Vijaya Diagnostic Centre (VDC) is a Telangana/Andhra Pradesh based diagnostics provider with a strong base in Hyderabad. The company provides integrated diagnostics services across pathology and radiology (65/35 per cent revenue split). The company works on a typical hub and spoke model but focusses on a wider service offering at each location. The primary clientele being 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). The IPO is entirely an offer for sale to provide partial exit to existing investors, who will be divesting 30 per cent of the stake while the promoter is divesting 5 per cent. Investors may find the operational metrics of the regionally well-established company to be at a reasonable valuation (see peer comparison table) in the IPO offering. But investors should also give due weight to the risks from high degree of geographic concentration and non-franchisee model of the company, and can adopt a wait and watch approach.
In FY21, VDC derived 96 per cent of its revenues from Telangana and Andhra Pradesh of which 86 per cent are from Telangana state. Within Telangana, Hyderabad accounted for 80 per cent of total revenues in the period, and furthermore the flagship centre in Hyderabad accounted for 18 per cent of total revenues. VDC has built strong brand recognition in the region with its comprehensive service offering at competitive rates, but concentrated operations are fraught with risk. For instance, the typical risk associated with geographic concentration even played out in FY21 as VDC was subjected to local regulations and could not administer Covid tests in the early part of the pandemic. VDC was able recover from the slower growth in the first half of the year to report revenue growth of 11 per cent in FY21, compared to revenue growth of 53 per cent in Krsnaa Diagnostics or 19 per cent in Dr. Lal PathLabs (DLPL) with wider presence. Also, healthcare being a state subject, VDC cannot diversify any potential regulatory risk. The other main risk associated with concentration is that any increase in competition in core markets could have a significant impact on VDC. Thyrocare, which has a strong presence in markets of Hyderabad and South India, has joined forces with PharmEasy and now has the resources of an online aggregator backing its operations. Operating from a limited region implies eventually reaching a growth ceiling in the absence of an aggressive expansion plan. The current expansion plan is built on penetrating further into core market and expanding into adjacent regions in concentric cirlcle around core markets. DLPL has been successful only recently, in diversifying away from its core market of NCR. This has been at the cost of pricing ability while being backed by a recognisable brand and a model which married franchisees, technological reach and company presence.
VDC’s 81 centres operate as 1 flagship centre co-housing a national reference lab, 20 hubs co-housing 10 reference labs and 60 diagnostic centres. Most centres are company-operated leased facilities offering integrated diagnostics services (pathology and radiology) with smaller spokes offering basic testing across the two. This has allowed VDC to be in charge of a complete customer experience, which in turn drives customer stickiness. But on comparison with other existing models, this comes across as an intensive model low on agility. DLPL, which is over 4 times the revenues of VDC, operates 229 central labs with 9,000 pick-up points and the company depends on franchisee model for growth. While VDC generates integrated, faster and deeper customer experience at fewer locations, the other models allow for wider reach which makes up for the lower pricing in aggregator/franchisee model. VDC also has a good support staff including radiologists at most locations compared to centralised teams approach adopted by most other competitors. This will again involve the similar trade-off of depth of offering versus reach for the company.
The company reported a revenue growth of 19 per cent CAGR in the 5 years preceding FY21 that is from FY19-20 as the VDC focused on core markets expansion and test menu. The revenue growth of FY19-21 was more in line with the industry range at 13.5 per cent CAGR. VDC’s revenue per test (₹428 vs ₹275 for DLPL) or revenue per customer (₹1,200 vs ₹700 for DLPL) are amongst the highest in the industry driven by radiology mix, higher tests per customer (2.8 tests vs 2.5 for others), and a largely walk-in clientele which does not attract finder’s fee from aggregators/franchisee’s. The same has also held up the margin profile of the company along with an asset base which is largely matured (allows for higher utilisation). Compared to Krsnaa where half of the asset base was established in the last three years, VDC added 25 per cent to the base from FY19. VDC’s reported EBITDA margins improved 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.
VDC’s EV/EBITDA stands at 34 times FY21 EBITDA which is lower than the industry range. Investors should consider the potentially difficult environment for future growth in considering the reasonable valuation for VDC with strong operating metrics in its home market.