Verdict: Local Player at Stretched Valuation

Rs. 1,895 cr IPO: Entirely OFS – 86% comprises part exit to PE Kedaara from 40% holding to 10%, and 14% OFS by promoter to trim 60% holding to 55%

IPO Date: Wed 1^st Sep to Fri 3^rd Sep 2021

Price band: Rs. 522-531 per share (FV Re.1 each)

Mcap: Rs. 5,415 cr, implying 35% dilution

Listing: 14^th Sep 2021

Hyderabad based Diagnostic Chain

64 of its 81 diagnostic centres are located in Hyderabad, accounting for 86% of FY20 revenue of Rs. 339 cr (FY21 not considered due to non-recurring covid revenue). Company is a pre-dominantly a single-city diagnostic chain, and it operates 1 centre each in Kolkata and NCR, and 15 in tier 2/3 towns of AP and Telangana. It now plans to expand into South and East India.

Highly Competitive Industry 

Despite 40 years of existence and concentrated regional presence, Vijaya’s market share is a mere 7% in out-of-hospital (OOH) diagnostic services in home geography of AP/ Telangana, highlighting the fragmented and competitive nature of the industry, lacking entry barriers or strong competitive moats.

Highest EBITDA Margin but Lower RoE

Over 90% of Vijaya’s revenue is generated from B2C segment, much higher than peers’ 25-60%, leading to high average realization per customer of Rs. 1,214 vis-à-vis Rs. 850 for Metropolis, Rs. 690 for Dr Lal and Rs. 225 for Thyrocare.

Since 35% of revenue is from radiology services, where consumables cost is lower than pathology, company’s EBITDA margin of 44% is also the highest among the listed peers. However, PAT margin of 18% is similar to peers’ 15-20%, on account of higher depreciation on asset-heavy radiology equipments.

Lower asset turnover ratio, due to capex-heavy radiology business, is a challenge faced by recently-listed Krsnaa Diagnostics, radiology accounting for 65% of its revenue, which is still ruling below IPO price. Vijaya’s 35% radiology revenue makes its 23% RoE better than Krsnaa, but trails Metropolis’ 27% and Thyrocare’s 24% RoE.

Demanding Valuation

On FY20 PAT of Rs. 63 cr, mcap of Rs. 5,415 cr translates into PE multiple of 87x which is quite stretched not only on an absolute basis, but also in relation to similar sized peer Thyrocare, having FY20 PAT of Rs. 88 cr and ruling at PE of 78x. Larger peers Dr Lal and Metropolis are ruling at PE of 120-140x, but Vijaya’s lower size and local presence calls for a discount.

In the past 1 year, share prices of all listed diagnostic players have run-up very sharply and the entire industry faces the risk of revenue contraction in FY22 (on higher base of covid-led FY21). While earnings growth may normalise, high valuation multiples appear unsustainable.

Conclusion

Local player, with small topline, at stretched industry-wide valuation does not provide adequate risk-reward. Hence, the IPO can be given a miss.

Grey Market Premium (GMP) of Vijaya Diagnostic: Grey Market Premium of Vijaya 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.