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New centre costs weigh on earnings

Vijaya’s 3Q was tad below JMFe primarily due to seasonality and new hub costs weighing on PAT. However, Dec’22 has seen good volumes (3Y CAGR at ~12%) which are expected to continue in 4Q. We believe EBITDA margins will revert to 40%+ despite these new centre costs driven by higher operating leverage. Non-Covid grew +10%YoY/-4%QoQ with Covid contribution <1% of revenues (vs.8%YoY). B2C share stood at 95% (marginally improved vs. 94% in FY22) while wellness share improved significantly to 12.9% (vs. 8.5%YoY). ARPP continued its uptrend to INR 1464 (vs. INR 1418 QoQ) led by higher radiology mix sequentially (36% vs. 34% QoQ). The company operationalized 15 new centres during 9M, completing major capex initiatives for FY23E whilst preponing part FY24 capex. Vijaya’s eagerly awaited Punjagutta centre, Hyderabad and Rajahmundry centre, Andhra Pradesh should augment growth in the coming quarters while also achieving EBITDA breakeven within 2 quarters. Management guided on mid-teens growth and ~40% EBITDA margin on sustainable basis along with steady organic expansion in FY24. We maintain our positive stance on Vijaya driven by rapid expansion ahead of expectation, margin sustenance, continued high B2C focus and healthy cash-flows provide a long runway to growth. We reduce our FY24/25 earnings by 13%/9% to factor in new centre costs in depreciation and interest. We value Vijaya at 33x FY25 earnings to derive a Price Target of INR 460.

* Growth trending as expected: Vijaya’s non-Covid revenues grew 10%YoY (in-line) with management guiding for a consistent mid-teens growth. Covid revenues dipped to INR35mn. B2C revenues comprised 95% of revenues. Wellness share increased to 12.9% (vs.8.5%YoY). ARPP improved to INR 1464 (+12%YoY/ +3%QoQ); sustainable ARPP is expected to be INR 1250-1300 as guided by the management earlier. Test mix remained in favour of radiology on a YoY basis with radiology at 36% and pathology at 64%. Total tests increased 7%YoY to 2.49mn with tests/footfall improving to 3.22 (vs. 2.73YoY). Patient footfalls dropped to 0.77 mn (vs. 0.85 mn QoQ; 0.85 mn YoY). The company experienced lower volumes in Oct-Nov due to festive season but registered a strong uptick in Dec’22 (3Y CAGR of ~12%).

* Early FY23 capex to enhance growth ahead: The company operationalised 5 new centres during the quarter and closed 1. The management has guided to open 4 hub and 11 spokes in FY24 with 15 new centres per year thereafter. Vijaya’s Punjagutta centre, Hyderabad and Rajahmundry centre in Andhra Pradesh was operationalised recently. We believe this will accelerate revenue momentum in the coming quarters whilst achieving EBITDA breakeven in 2-3 quarters. Revenue contribution from Punjagutta and Rajahmundry is expected to be INR 400 mn and INR 150-200 mn respectively within the next 2-3 years (Himayatnagar, their flagship centre, has INR 600 mn annual revenue). Capex guidance for FY23 is INR 1.1- 1.5bn with INR 140-150mn incremental capex for purchasing equipment in existing centres. Vijaya is also set to launch state of the art facility in Tirupathi, Andha Pradesh in Feb’23 and set up spokes thereafter in FY24. Their robust cash balance of INR 2.4 bn creates significant headroom for inorganic expansion posing upside risks to JMFe. FY24 focus will be on creating hub labs in Gulbarga, Kolkata,Tirupathi and 1 planned hub and create spokes. Capex outlay for FY24 is estimated at INR 800mn. The robust execution and higher hub labs set-up is, in our view, a key positive measure which will help cement future growth, and even enhance it

* Competitive concerns clarified: A growing concern over the impact of increasing competition is unwarranted in Vijaya’s case. The management has clarified certain aspects of it: (1) Vijaya is a B2C player with an integrated offering. Radiology (35% of revenues) remains insulated (sales have been stable in 3Q due to better specialised mix); (2) Revenue contribution of aggregators accounts for less than 1% of total revenues and has remained stagnant over the last few quarters. The company expects that the revenue contribution of aggregators could be minimal for other players in the region as well; (3) the real competition Vijaya faces is from local players who flourished amidst the pandemic due to higher operating leverage driven by Covid revenues. Notably, a few of them are under stress at present; (4) The wellness industry is growing and Vijaya’s wellness contribution is going up in line with the industry. However, wellness tests have relatively lower margins due to lower price points; (5) Home collections have been on the decline post Covid and customer acquisition cost is very high for digital players making it difficult for them to participate.

* Key Financials: : Revenue/ EBITDA/ PAT grew 2%/-7%/-35% YoY and -3%/-5%/-28% vs. our estimates. Gross Margins were ahead of expectations by c.120 bps to report 87.9% (vs. 85.3% YoY; 86.2% QoQ). Gross margins are expected to remain at 86-88% hereon with negligible covid contributions. EBITDA margins declined to 39.1% (vs. 43.2% YoY; 40.4% QoQ; 55 bps miss vs. JMFe) is trending near the management guidance despite incremental costs from new/ upcoming facilities. Cash flow from operations during the quarter was INR 328 mn with CFO/EBITDA at a healthy 74.2%. Cash and cash equivalents stood at INR 2.4 bn with negative working capital (-10 days).

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