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Growth levers intact; 2H to further improve

Krsnaa Diagnostics’ 2Q earnings were almost in-line with estimates. Non-Covid revenues grew 19%YoY/ 9%QoQ while margins were below estimates due to new centre costs and sluggish volumes at existing centres. This is expected to improve in 2H and ramp-up faster in FY24 as these new centres mature. Covid revenues were negligible this quarter at INR 3 mn. Most of the RHP tenders (including Punjab) have been operationalized by Sep’22 despite unforeseen delays. We believe that performance will consistently improve QoQ as Punjab centres further scale up (2Q contribution INR 100mn). Additionally, new tender wins in CY22 should also see commencement by FY23-24. Krsnaa’s B2C foray includes rolling out 600 collection centres in Phase 1 using a franchise model. Krsnaa will bid for the Rajasthan tender (potential of INR 2bn p.a.) and the outcome is expected by year-end. The management may recalibrate their FY24 outlook given the delay in project implementation. Cautiously, we have moderated our earnings by 9-10% to factor-in this gradual execution. However, we continue to remain positive given the comfort on valuations (trades at 15x/13x FY24/FY25 earnings), our relatively conservative high-growth estimates (vs. management guidance) and 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 840.

* Revenues in line; performance to only improve sequentially: Krsnaa reported growth in Non-Covid revenues of 19%YoY/ 9%QoQ with negligible Covid contribution. Punjab tenders contributed INR 100mn in 2Q which will continue to ramp-up. Himachal pathology labs are expected to be operationalized by FY23-end which should also support growth and aid operating leverage. ARPP (ex-tele-reporting) remain flat QoQ at 966 while ARPP for tele-reporting improved QoQ to 91 (vs. 85). Patient volumes 9%QoQ to 1.14mn and tele-reporting patients increased 8%QoQ to 1.42mn. Radiology tests grew to 0.34mn (vs. 0.23mn YoY; 0.28mn QoQ) while pathology tests increased to 3.65mn (vs. 3.81mn QoQ; 3.05mn YoY). EBITDA margins improved marginally QoQ to 24.9% (24.6% QoQ; JMFe: 25.9%). The miss in EBITDA margin was primarily due to lower gross margin and higher employee costs attributable to new centres that were operationalized. With most RHP centres operationalized along with some contribution from newer tenders, we expect the revenues to reach INR 1.4bn 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. We expect new tender wins to contribute INR 2bn+ to FY25 topline expanding margins with higher operating leverage. As guided earlier, most RHP centres (having INR 1bn+ potential) have been operationalised by Sep’22 and should start ramping up hereon. The tenders won in CY22 will gradually start contributing 4Q onwards (meaningfully in FY24- 25). 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 1.2bn/306mn/153mn grew 14%/-4%/22% YoY and were -1%/-5%/-2% vs. our expectations. EBITDA margins marginally improved QOQ to 24.9% (vs. 24.6% QoQ) as new centre cost continued to weigh in, albeit expected to correct going forward. The company has a net cash position of INR 2213mn as on 30 Sep’22. Receivable days stood at 87 days (nearly doubled) as collections tend to come in 4Q.

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