Krsnaa Diagnostics

Verdict: An Expensive Test

Rs. 1,213 cr IPO:

• 67% is OFS by PEs Somerset, Lotus, Kitara and Phi Cap, to trim 56% combined holding to 22%
• 33% is fresh issue for paring Rs. 146 cr debt and Rs. 151 cr capex over 12 months

IPO Date: Wed 4^th Aug to Fri 6^th Aug 2021

Price band: Rs. 933-954 per share

Mcap: Rs. 2,994 cr, implying 40% dilution

75% allocation to QIB and only 10% retail, as company reported accounting loss on convertible instrument, although business is profitable  

Listing: 17^th Aug 2021

1,823 Diagnostic Centres on PPP Model

Company follows the public private partnership (PPP) model, with diagnostic lab located on hospital premises - 1,797 in public and 26 in private hospitals. Company’s presence is largely in lower tier towns, with tests priced 40-60% lower than peers.

Of Rs. 258 cr revenue in FY20, 65% came from radiology and 35% from pathology segment. Although share of higher-margin radiology services (where consumable cost is lower) is more in the revenue mix, EBITDA margins of 29% matches peers Dr. Lal and Metropolis and is not higher, despite the cost advantage. On the net margin level, Krsnaa’s 8% margin is much lower than 18-22% of peers.  

Covid-led Industry-wide Profit Surge

Krsnaa’s revenue grew from Rs. 108 cr in FY18 to Rs. 258 cr in FY20, with adjusted PAT rising from Rs.3.6 cr to Rs.14.3 cr, leading to 5.5% net margin in FY20. In FY21, revenue surged to Rs. 396 cr, 37% of which was covid testing. With no price caps on covid tests till 9MFY21, average revenue per test increased 75% YoY to about Rs.424, from Rs. 242 in FY20. If covid-related revenues are excluded, FY21 revenue declined 3%YoY, in line with peers. FY21 adjusted PAT stood at Rs. 32 cr, implying 8% net margin, partly aided by covid and partly by maturing centres.

RoE Half of Peers, on Lower Asset Turn

Krsnaa’s asset turnover ratio of about 1.5x is much lower than 7-8x for Dr Lal and Metropolis, which limits growth potential or accelerates need for frequent fund raise. On Rs. 160 cr fixed assets, Dr. Lal clocked revenue of Rs. 1,330 cr in FY20 while, Metropolis achieved Rs. 850 cr revenue on Rs. 120 cr fixed assets. The asset light business model of peers keeps their RoEs between 25-30%, much higher than Krsnaa’s single digit RoE. Thus, irrespective of future growth and operating leverage, Krsnaa’s business model involving high capex and lower test prices cannot match asset turnover ratio or RoEs of listed peers, which warrants lower valuation multiples. This is also the reason why net margins need to be compared and not EBITDA. 

Besides, FY22 may witness reduction of covid tailwinds, as testing becomes non-mandatory post vaccine. Thus, on YoY basis, growth rates may appear flat, especially for Krsnaa, as, 37% of FY21 revenue comprised covid-testing, much higher than 18-25% of peers.

Peer Comparison

Even after pricing in 40% non-covid revenue growth for FY22E, PE multiple for Krsnaa is about 80x, which is quite aggressive:

1. Peers are ruling at PE of 60-90x
2. RoE in single digit over 25-30% for peers
3. Smaller scale of operations: Dr Lal’s revenue is 4x Krsnaa and Metropolis is 2x
4. Dr Lal and Metropolis are already cash rich companies, with 30-80% of net worth in cash. Krsnaa will become cash surplus after Rs. 150 cr debt repayment from IPO proceeds, thus incoming investors will be contributing to the debt free status.

Growth alone cannot be the sole valuation parameter. Besides, peers are already ruling at quite stretched and uncomfortable valuation levels.

Conclusion

Industry-lagging RoE on low asset turnover ratio with aggressive pricing overshadows expected growth. Hence, we do not advise applying in the IPO.

Grey Market Premium (GMP) of Krsnaa Diagnostics: Grey Market Premium of Krsnaa Diagnostics is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.