IPO Size: Rs. 846 cr, Entirely Offer for Sale (OFS)

• 56% of OFS comprises sale by PE OrbiMed, trimming 33% holding to 13%
• 33% of OFS by 3 promoters, reducing 61% combined holding to 49%
• 11% OFS by extended family of promoter (5.6% stake to drop to 1.5%)

Price band: Rs. 420-441 per share

M cap: Rs. 2,297 cr, implying 37% dilution

IPO Date: Fri 29^th Nov to Tue 3^rd Dec 2024, Listing Fri 6^th Dec 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

West Bengal-based Diagnostic Chain

Suraksha Diagnostic operates 49 diagnostic centers, of which, 46 are located in West Bengal. B2C accounts for nearly 94% of Rs. 219 cr annual revenue. High-value radiology tests contribute to 46% of revenue (against pathology), leading to industry-leading revenue per patient of about Rs. 2,000. Yet, net margins lag peers, due to small scale of operations.

Geographic Concentration

49% of FY24 revenue came from 1 district i.e. North 24 Parganas, and another 25% from Kolkata. Geographical concentration of revenue is a big systemic risk. It also implies company is more of a local player, and not even regional.

Large Supply of Stock

37% is seen very heavy dilution, and moreover the entire IPO is an OFS. Promoters are seeking to repay Rs. 80 cr borrowing (taken to increase stake in company), for which 40% of total equity encumbered, from the OFS proceeds. Another 23% stake held by non-executive promoter and extended family, is subject to similar arrangement.

Post IPO, promoter holding will slip below 50%, while there will be a supply overhang of OrbiMed’s 13% stake post expiry of 6 months lock-in, as it invested in Dec 2016.

Yet to Prove its Mettle

Suraksha plans to add 12-15 new centres annually for the next 3 years (internally funded), but in FY20, it shut 3 centres in NCR, due to inefficient operations. Historically, centre addition has been very slow - only 5 centres added in FY24 and 1 in Q1FY25. As, one new centre takes 5 years to mature, short term profitability will not get a boost. Thus, company’s growth plan and ability to scale up, especially outside a couple of districts in West Bengal, is yet to be proven.

Scale and Margins Lower than Peers

In revenue terms, Suraksha is half the size of 3 listed peers Krsnaa, Vijaya and Thyrocare, with net margins of both Vijaya (22%) and Thyrocare (16%) being higher than Suraksha’s 13%. 

Suraksha’s FY24 revenue jumped by 15% YoY to Rs. 219 cr, with 33% EBITDA margin and 11% net margin. Q1FY25 revenue stood at Rs. 61 cr, with Rs. 8 cr PAT and 13% net margin, as benefits of scale kicked-in. Q1FY25 EPS was at Rs. 1.49, against FY24 EPS of Rs. 4.4.

No Money Left on the Table

Seasonally, Q2 is the stronger quarter for the industry, with Q3 declining sequentially. Estimating FY25E EPS of Rs. 6.5, current year PE multiple of 68x makes the IPO full-priced, given the small scale (only Rs. 35 cr PAT) and 17% RoE (Q1FY25 annualised).

• Krsnaa Diagnostics has a m cap of Rs. 3,250 cr, for Rs. 72 cr PAT, whereas Suraksha is seeking Rs. 2,300 cr for less than half the PAT.
• Vijaya Diagnostic has a lower revenue per patient of Rs. 1,600, with the same B2C mix of 94%, yet its PAT margin is at 21%, leading to a PE multiple of 88x, for higher scale, better profitability and faster growth.
• Thyrocare clocks close to Rs. 600 cr topline and 16% net margin, yet its PE multiple of 59x is much lower than Suraksha.

Diagnostics is a growing, high-margin and cash generating business, but current industry valuation discount many years forward, pricing in all the positives. Similar is the story for Suraksha IPO, wherein the valuation multiple appears to have peaked-out.