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Impressive revenue growth; new centre cost weighs on margin

Krsnaa Diagnostics reported an impressive revenue growth of +27% YoY. However, new centre cost of c. INR 70mn impacted EBITDA/ PAT adjusted for which performance was largely as per expectations. Krsnaa has submitted the requisite bank guarantee (in line with the Rajasthan High Court's order); however, the authorities have not yet signed the agreement. The company has taken further legal recourse and the matter is subjudice. Admittedly, the turn of events pertaining to this contract is unprecedented but we continue to monitor these developments and remain optimistic of a positive outcome. The new centre cost (Assam, Maharashtra) should be largely incurred by the next 2 quarters post which we should see healthy operating leverage play out. The management remains firm on its 30% (ex-Rajasthan) revenue growth guidance in FY24. Krsnaa is participating in new tenders (such as AP) and is also working towards expanding its B2C footprint. We adjust our earnings for new centre cost impact over the near term and remain confident of Krsnaa's execution capabilities and continue to believe that there is significant scope for a re-rating. We maintain BUY with a revised Sep’24 TP of INR 1,010.

* Strong revenue growth, margins to recover: Non-Covid revenue grew 27% YoY/11% QoQ with negligible Covid contribution. EBITDA margin declined 450bps YoY to 20.4% (JMFe: 23.1%) due to new centre cost of INR 70mn adjusted for which the performance was in line with JMFe. Krsnaa established 7 pathology labs, 93 pathology collection centres and 5 new tele-reporting centres. The ongoing large-scale implementation of tenders (excluding Rajasthan) is likely to be complete by next 2 quarters post which operating leverage could play out. The company started its first private lab opened in Mumbai, which will act as a central processing lab for the Western region. It is currently implementing pathology operations across various geographies and is establishing 40 labs (22 labs established so far) across locations in private premises taken on lease. This will enable the company to synergise PPP and B2C business.

* Firm on guidance; Rajasthan uncertainty prevails: At present, Krsnaa has to deploy 47 CT scans, 2 MRIs, 162 labs and 2,689 collection centres under various contracts won including Rajasthan. The company has now operationalised BMC and Orissa collection centres, and ramp-up is expected over the next few quarters. Krsnaa is also participating in new large tenders (such as AP). FY24 guidance: The management remains firm on its 30% (ex-Rajasthan) revenue growth guidance. The contribution of Rajasthan tender is expected in FY25 (vs. 4Q earlier). EBITDA margin will remain subdued at 24-25%. Future guidance: The company expects to sustain historical growth trajectory with 26-28% EBITDA margin. Krsnaa has submitted the requisite bank guarantee (in line with the Rajasthan High Court's order); however, the authorities have not yet signed the agreement. The company has taken further legal recourse and the matter is subjudice. Admittedly, the turn of events pertaining to this contract is unprecedented but we continue to monitor these developments and remain optimistic of a positive outcome. The company is likely to implement the Rajasthan tender in a phased manner

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