Krsnaa Diagnostics Limited IPO 7-Point Detailed Analysis

Introduction:

Krsnaa Diagnostics Limited, a Diagnostics company has made its IPO live and is open for subscription between 4^th August to 6^th August 2021. As per the data of NSE, this IPO received a bid for 3,80,33,730 Shares against the issue of 71,12,099 Shares by the company. At the end of Day 2 of the IPO, it has been oversubscribed by 5.42 Times, wherein Qualified Institutional Buyers (QIBs) subscribed 0.50 times followed by Non-Institutional Investors (NIIs) 4.76 times, and the retail investors 22.09 times. Here is a detailed analysis to get an insight into whether apply for this IPO or not, if haven’t decided so far.

1) Initial Public Offer (IPO) Details:

• The IPO of Krsnaa Diagnostics is open from 4^th August 2021 to Rs. 6^th August 2021.
• The Price Band of IPO is between Rs. 933 to Rs. Rs. 954 per equity share.
• The face value is Rs. 5 Per Equity Share.
• The Size of the IPO is Rs. 1,213 Cr. consisting of both Fresh Issue and Offer for Sale.
• The Fresh Issue of the IPO is Rs. 400 Cr. while the Offer for Sale (OFS) is worth Rs. 813 Cr.
• This will be listed in both the stock exchange i.e., Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
• The Lot Size of IPO is 15 shares in 1 Lot and multiples thereof up to  13 lots.
• The reservation criteria of Investors for this IPO are as follows Qualified Institutional Buyers (QIBs)- 75%, Non-Institutional Investors (NIIs)-15%, and Retail Investors-10%. Also, Equity Shares worth Rs. 20 Cr. has been reserved for employees.

Objectives of the Issue:

• Financing the cost of establishing diagnostics centers at Punjab, Karnataka, Himachal Pradesh, and Maharashtra (Rs. 151 Cr)
• Repayment certain of borrowings (Rs.146 Cr)
• General Corporate purposes
• The Offer for Sale (OFS) by Promoters and Investors with their respective offloading shares are as follows:
• Phi Capital- 16.00 Lakh
• Kitara- 33.40 Lakh
• Somerset- 35.63 Lakh Shares
• Lotus Management Solutions- 0.21 Lakh
• The Stake of Promoter’s Pre-IPO stood at 29.53% which will come down to 25.57% post listing.
• The company raised Rs. 527 Cr. from Anchor Investors in Pre-IPO Placement.

2) Company Overview:

• Krsnaa offers a range of diagnostics imaging services and clinical laboratory tests that include both routine and specialized tests/studies and profiles, which are used for prediction, early detection, diagnostic screening, confirmation, and/or monitoring of diseases
• They operate one of India’s largest teleradiology reporting hubs in Pune that can process large volumes of X-rays, CT scans, and MRI scans
• They currently have a team of 190 radiologists, 30 pathologists, 8 microbiologists, and more than 2800 qualified professionals.
• The company currently operates 1823 diagnostic centers offering radiology and pathology services across 13 states in India
• With the company’s continued focus on the PPP segment, it has become a preferred partner of public health agencies resulting in allotment of 77.59% of all tenders being bid for getting up granted to the company
• The Company offers our diagnostic services at competitive rates and at significantly lower rates than players with revenues exceeding ₹1,500 million. For example, the radiology tests are priced 45% – 60% lower than market rates while pathology tests are 40% – 80% lower than market rates (Source: CRISIL Report)
• Since its inception, the company has served for than 23 million patients

Characteristics:

The PPP (Public-Private Partnership) Model of the company

• Land, building, light, and water connection is provided by the government to the private player, typically in government hospitals in areas where there is a shortage of basic health infrastructure facilities
• The private player sets up the allotted facility using its equipment and machinery which would include machinery for X-ray, CT scan, and other laboratory services for pathology and radiology
• In certain cases, these diagnostic services are provided free of cost to the beneficiaries referred by the government institutes, with cost reimbursed by the authorities on a timely basis
• These user charges have escalation clauses and hence, they increase throughout the concession period. These covenants are mentioned in the agreement and have to be abided by the PPP segment of healthcare services is a large target market, representing a market opportunity of ₹95 billion – ₹100 billion in Fiscal 2021. Going forward, this market is expected to grow at a CAGR of 14% and 17% between Fiscal 2021 and 2023 to reach ₹125 billion and ₹135 billion on the back of higher government spending in the PPP segment.
• Apart from the PPP model as mentioned above, the company has the normal diagnostic model for private beneficiaries in which the user pays for the diagnostic services.

3) Financial Performance:

i) Revenue Breakup:

• The company earns the majority of the revenue from Public Healthcare Agencies i.e., around 67%, and the rest from Private Healthcare Providers.
• The breakup of revenue of the company from Public Healthcare Agencies (PPP Model) and Private Healthcare Providers is as under:

ii) Financial Performance:

• The company has had good growth in revenue for the past 2 years with a CAGR of 38% and also has an impressive EBITDA % of above 25% in all of the last 3 years.
• The adjustment to EBITDA and PAT is made to eliminate the effect of fair valuation of compulsorily convertible preference shares following IND AS which is a significant component of profit and loss statement in the last 3 years.
• The adjusted PBT (profit before tax) has increased in FY21 to Rs. 42.67 Cr from Rs. 18.70 Cr. The PAT in FY21 is negative on account of the deferred tax effect.
• The company has a debt-equity ratio of approximately 1 in FY21

4) Peer Comparison:

• The major competitors of the company in the sector are Dr. Lal Pathlabs, Metropolis Healthcare, and Thyrocare Technologies.
• However, the company is unique in the aspect of PPP coverage in its business model which is not the same in other players in the industry.
• As per the graph provided below, Krsnaa Diagnostics has a PBDIT per test of Rs. 88 which is more than Dr. Lal and SRL.
• Krsnaa’s radiology tests are priced 45-60% lower than market rates while pathology tests are 40-80% lower than market rates. Despite offering services at almost 50-60% lower than its peers, Krsnaa has depicted good PBDIT margins. This indicates Krsnaa’s strong cost leadership over its peers. Further Krsnaa’s lower price points make it resilient to any future price capping that the peers are susceptible to, in terms of the erstwhile price cap of ₹4,500 for RT-PCR which was significantly revised downwards to ₹500-1,500 by different states.
• However, since Krsnaa frequently enters into PPP contracts, price escalation in the range of 3% to 5% is taken care of in the contract agreements as against the peers who are vulnerable to price adjustments and variations in the overall market.
• The operating income CAGR of Krsnaa over the last 3 years is 47% which is much higher than any of the peers (closest being Metropolis at 16%) but the lower base of Krsnaa is the biggest catalyst for the same.
• Some comparisons with them are as under –

5) Key Strengths:

• KDL has a presence in 13 states across India in over 1800 locations
• It is a large and early entrant in PPP diagnostic industry where the headroom for growth in the Indian scenario is big. The company also has a good strike rate in winning tenders for the PPP contracts
• The company has a big pricing advantage in comparison to its peers. Some of the radiology and pathology tests of the company are priced 40-80% lower than peers and yet the company has been able to earn good PBDIT per test due to lower costs. Under the PPP model, the company gets rent-free space and access to utilities which is a significant factor for lower costs.
• The PPP model of the company ensures a degree of revenue visibility. The contracts also include price escalations which other peers might not have the liberty to due to intense competition
• Experienced promoters and management team supported by a strong employee base.

6) Key Risks:

• A substantial portion of the revenue from operations depends on payments under contracts with public health agencies. If the company is unable to negotiate and retain similar fee arrangements or if the contracts are canceled, or if the company is unable to realize payments, the business may be materially and adversely affected
• The PPP contracts are awarded through a bidding process. There is no guarantee or assurance that the company will qualify and successfully keep winning tenders.
• Delays in the establishment of diagnostic centers could lead to termination of the agreements or cost overruns, which could harm cash flows, business, results of operations, and financial condition.
• The prices for the tests charged for by the company are susceptible to heavy regulation and any capping of prices could have a hindrance on the profitability of the company.
• There is intense competition in the diagnostic space from some of the bigger peers of the company like Dr. Lal Pathlabs, Metropolis Healthcare, and Thyrocare Technologies.

7) Valuations:

Conclusions:

Currently, the stock IPO is demanding a GMP of around Rs. 350. The business model of the company consists of good earning visibility. Follow due diligence before making any investment decisions