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Suraksha Diagnostic

• Suraksha Diagnostic is coming out with a 100% book building; initial public offering (IPO) of 1,91,89,330 shares of Rs 2 each in a price band Rs 420-441 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on November 29, 2024 and will close on December 03, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 2 and is priced 210.00 times of its face value on the lower side and 220.50 times on the higher side.
• Book running lead managers to the issue are ICICI Securities, Nuvama Wealth Management and SBI Capital Markets.
• Compliance Officer for the issue is Mamta Jain.

Profile of the company

Suraksha Diagnostic offers a one-stop integrated solution for pathology and radiology testing, and medical consultation services to its customers through its extensive operational network, consisting of its flagship central reference laboratory, 8 satellite laboratories (co-located with its diagnostic centers) and 215 customer touchpoints which include 49 diagnostic centres, and 166 sample collection centres (primarily franchised), as of June 30, 2024 across the states of West Bengal, Bihar, Assam, and Meghalaya. Its central reference laboratory has an accreditation from the College of American Pathologists, 3 of its laboratories hold National Accreditation Board for Testing and Calibration Laboratories (NABL) and 3 of its advanced diagnostic centres hold National Accreditation Board for Hospitals & Healthcare Providers (NABH) accreditations.

The company offered a comprehensive range of over 2,300 tests that cover a range of specialties and disciplines, as of June 30, 2024. The company’s diagnostic test menu included (a) 788 routine pathology tests ranging from basic biochemistry and hematology to 664 specialized pathology tests such as advanced biochemistry, histopathology, and molecular pathology, and (b) 766 basic/intermediate radiology tests ranging from basic x-rays, ultrasonography (USG), and computerized tomography (CT) scans to 119 advanced radiology tests such as magnetic resonance imaging (MRI) scans and specialized CT scans, as of June 30, 2024. Its radiology equipment consists of 24 CT and 13 MRI machines.

In addition to integrated pathology and radiology testing services, it also offers omnichannel medical consultation services via online and offline modes to its customers under a single roof through 44 of its diagnostic centres which house 126 polyclinic chambers hosting over 750 doctors, as of June 30, 2024. The doctors at its polyclinics range across specialties and super-specialties such as cardiology, pediatrics, dermatology, rheumatology, oncology, and nephrology. The company’s model of polyclinic chambers housed in diagnostic centres providing medical consultation services enables patient convenience through holistic integration of services and offering it the first right to a patient’s prescription leading to higher cross-selling opportunities to the company.

Proceed is being used for:

• Carrying out the offer for sale of up to 19,189,330 equity shares of face value Rs 2 each by the selling shareholders
• Achieving the benefits of listing the equity shares on the stock exchanges

Industry Overview

India’s fast-growing healthcare industry has become one of the leading contributors to the economy. A combination of economic and demographic factors is driving healthcare demand in the country. Factors such as an ageing population, a growing middle class, increasing incidence of lifestyle diseases, and the adoption of technology are some of the key drivers. The healthcare industry grew at 10-11% CAGR between FY17 and FY24 to Rs 9.5-10.5 trillion. By FY28, the industry is expected to grow to Rs 14.5-15.5 trillion, at a CAGR of 10-11%, driven by factors such as an aging population, increased incidence of lifestyle diseases, growing healthcare awareness, technology adoption and a growing affluent middle class. Within the healthcare industry, Diagnostics formed about 10% of the industry in FY17. The diagnostic industry grew at 9-10% from FY17 to FY24 to form 9% of the 9.5-10.5 trillion Healthcare market in FY24. The growth was led by increasing number of people undergoing preventive health check-ups, Rising disposable income, prevalence of non-communicable diseases etc.

The diagnostic services sector plays a pivotal role in recommending essential treatments and monitoring the recovery of patients’ post-treatment. The industry experienced robust growth at a CAGR of 9-10% over FY17 and FY24 due to factors like increasing urbanisation, rising disposable income, increased test menu by players, increase in prevalence of non-communicable diseases which has led to a rise in healthcare demand. The diagnostics industry’s market size is poised to grow at a CAGR of 10-12% over FY24 and FY28 to Rs 1,275-1,375 billion led by rising literacy rates and disposable income among the population, leading to increased awareness and demand for quality healthcare services, including diagnostics. Further, a rise in urbanisation, coupled with lifestyle-related diseases and aging population, will create a greater need for accurate and timely diagnostic services to identify and manage these health issues effectively. Chained diagnostic players are expected to grow at a faster rate than the overall industry between FY24 and FY28.

The pathology segment, estimated to have grown steadily at a CAGR of ~8-9% over FY17 to FY24, is estimated to clock a CAGR of 9-11% over FY24 to FY28. This trajectory suggests an increasing demand for pathology diagnostic services, potentially driven by factors such as rising chronic disease prevalence and improved diagnostic technologies. Similarly, the radiology segment, estimated to have grown at a CAGR of 9.5-10.5% over FY17 to FY24, is expected to rise further at a CAGR of 11-13% over FY24 to FY28, indicating robust growth potential led by technological advancements and heightened demand for diagnostic imaging across medical specialties. Overall, the analysis underscores positive growth prospects for both pathology and radiology segments in the Indian diagnostic market, driven by evolving healthcare needs and technological innovation.

Pros and strengths

Integrated diagnostics provider with one-stop solution offering pathology and radiology testing: The company offers a comprehensive range of over 2,300 tests that cover a range of specialties and disciplines, as of June 30, 2024. The company’s diagnostic test menu included (a) 788 routine pathology tests ranging from basic biochemistry and hematology to 664 specialized pathology tests such as advanced biochemistry, histopathology, and molecular pathology, and (b) 766 basic/intermediate radiology tests ranging from basic x-rays, USG, and CT scans to 119 advanced radiology tests such as MRI scans and specialized CT scans, as of June 30, 2024. For three-month period ended June 30, 2024, it derived 49.75% of its revenue from pathology, 46.52% of its revenue from radiology and 0.03% of its revenue from COVID-19 tests. For Fiscal 2024, it derived 53.30% of its revenue from pathology, 46.03% of its revenue from radiology and 0.18% of its revenue from COVID-19 tests.

Technologically advanced clinical infrastructure: The company has been at the forefront of technology in diagnostics and its strong technical capability and ability to adopt to the latest technologies in the diagnostic industry have ensured that its patients benefit from the latest technologies and receive high quality and reliable diagnostic services. Currently, its testing operations are supported by over 500 medical equipment offering a test menu of over 2,300 tests with a capacity to handle over 30,000 pathology samples and over 5,000 scans a day, which includes radiology equipment consisting of 24 CT machines, 13 MRI machines, which represents the leading technology used in the field, and a team of 23 laboratory doctors, 255 radiologists and other reporting doctors, and 529 well-trained technical staff in its operational network, as of June 30, 2024.

Commitment to quality driving high individual consumer business share and customer retention: The company has built a trusted, high quality and reliable brand of choice over the last three decades, evidenced by its high repeat rate of over 49%, and the primary contribution of the B2C segment to its revenue from operations, which was 93.48% in three-month period ended June 30, 2024, 93.83% in Fiscal 2024, 96.01% in Fiscal 2023, and 95.56% in Fiscal 2022. Over the years, it has received several awards that recognize the strength of its brand and its focus on offering superior diagnostic services. For example, it was recognized for ‘excellence in exemplary trust & commitment towards diagnostic services’ and ‘excellence in quality diagnosis and convenient service in eastern India’ by Zee 24 Ghanta in 2023 and 2022 respectively, as ‘business leader of the year’ in 2021 by the World Leadership Congress & Awards, and for ‘best customer service in healthcare’ and ‘best quality in service delivery’ by ABP News in 2019 and 2017 respectively.

Diagnostic chain in eastern India well positioned to leverage growth opportunity for organized diagnostic chains: The company reported a compounded annual growth rate (CAGR) of 20.87% in terms of non-COVID revenues between Fiscals 2022 and 2024. It has built an extensive operational network across the states of West Bengal, Bihar, Assam, and Meghalaya. As of June 30, 2024, 44 of its diagnostic centres also house polyclinic chambers hosting specialized doctors for patient convenience. As of Fiscal 2024, the market share of the company eastern India is 1.15% to 1.30%, which is less than peers such as Dr. Lal Pathlabs Limited which has a market share of 5.30% to 5.70% in its major market i.e north India and Vijaya Diagnostic Centre Limited which has a market share of 2.20% to 2.50% in its major market, i.e. South India. This indicates headroom for growth in its core geography.

Risks and concerns

Maximum revenue comes from B2C segment: Since the company derives the majority of its revenues from the B2C segment (i.e., individual patients, who either walk into its diagnostics laboratories or its customer touchpoints or use its home collection services or avail medical consultation services through its polyclinics), recognition of its brand and its reputation are critical for the success of its business and operations. The company has garnered 93.83%, 96.01% and 95.56% of revenues from B2C segment in FY24, FY23 and FY22 respectively. The growth in the B2C segment is dependent on brand recognition, wider acceptance of its business in the communities in which it operates and its ability to compete effectively within its industry, all of which may be negatively affected by a wide variety of reasons. The company’s ability to maintain and improve its brand name and brand image is dependent on factors such as quality, accuracy and efficiency of its diagnostic tests, the quality of medical consultation services through its polyclinics, turnaround time of issuing reports, patient experience and satisfaction, the performance of its service network and the introduction of new tests and services.

Dependent on growth of diagnostic market in Eastern Region: The diagnostic market in India for FY24 displays a notable regional split, with the North leading at 28-30%, followed closely by the South at 25-27% and the West at 25-27%. The East including Northeast region lags behind with 20-21% share. The company is a full-service and integrated diagnostic chain headquartered in east India. Its market share in the diagnostics services market in Eastern India was 1.15% to 1.30% in Fiscal 2024. In case the East including Northeast region does not grow as expected, its growth may be adversely impacted.

Geographical constrain: While the company has presence across 12 cities and towns in India across the states of West Bengal, Bihar, Assam, and Meghalaya, as of June 30, 2024, a significant portion of its operations are concentrated in West Bengal. The company has garnered 95.48%, 96.74% and 97.05% of its revenue of operation from West Bengal in FY24, FY23 and FY22, respectively. In the event of a regional slowdown in the economic activity in West Bengal, or any other developments including political or civil unrest, disruption, disturbance or sustained economic downturn that reduce the demand for its services in the state of West Bengal or any changes in the policies of the state or local governments, could adversely affect its business, results of operations, cash flows and financial condition. The company cannot predict the impact of any future occurrences of such events on the demand for its services in West Bengal and the consequent impact on its business and operations.

Seasonal fluctuation in operating results and cash flows: The company’s business is subject to seasonal fluctuations due to the outbreak of contagious diseases such as the COVID-19 pandemic. For instance, the company made a profit after tax of Rs 208.24 million in Fiscal 2022 due to the outbreak of the COVID-19 which resulted in more tests being purchased but only made a profit after tax of Rs 60.65 million in Fiscal 2023 due to the decline of the COVID-19 pandemic. In addition, during the monsoon season, the company also experience marginal seasonality during the monsoon season, as a result of a greater degree of prevalence of dengue and malaria. Diagnostic healthcare testing volume is also subject to decline due to severe weather, such as extreme hot or cold weather, which can deter patients from having tests performed and which can vary in frequency, duration and severity from year to year. As a result of these factors, the company may be subject to seasonal fluctuations in operating results and cash flows during any interim financial period, and consequently, such results cannot be used as an indication of its annual financial results or relied upon as an indicator of its future performance.

Outlook

Suraksha Diagnostic offers pathology, radiology testing and medical consultancy services. The company has a central reference laboratory with 8 satellite laboratories and 215 customer touchpoints, including 49 diagnostic centres and 166 sample collection centres as of June 30, 2024, across West Bengal, Bihar, Assam, and Meghalaya. The company is well-positioned diagnostics chain to capture the large growth opportunities for organized diagnostics chains in the fragmented markets for diagnostic services in eastern and northeastern India. On the concern side, the company generated 95.48% of its revenue from operations in Fiscal 2024 from West Bengal, and any loss of business in such region could have an adverse effect on its business, results of operations and financial condition. Moreover, the company generated 93.83% of its revenue from operations for Fiscal 2024 from the B2C segment and its ability to attract individual patients is largely dependent on its brand recognition, reputation and brand image, any wrong diagnosis or treatment may induce negative publicity to its brand and reputation and could adversely impact its revenue from operations.

The company is coming out with a maiden IPO of 19,189,330 equity shares of Rs 2 each. The issue has been offered in a price band of Rs 420-441 per equity share. The aggregate size of the offer is around Rs 805.95 crore to Rs 846.25 crore based on lower and upper price band respectively. On performance front, revenue from operations increased by 15.03% to Rs 2,187.09 million for the Financial Year 2024 from Rs 1,901.34 million for the Financial Year 2023 primarily due to growth in increase in revenue from customers on account of increase in the number of customer touch points. Moreover, the company’s restated profit for the year increased by 281.32% to Rs 231.27 million for the Financial Year 2024 from Rs 60.65 million for the Financial Year 2023.

The company intends to strengthen its presence in the regions in which it operates, with emphasis on Kolkata. The company’s diagnostic centres are primarily located in urban regions of Kolkata. To capitalize on its existing brand equity, the company intends to expand its operations further into sub-urban regions of Kolkata i.e. Greater Kolkata, and replicate its existing performance. Moreover, the company intends to increase its touch points and engagement with customers through digital and technological initiatives. It has a web application for its customers to enable them to easily book home collection service requires and access their test reports. It is constantly enhancing and upgrading its website in order to ensure a smooth and seamless experience for its customers. It also intends to use detailed data from its various segments and regions to support and develop solutions based on artificial intelligence in pathology and radiology.