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Optically subdued growth

Krsnaa Diagnostics’ 3Q earnings were below estimates primarily due to expiry of Rajasthan tender which contributed ~INR 120mn in 3Q22. Adjusted for this, non-Covid growth has been encouraging at ~27%YoY, in line with what the management has been indicating. Covid revenues were negligible this quarter. Krsnaa does not expect termination of anymore contracts in FY24. Krsnaa has commissioned most of the RHP tenders, Himachal pathology labs and Tripura centres. Additionally, new tender wins from BMC (600 collection centres) and Orissa (386 collection centres) will commission early FY24. This, in our view, can drive healthy double digit topline growth with higher EBITDA growth. Krsnaa has bid for the Rajasthan tender (potential of INR 2bn p.a.) and the outcome is expected in the near-future. The management will provide more insight on FY24 guidance in 4Q. We remain confident of robust execution deriving comfort from their current adjusted growth. Post the steep correction, valuations remain attractive at 13x/11x FY24/FY25 earnings with huge potential upside from (1) B2C foray; and (2) Rajasthan tender win not factored in JMFe or street estimates. We reiterate BUY with a Sep’23 Price Target of INR 810.

* Revenues in line; performance to only improve sequentially: : Krsnaa reported growth in Non-Covid revenues of 12%YoY/-4%QoQ with negligible Covid contribution. The Rajasthan tender expired in Aug’22 which created a void in the base, adjusted for which, non-Covid revenues grew 27%YoY- significantly ahead of estimates. Rajasthan tender contributed INR 120mn in 3Q, INR 700mn in FY22 and INR 400mn till Aug’22. Punjab tenders and Himachal pathology labs are ramping up well supporting growth. EBITDA margins remained constant QoQ at 24.9% (JMFe: 26%). With most RHP centres operationalized along with some contribution from newer tenders, we expect the revenues to reach INR 1.3bn by 4Q thereby improving margin profile as well.

* Tapping the tender business; B2C plans in pipeline: : Krsnaa has already won 5 orders from Maharashtra, Punjab, Himachal Pradesh and Karnataka (RHP contracts) with additional wins from Himachal Pradesh, Chandigarh and Uttar Pradesh in 4QFY22. In 1QFY23, the company won additional 4 contracts in Maharashtra, Rajasthan, Tripura and Delhi. In 3Q, Krsnaa won new contracts from BMC for setting up 600 collection centres (INR 500mn potential) and to set up 386 collection centres in Orissa. We expect new tender wins to contribute INR 2bn+ to FY25 topline expanding margins with higher operating leverage. The newer tender wins are primarily in pathology which have slightly lower gross margins than radiology (3-4% difference). The company also announced their foray into B2C market in a phased manner by launching 600 collection centres under franchise model (100 launched so far).

* Key Financials: Revenue/EBITDA/PAT of INR 1.1bn/294mn/136mn grew 11%/-2%/- 16%YoY and were -10%/-14%/-23% vs. JMFe respectively. EBITDA margins were flat QOQ at 24.9% (vs. 26% JMFe) as new centre cost continued to weigh in, albeit expected to correct going forward. The company has a net cash position of INR 2bn+. Receivable days nearly doubled to 90+ days as collections tend to come in 4Q.

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