About the company:
South-based Popular Diagnostics player Vijaya Diagnostics is coming up with an IPO worth Rs.1,895 cr which is 100 percent Offer for Sale. The IPO is scheduled to open on 1st Sep, 2021 and will remain open till 3rd Sep, 2021. The price band is set between Rs.522-531 per share for a lot size of 28 shares per lot bid.
Background:
Vijaya Diagnostic Centre is the largest integrated diagnostic chain in southern India, by operating revenue, and also one of the fastest-growing diagnostic chain by revenue for FY20. They offer a one-stop solution for pathology and radiology testing services to their customers through an extensive operational network, which consists of 81 diagnostic centres and 11 reference laboratories across 13 cities and towns in the states of Telangana and Andhra Pradesh and in the National Capital Region and Kolkata as on June 30, 2021. The company offers a comprehensive range of 740 routine and 870 specialized pathology tests and 220 basic and 320 advanced radiology tests that cover a range of specialties and disciplines, as of June 30, 2021. Their test menu includes pathology tests ranging from basic biochemistry and clinical pathology to cytogenetics and high-end molecular diagnostic tests, and radiology tests. They also offer a broad spectrum of health and wellness packages to the customers as per their requirements. Vijaya follows a customer centric approach as substantial majority of its customers are individual customers, with over 92 percent of revenue from operations for the FY21, being directly attributed to individual consumer business, as a result of its trusted and quality diagnostic services built over decades of experience. Telangana and Andhra Pradesh are Vijaya’s key markets which derived ~96 percent of its FY21 revenues out of which 86 percent came in from only Telangana. Further, Vijaya Diagnostic Centre intends to strengthen their presence in regions in which they operate, with emphasis on the states of Telangana and Andhra Pradesh. Vijaya also plan to expand presence in east India, in particular Kolkata. They believe that the growing demand presents them with an opportunity to establish a network of diagnostic centres in East India.
Growth Strategies of Vijaya Diagnostics:
They intend to supplement their organic growth with selective acquisitions of/strategic partnerships with brands with strong vintage and market position in adjacent markets. It is actively looking to explore select expansion opportunities through strategic acquisitions of/partner with regional diagnostic service providers who possess brand recognition among an existing customer base to. Also it is looking to:
Increase its customer base to consolidate their position in core markets in which they currently operate;
Achieve operating leverage in core markets by unlocking potential efficiency and synergy benefits;
Strengthen or expand technological capabilities; and
Grow in new markets (Eastern Region)
Healthy & Growing Financials:
| Particulars (Rs.Cr) | FY19 | FY20 | FY21 | 3 - year CAGR |
| Revenue | 293 | 339 | 377 | 13.40% |
| EBITDA | 119 | 148 | 178 | 22.30% |
| EBITDA Margin (%) | 41% | 44% | 47% | - |
| PAT | 46 | 63 | 85 | 35.90% |
| PAT Margin (%) | 16% | 19% | 23% | - |
| EPS | 4.5 | 6.1 | 8.3 | - |
| Net Worth | 207 | 274 | 359 | |
| CFO | 91 | 106 | 130 | 19.50% |
| ROE | 22% | 23.00% | 24.00% | - |
| ROCE | 30% | 33.00% | 30.00% | - |
Vijaya Diagnostics Revenue and PAT grew at a CAGR of 13.4 percent and 35.9 percent respectively in the last three years with a consistent operating margin of above 40 percent as compared to its peers whose margin ranged between 17-25 percent. Its PAT margin was also above peers average in FY21 which came in at 23 percent as compared to peers range of 10-18 percent. In addition to high operating margins, Vijaya’s attractive financial profile is also evidenced by negative working capital and high cash flow generation leading to strong net cash position. They have also enjoyed return on equity of 23.64 percent and the return on capital employed (RoCE) of 42 percent during the FY21.
Superior Operating Metrics:
| Particulars (Rs.Cr) | Vijaya Diagnostics | Dr.Lal | SRL | Metropolis |
| Operating Income Per Patient | 1.214 | 686 | 797 | 857 |
| Average Tests Per Customer Visit | 2.8 | 2.5 | 2.4 | 2 |
Risks:
Geographical Concentration- As of FY21 96 percent of its revenues came from south regions (Telangana & Andhra Pradesh)
Intense Competition- Pricing-related competition may intensify in the near future
High cost and dependency on third parties for testing equipments
Conclusion:
Vijaya Diagnostics is pre-dominantly a south-based company with major presence in Telangana and Andhra Pradesh region. Its current financials and brand recall value seems decent but due to the geographic concentration and no major timeline to expand to adjacent geographies, its future growth continues to remain a major challenge. The fact that the IPO is 100 percent OFS also gives a message that the company is currently not looking for growth of its business as none of the capital raised will be used for any kind of inorganic or organic expansion immediately post IPO. Investors are spoilt by choice when it comes to investing in diagnostics space as there are other Pan-India players which provide a better growth outlook. Valuation-wise too Vijaya looks fairly valued at 64.3x (upper band) as compared to Dr.Lal Path Labs-88.2x, Metropolis- 74x. So, considering all these factors we recommend Investors to ‘AVOID’ this IPO for now.
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