IGI Logo

Krsnaa Diagnostics Ltd (KDL), established in 2010, is one of the fastestgrowing diagnostic chains in India. During FY18-21, KDL expanded its reach by opening 1,131 diagnostic centers (892 radiology centers & 239 pathology labs) across India, which took its overall network to 1,830 diagnostic centers (1,365 radiology centers & 465 pathology labs) in 14 states. The company offers a wide range of diagnostic services such as imaging/radiology services (X-rays, MRI, CT scan, etc.), routine clinical laboratory tests, pathology, and tele-radiology services.

KDL’s centres are located within existing facilities of public and private hospitals or community health centres. Such arrangements with hospitals save the operating cost for KDL, which it passes-on to patients by offering diagnostic services at competitive and affordable rates (45-60% lower than market rates). The company operates under two unique business models:

PPP (Public Private Partnership) – PPP contracts awarded by government agencies through a competitive bidding process. Accessible and affordable services are the main strengths of a PPP model, which generates significant volumes for diagnostic centers. Since the diagnostic centers are located at existing health centers, marketing cost are negligible and optimum capacity utilization is achieved in record time. As on 30th Jun 2021, KDL operated 1,797 centers under PPP (up from 670 centers in FY18) and average annual revenue per center was ~INR 15 lacs.

Revenue sharing with private hospitals & institutions – KDL is also collaborating with private healthcare providers to improve its penetration in metros and Tier I cities. As on 30th Jun 2021, KDL operated 26 centers under this model (up from 12 in FY18) and the average annual revenue per center was more than INR 2.0 cr.

KDL operates a very unique business model in radiology. The diagnostic centers are connected to a tele-radiology hub (located in Pune) to which data is beamed through special image transfer software. The qualified medical personnel (who operate on a variable pay structure) have a TAT of 45 min – 2 hours for providing the results of diagnosis which is significantly faster than the industry average. The business model being scalable has tremendous upside potential.

KDL has state-of-the-art processing centers, which are accredited by NABL and NABH, while the diagnostic equipment is procured from leading OEMs including Wipro GE Healthcare, Siemens Healthcare, Fujifilm India, HORIBA India and Agappe Diagnostics. Due to its bulk ordering and long term B2B relations, KDL is able to procure the medical equipment at significantly competitive rates than peers. As a result, many private hospitals are entering into partnership with KDL to leverage their significantly competitive and scalable business model.

The Indian diagnostic industry, estimated size of ~INR 720 bn, is expected to grow at a CAGR of 14-15% over the next 3-4 years given the government thrust on testing and the long term policy directive of the National Health Policy to increase public healthcare expenditure to 2.5% of GDP from the current 1.2%. It is expected to significantly enhance the network of healthcare centers and government hospitals across India. This provides outsized opportunities for PPP players from the heavy expected throughput. KDL is best placed to benefit from this opportunity.

During FY18-21, KDL’s revenue / EBITDA / Adj PAT grew at a CAGR of 54.5% / 50.0% / 102.2% to INR 397 cr / INR 94 cr / INR 32 cr, respectively. However, EBITDA margins deteriorated by 218bps (to 23.7%) due to a rise in the sourcing cost of medical consumables, which resulted in a 202bps decline in RoIC to 19.5% in FY21. The adjusted PAT margin improved by 447bps to 8.1%, which resulted in a positive RoE of 13.8%. The company reported a negative RoE of 16.9% in FY18 due to its negative networth of INR 23 cr.

KDL is planning to open 31 diagnostic centers in Punjab, Karnataka, Himachal Pradesh and Maharashtra in FY22 and FY23 at an estimated capex of INR 151 cr. To fund this expansion and to repay INR 146 cr of debt (out of the total debt of INR 203 cr), the management is looking to raise INR 1,213 cr through a maiden public offering (INR 400 cr through fresh issue and INR 813 cr through OFS).

We expect KDL to grow its revenue at a CAGR of 39.8% to INR 1,083 cr over the period of FY21-24E. EBITDA and PAT over the same period are set to grow at a CAGR of 41.1% to INR 264 cr and 71.5% to INR 161 cr, respectively.

Management aspires to maintain the EBITDA margins between at ~24%, but due to the leverage effect, we are expecting it to improve in the long term. The repayment of INR 146 cr of debt is expected to significantly reduce the interest cost going ahead. As a result, both EBITDA and PAT margins are expected to improve by 68bps to 24.3% and 683bps to 14.9%, respectively by FY24. Return ratios RoE and RoIC are also expected to improve to 16.0% (+218bps) and 25.7% (+624bps), respectively, over the same period.

Valuation

We initiate coverage with a SUBSCRIBE for long term investing. With a strong countrywide network and dominant position in the PPP space, the company has strong moats around its business. We believe that the company is a good bet to benefit from growing demand for diagnostic centers in Tier II & III cities.

To Read Complete Report & Disclaimer Click Here

SMS subject to  Disclosures and Disclaimer goo.gl/8bCMyQ VENTURA

Above views are of the author and not of the website kindly read disclaimer