 per cent for peers). VDC has 79 centres spread across the two southern States and one centre each in NCR and Kolkata (total 81).
In FY21, VDC derived 96 per cent of its revenues from Telangana and Andhra Pradesh of which Hyderabad accounted for 80 per cent of total revenues. VDC reported 19 per cent CAGR in revenue in the five years up to FY20. It narrowed to industry-level growth in the last three years, 13.5 per cent CAGR in FY19-21. VDC’s industry leading revenue per test or/per customer is driven by radiology mix, higher tests per customer and a largely walk-in clientele. This, along with mature asset base, aided VDC’s reported EBITDA margins’ improvement from 37 per cent in FY19 to 44 per cent in FY21 (42 per cent adjusted for Covid disruption). VDC is cash surplus with negligible debt, apart from the leasing liability.