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Expansion drag in near-term, growth visibility intact

Vijaya delivered a moderate 4Q with the top line growth of 12% YoY. The broader numbers were a miss; with 4QFY25 Revenue/EBITDA/PAT being -4%/-6%/-13% vs JMFe and -4%/- 6%/-11% vs street consensus. Revenue underperformance vis-à-vis estimates is on account of single digit YoY growth in February, dragging the overall 4Q momentum down. Though, the numbers have shown resilience March onwards and are on upward trajectory. 4Q RM cost increased 18% YoY due to both higher contribution from Wellness portfolio and partially because of input price inflation. Wellness portfolio has relatively higher COGS but eventually flows into better EBITDA margins. However, the bloated overheads due to the ongoing rampant expansion led to a 91bps contraction in EBITDA margins. The company added 6 hubs during the last 3 months, 2 each across – Pune, Bengaluru and West Bengal. These hubs will contribute from 1QFY26 onwards and are expected to breakeven within 12 months. In our view, the ramp up of new hubs, along with addition of more spokes will enable the company to attain strong double digit growth (16%/17%/23% Rev/EB/PAT CAGR over FY25-28) and healthy cashflow generation (INR 6.6bn FCFF over the next 3 years). Thus, we value Vijaya at 55x June’27 EPS to arrive at a TP of INR 1,218, implying a 23% upside. Maintain BUY.

* Expansion plans: The company intends to add 10 new hubs in FY26. Breakeven target for new hub additions is kept at 12 months. Vijaya plans to add more spokes in Pune once the new hubs stabilise. West Bengal will see spoke addition post another hub being operational. Banaglore has no spokes planned for the near future till further hubs are added to cover the city. The management has planned CAPEX of INR 1.4-1.5bn in FY26. Vijaya is also open to inorganic expansion, however the opportunity should be in the market they are already present in.

* PH Diagnostics: EBITDA margins in 4Q were subdued at ~29% - this was due to one off expenses. Excluding one-offs, EBITDA was at ~35%. Pune expansion has resulted in additional hiring, with the associated revenue generation yet to materialize and thus putting further downard pressure on margins. The management believes that the business will deliver ~39% EBITDA margins from FY27 onwards, once the Pune operations stabilizes and new hubs ramp up. Further, legacy PH B2B clients had payment related issues which led the management to turn down volumme and thus leading to lower than anticipated growth for PH.

* Bengaluru: Vijaya currently has only 2 hubs in the city, that too at different corners in the city. Pricing is similar to Hyderabad, and not Pune/West Bengal. Vijaya is testing the waters at the moment with GTM strategy similar to Pune. The company plans to add multiple hubs to cover the city, post which the focus will be on adding spokes in the city.

* Hyderabad: The company is growing faster than peers despite not adding any new centres. Vijaya’s strength is providing good infra, superior doctor talent, trust, entirety of offerings under roof - all at a price similar to in-market price.

* Andhra-Telangana: Ongole hub (Aug'24 operationalised) broke even a few months back. Currently offerings are limited at Nizamabad hub (Nov'24 operationalised), the same is expected be overcome in a couple of months. The company maintains its target of breakeven by No’25. ? Guidance: The management maintains its commitment of delivering 15+% topline CAGR over next two to three years. This will also be aided by 1-2% price increase. The company gave guidance of 1-2% dip in EBITDA margins over the next few quarters owing to ongoing expansion, with normalcy expected to come by FY26 end. Going ahead, key areas of focus will be 1. Stabilization of the newly launched hubs, 2. Commissioning additional new hubs in West Bengal and Core geographies and 3. Investment in technology and strengthening talent pool across critical departments. Geographical diversification will lead to Hyderabad contribution going below 70% over time.

* Key Financials:

* Revenue /EBITDA/ PAT for the quarter were INR 1.7bn/689mn/346mn growing 12%/9%/4% YoY; were -4%/-6%/-13% vs JMFe and -4%/-6%/-11% vs street consensus;

* Gross Margins come in at 87.2% (vs 87.8% JMFe), a reduction of 67bps YoY;

* EBITDA margins at 39.8% (vs 40.5% JMFe, 40.4% consensus), YoY margin reduction from 40.7% 4QFY24 is primarily due to higher than anticipated RM cost and staff cost. Staff cost is high due to on-going expansion;

* PAT Margin of 20.0% (vs 22.0% JMFe, 25.1% Street).

* Our view and valuation: Vijaya has rapidly increased the number of hubs in ex-HYD markets it is present in. This expansion is likely to result in a 1-2% EBITDA margin contraction over next few quarters, with recovery expected towards FY27. The PAT margins will be muted in the near term future owing to the higher absolute depreciation amount with accompanying revenue ramp up taking a while to set in. This strategy is expected to yield results once the hubs stabilize and spokes are added to increase the penetration and corner market share. With the 12 month breakeven target, the on-going expansion will lead to a margin expansion FY27 onwards. We expect the healthy double digit growth momentum to sustain over the next three years, delivering a 16%/17%/23% Revenue/EBITDA/PAT CAGR over FY25-28. This will lead to INR 6.6bn FCFF generation over next 3 years. Thus, we value Vijaya at 55x June’27 EPS to arrive at a TP of INR 1,218, implying a 23% upside.

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SEBI Registration Number is INM000010361