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Krsnaa Diagnostics reported a strong 1Q with margins improving to 25% (JMFe: 24.1%). With major implementation costs in the base, operating leverage will help build on earnings momentum hereon, in our view. Over the last few quarters, the management has lowered their guidance – a step in the right direction. While there seems to be a B2C push, this is a medium-term initiative with no immediate triggers. In our previous note, we highlighted delays with respect to receivables particularly from HP – these have now started flowing in thereby improving OCF. Rajasthan tender resolution has been prolonged and timelines remain elusive; accordingly, we revise our earnings by excluding this tender and believe any future resolution could be an added upside. Krsnaa has lagged its peer primarily due to weak earnings growth and it should catch up this fiscal onwards. We expect Revenue/EBITDA/PAT CAGR of 21%/26%/38% over FY24-27 (on a soft FY24 base). We maintain BUY with a revised Jun’25 TP of INR 880.

* Sustaining revenue momentum with margin recovery: Revenues grew 22%YoY/2%QoQ to INR 1.7bn (in-line) led by ramp up of new tenders. EBITDA margin improved 2.5ppt YoY to 25.1% (JMFe: 24.1%). The mature centres reported 38% margin. As it stands, the change in mix towards pathology could lead to gross margin dilution but ~25% EBITDA margin on a sustainable basis. B2C is at a nascent stage contributing 2-3% to revenues. The company now has a lion’s share of contracts in Maharashtra.

*  Guidance has been gradually toned down: The management remains firm on its 25% revenue growth guidance over 5 years with sustainable EBITDAM of ~25%. The guidance has been toned down but still remains slightly on the higher side, in our view, if we exclude Rajasthan.

* Decision on Rajasthan awaited; we reset our estimates due to prolonged delays: The matter remains sub-judice and timeline for resolution remain elusive. Accordingly, we have reset our estimates to exclude Rajasthan tender. Any favourable outcome will pose upside risk to our estimates.

* Key financials:

* Revenue/EBITDA/PAT of INR 1702mn/427mn/179mn grew 22%/36%/22% YoY and were -1%/+3%/+5% vs. JMFe;

* Gross margin was at 75% (vs. 78% JMFe) due to higher pathology mix;

* EBITDA margin improved to 25% vs. 22.5% YoY (JMFe: 24.1%);

* PAT was up 22% (despite higher EBITDA growth) due to higher depreciation costs from new centres and higher tax rates;

* Prashant Deshmukh stepped down as CEO due to personal reasons;

* The company has made recoveries and cash balance remains INR 2.4bn

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SEBI Registration Number is INM000010361