SynopsisA sluggish sentiment that affected some recent public issues seems to have rubbed off on Vijaya Diagnostic. However, what works for it is its strong consumer connect in South India, steady cash flow, robust financials, and not to mention the promising outlook for healthcare industry. These factors make it a good buy for the long term.
It’s raining IPOs this year. The primary market has been buzzing, with benchmark indices touching new highs. While many public issues are lined up for launch in the coming months, the excitement around IPOs has fizzled out a bit recently.
Hyderabad-based Vijaya Diagnostic Centre’s IPO is the latest example of this. Despite robust business performance and the growing diagnostics industry in India, the company’s INR1,894 crore IPO was subscribed just 4.54 times its offer.
Vijaya Diagnostic’s IPO was a 100% offer for sale (OFS) of 35.7 million shares by promoter and private-equity firms Karakoram and Kedaara Capital. The price band was INR522 to INR531 per share. At the upper price band, the IPO is valued at 64 times its FY21 earnings.
The company’s price-to-earnings (P/E) multiple of 64 times is higher than Metropolis, which is trading at a 12-month trailing P/E of 59 times. India’s largest diagnostic chain Dr Lal PathLabs is trading at a P/E of 85 times.
An analyst says high valuation, a fully OFS issue, and weakened retail-investor sentiment weighed on the IPO of Vijaya Diagnostic. “At this valuation, there was not much left on the table to enthuse investors. But the company has a robust business and strong financial performance, which makes it a good option to buy on dips for the long term.”
Investors seem to have become more selective recently after many of the IPOs listed in the last couple of months have failed to maintain gains and have fallen below the listing price, and in some cases, even below the issue price. In healthcare, Krsnaa Diagnostics and Glenmark Life Sciences’ public issues saw tepid listings.
If the lukewarm performance of Krsnaa Diagnostics after listing is any indication, investors should not expect a substantial listing gain for Vijaya Diagnostic. However, steady cash generation, a superior balance sheet, a decent return ratio, and the promising outlook for healthcare industry augur well for the company from a long-term perspective, broking firm Reliance Capital said in its IPO note.
The grey-market premium for Vijaya Diagnostic has eroded, further fading hopes of strong listing gains. According to reports, the grey market premium was INR5 per share as of Wednesday. The company’s shares will be listed on the Indian stock exchanges on September 14.
Moreover, the strong momentum in shares of other listed diagnostics firms like Dr Lal PathLabs, Metropolis Healthcare, and Thyrocare is tapering, and their valuations have come down a bit. Investors betting on diagnostics may opt for these companies, which have a pan-India network.
The strength of Vijaya Diagnostic lies in its strong consumer connect and brand recall in Telangana and Andhra Pradesh. About 93% of its business comes from walk-in customers, which is much higher than peers. This helps the company enjoy high margins.
While Vijaya Diagnostic has built a dominant position in Telangana and Andhra Pradesh, expanding to other areas and scaling up is likely to be challenging. This raises some concerns over sustainability of the margins and earnings growth seen earlier.
A strong regional play
Vijaya Diagnostic’s business is concentrated in the states of Telangana and Andhra Pradesh. They account for 87% of the total revenue. Betting on the company would be like betting on the growth prospects in these states.
The company has 40 years’ experience of operating in these two southern states. It has 64 centres in Hyderabad, including its flagship centre and 15 others in the rest of Telangana and Andhra Pradesh. Only two of its 81 centres are located outside these states. Its flagship centre in Hyderabad accounts for 15%-17% of the total sales.
Suprita Reddy, chief executive officer of Vijaya Diagnostic, tells ET Prime that the company has a strong brand recall and is a preferred choice of customers in the region. Customer stickiness is also high, considering the comprehensive test list of the company, including specialised tests not offered by most other local players and the quality of service.
Vijaya Diagnostic offers a comprehensive range of about 740 routine pathology tests, 870 specialised pathology tests, about 220 basic radiology tests and 320 advanced radiology tests that cover a range of specialties and disciplines. It provides services such as home collection of specimens and samples, house calls, and delivery of test reports via different modes such as its diagnostic centres, SMS, e-mail, and Web portal.
The company’s financial performance has been strong in the last few years. In FY21, its revenue was INR377 crore, up from INR339 in the previous year, while net profit was INR85 crore as against INR62 crore a year ago. Vijaya Diagnostic’s return on capital employed (pre-cash) improved to 42% in FY21 from 33% in FY20.
While the high dependency on these two states can be a risk, the company believes that there is still significant potential in the region.
Sunil Chandra Kondapally, executive director of Vijaya Diagnostic, tells ET Prime that even though the company has a dominant position in Telangana and Andhra Pradesh, its market share is just about 7%. This means there is a lot of room for growth and penetration in this region and the company plans to expand further in its core markets.
There is competition from other local diagnostic chains as well as standalone labs, but demand is shifting towards larger branded players and customers are looking for quality, he adds.
Apart from Vijaya Diagnostic, other players in the region include Thyrocare, SRL, Metropolis, Lucid Medical Diagnostics, Medall, and Tenet Diagnostics.
According to Crisil Research, south India accounts for 27% to 29% of the country’s diagnostic market of about INR70,000 crore. Within the south Indian market, share of Andhra Pradesh and Telangana is about 45%, with a value of around INR8,700 crore in FY20.
The out-of-hospital diagnostics market is estimated to be nearly 60% of the entire diagnostics market in Andhra Pradesh and Telangana. This is likely to grow at a CAGR of 12% to 13%, as per Crisil Research.
This growth can be attributed to rising non-communicable diseases in the states and increasing share of aged population, besides other fundamental growth drivers such as rising health awareness, favourable government schemes related to healthcare, and growing health-insurance coverage.
Apart from expanding in its core markets, the company is planning to tap adjacent markets and increase presence in east India. It is looking to expand organically as well as through acquisitions. Given its strong financial base and brand recall, it may be able to do well in adjacent markets, but scaling up beyond that will not be easy.
In other markets, the competitive intensity will be high and customers will prefer the established regional players and pan-India diagnostic chains. For example, in east India, Dr Lal PathLabs has good presence.
Vijaya Diagnostic has an integrated hub-and-spoke model, and it prefers to own its centres and control its network. While this has helped in good customer experience, it is capital intensive and will not be easy to replicate as the company expands its geographic presence. This is different from the franchise model adopted by most other large diagnostic chains.
The company believes it has the capabilities, skilled staff, infrastructure, and good balance sheet to support its expansion plans. But it is not looking at a pan-India presence as of now.
“We have been able to open 30 centres in last three years, which gives us the confidence that we have the ability to scale up. Moreover, B2C is a harder business to build, and we have succeeded in that, and since we do not have franchises, we get revenue directly from customers and do not have to share with partners. This is why we have high margins even though our pricing is affordable,” Kondapally says.
Within the existing markets, the company is expecting the shift from unorganised to organised to augur well for its business.
Overall, the rising focus on healthcare, diagnostics, and awareness around disease prevention, especially since the outbreak of Covid-19, has put the Indian diagnostics industry in a sweet spot. Hence, long-term growth prospects of diagnostic companies look bright.
(Data support by Rochelle Britto;graphics by Mohammad Arshad)
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