Stock Fundamentals

Should you subscribe to the Krsnaa Diagnostics IPO?

Sai Prabhakar Yadavalli | Updated on August 04, 2021

Valuation is reasonable given the growth opportunity

Krsnaa Diagnostics Limited (Krsnaa), a Pune-based diagnostics provider, has launched its IPO which is open till August 06, at a price band of ₹933-954 per share.

The company’s business model primarily relies on Public-Private Partnerships (PPP) in non-metro locations, focusing on radiology/imaging along with pathology. It is different from listed competitors whose largely pathology centred operations are based out of metro cities.

Investors can subscribe to the offer considering the differentiated business model, growth visibility for the company and valuations comparable to the fast-growing industry peers.

The IPO aims to raise ₹1,213 crore, of which the company will utilise ₹400 crore of a fresh issue for capital investments and debt repayment. The remaining ₹813 crore is an offer for sale to provide partial exits to three non-promoter investment funds. The promoter stake will be at 27 per cent post IPO and Krsnaa will be valued at around ₹3,000 crore.

PPP model

Krsnaa derives around 70 per cent of its revenues from contracts to public health agencies, which it wins through tenders. The company can access a ready captive market in these establishments, eliminating marketing, branding and real estate/franchisee costs typical to other large or standalone operators. Krsnaa has managed a high win rate of 78 per cent in these tenders based on lower pricing. The centralised hub in Pune with 190 radiologists to process the radiology scans and long relations with equipment vendors, provides cost differentiation and better pricing, 30-40 per cent lower than competition. The PPP model also allows for a wider reach than other large operators who rely on brand recall for expansion. The company has a more prominent presence in Tier II/III cities across 13 states which are mainly underserved (rural regions account for only 26 per cent of diagnostics market share), especially in imaging-based diagnosis.

On the other hand, the PPP model makes the company reliant on government receivables, unpredictable tender cycles and pricing. Krsnaa has managed to bring down receivable days to around 60 days in FY21 from 80 days in FY20, but a large Covid share may have played a part. Krsnaa will rely on individual state government’s tender cycles for new projects but will be better positioned to extend its current projects with an installed asset base. The pricing will be dependent on regulation and contract, but for now is better positioned with 2 per cent annual growth compared to pathology based competitors who are facing a constant decline in prices. As a mitigating factor, Krsnaa has a presence in private medical colleges and hospitals using a revenue share model and aims to increase the private revenue share to 50 per cent in the longer term.

Business mix

Covid testing added close to 37 per cent to revenues in FY21 to the pathology segment, and radiology revenue share decreased in FY21 to 40 per cent, from 65 per cent in FY20. Krsnaa’s revenue growth on a Covid base will be optically weaker when compared to its past growth rate of 37 per cent CAGR in FY19-21.

Krsnaa management is confident of sustaining positive revenue growth in the next two years, based on sustained growth in established base and new projects financed by the IPO proceeds. Even with a captive customer base, healthcare services have a gestation period before capacity is optimally utilised. Close to half of the installed based was launched only in the last three years before Covid interrupted growth in the radiology segment, which delivered 20 per cent growth in newly established centres. As the demand for elective surgeries and normal uptake of facilities increases in these regions post-Covid, the organic growth is expected to recover.

Krsnaa has won a significant contract from the governments of Punjab, Karnataka, Himachal Pradesh and Maharashtra. As the contracts are executed over the next 6-12 months, Krsnaa’s installed capacity of MRI and CT scans will increase by 30-40 per cent aiding radiology revenue growth. Even as the pathology segment normalises post-Covid to lower levels, EBITDA margins can be expected to grow back to 28-29 per cent from 26 per cent in FY21. The expected margin recovery and revenue growth will likely sustain the 40 per cent jump in absolute EBITDA to ₹100 crore achieved earlier in FY21. The margins at the higher range in the industry are due to higher realisations in radiology (around ₹500+) compared to pathology (range of ₹150-250) per sample/test.

 

Valuation

The three listed players in diagnostics Dr. Lal Path Labs, Thyrocare and Metropolis traded at around 25 times EV/EBITDA, last year, before re-rating to 40 to 70 times EV/EBITDA on a trailing basis on account of Covid related demand surge. The recent Thyrocare-PharmEasy deal valued it at 27 times FY23 EBITDA (40x EV/EBITDA on a trailing basis) supported by the high growth expected in the underpenetrated diagnostics segment. Considering the peer valuations and the differentiated PPP model of Krsnaa, which is sustainable and scalable but capital intensive at the same time, the IPO, which values the company at 31 times FY21 EV/EBITDA appears reasonable. Krsnaa has accumulated high debt at 0.87 debt to equity. Out of the IPO proceeds, ₹146 crore will be used to reduce the long-term debt of ₹167 crore reported on March 31, 2021.

 
Published on August 04, 2021

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