Vijaya Diagnostic offers one-stop solution for pathology and radiology testing services to the customers through extensive operational network, which consists of 80 diagnostic centers 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 on June 30, 2021.

Dr. S. Surendranath Reddy established the first Vijaya Diagnostic Centre in Hyderabad with a vision of providing comprehensive, innovative, and high-quality diagnostic services under one roof in a reliable, affordable, and customer-centric manner.

Unlike many of the diagnostic centers, that are B2B in their model, company has adopted a predominantly B2C approach. Individual consumer business contributed to 93.06% of total revenue from operations in Q1 FY2022 and 92.09% of total revenue in the FY2021, owing to the trust build over decades.

With diagnostic services becoming the cornerstone for recommending requisite treatments, as well as monitoring recovery posttreatment, the industry has posted healthy growth over the past few years. The diagnostic industry achieved a healthy CAGR of 13% to 14% from fiscal years 2017 to 2020.

Most of the healthcare enterprises in India are more concentrated in urban areas. With increasing urbanisation (migration of population from rural to urban areas) the awareness among the general populace regarding presence and availability of healthcare services for both preventive and curative care is expected to increase, thus paving the way for growth of the diagnostic industry.

As of June 30, 2021, company’s diagnostic center network consist of (i) a flagship center located in Hyderabad, which is equipped to conduct all of pathology specimens collection, basic and advanced radiology tests; (ii) 20 hub centers, which are equipped to conduct all of pathology specimens collection, basic radiology tests and certain advanced radiology tests; and (iii) 60 diagnostic centers, which are equipped to conduct a majority of pathology specimen collection and certain basic radiology tests.

As of June 30, 2021, company offers a comprehensive range of approximately 740 routine and 870 specialized pathology tests and approximately 220 basic and 320 advanced radiology tests that cover a range of specialties and disciplines.

During the three months ended June 30, 2021, the company conducted approximately 19.6 lakh pathology tests and 2.2 lakh radiology tests for approximately 9.4 lakh customers. Tests per customer visit stands at 2.83, operating revenue per customer was Rs 1,213.72 and operating revenue per test was Rs 428.14, all of which are higher as compared to its listed regional peers.

Growth in the Indian diagnostics market is driven by favorable changes in demographics, improvements in health awareness, increased spend on preventive care and wellness, increase in lifestyle-related ailments and rising penetration of insurance in India.

For the three months ended June 30, 2021, company derived 87.18% and 8.73% of total revenue from operations from Telangana and Andhra Pradesh, respectively. For the fiscal year 2021, it derived 86.21% and 9.99% of total revenue from operations from Telangana and Andhra Pradesh, respectively.

As of June 30, 2021, all of company’s laboratories hold National Accreditation Board for Testing and Calibration Laboratories (NABL) and its three diagnostic centers hold Patient Safety & Quality of Care (NABH) accreditations.

Offer and its objects

The IPO is a pure offer for sale of 356.8 lakh shares by Dr. S. Surendranath Reddy, Karakoram Limited and Kedaara Capital Alternative Investment Fund – Kedaara Capital AIF 1. The company will not raise fresh capital for its business from the IPO.

Price band for the IPO is Rs 522 to Rs 531 per equity share of face value Re1 each.

The public issue also includes the reservation of up to 1.5 lakh equity shares for eligible employees.

Company will not directly receive any proceeds from the Offer and all the Offer Proceeds will be received by the Selling Shareholders, in proportion to the Offered Shares sold by the respective Selling Shareholders.

Dr. S. Surendranath Reddy and promoter group together holds an aggregate of 60,951,621 equity shares, aggregating to 59.78% of the pre-offer issued and paid-up Equity Share capital.

The issue, through the book-building process, will open on 1 September 2021 and will close on 3 September 2021.

Strengths

Company is well positioned for growth that will be driven by long operating history in core geographies, extensive network, and reputation for providing quality diagnostic services.

Company is the largest integrated diagnostic chain in southern India, by operating revenue, and one of the fastest-growing diagnostic chain by revenue for fiscal year 2020.

Company has a track record of delivering strong financial performance, Its consolidated revenue from operations for the financial years 2021, 2020 and 2019 was Rs 292.59 crore, Rs 338.82 crore and Rs 376.75 crore, respectively. Revenue grew at a CAGR rate of 13.47% from FY19 to FY21.

Company has a strong cash flow position, with cash generated from operations standing at Rs 50.94 crore in Q1 FY22, Rs 129.64 crore in FY2021, Rs 106.11 in FY2020 and Rs 90.52 crore in FY2019. Company's cash flow from operations grew at a CAGR rate of 19.67% from FY19 to FY21.

Company offers a one-stop solution for pathology and radiology testing services through its extensive operational network and dominant position in south India.

Increasing health awareness and rising income levels of both rural and urban population is set to boost preventive/wellness tests, which will provide positive tailwinds to the company.

Management and leadership team is Professional with strong vision and expertise in the industry.

Diagnostic centers of the company are designed in accordance with high quality specifications, which include requirements in relation to design of work area, physical infrastructure and placement of technical equipment, the main aim is to provide customers with uniformity of experience for visit across the diagnostic centers.

COVID-19 testing has fueled demand for both pathology and radiology testing services. Radiology testing services have been crucial to gauge the intensity of infection, especially in the lungs. Hence, a lot of impetus has been given to chest CT scans by practitioners to detect early warning, thus giving positive tailwinds to the company’s radiology segment.

Weaknesses

Overdependence on states of Telangana and Andhra Pradesh. Company derived 87.18%, 86.21%, 89.83% and 88.04% of total revenue from operations from Telangana for the three months ended June 30, 2021, and the financial years 2021, 2020 and 2019, respectively.

The diagnostics industry in India is highly competitive and fragmented with several companies present in the market, and therefore it is challenging for the company to improve market share and profitability.

The company experienced heavy demand for RT-PCR testing due to the covid-19 pandemic, which has had a positive impact on its overall testing volume, level of the demand for covid related tests in the future remains uncertain.

The diagnostic business has a high amount of working capital requirement for maintenance and development of business network and infrastructure. Any Failure or malfunction of equipment could adversely affect operations.

The prices that company charges for its services could become subject to recommended or maximum fees set by the Government or other authorities. Therefore, implementation of pricing policies by the Government or other authorities could adversely affect financial performance.

Company’s Subsidiary Medinova Diagnostic Services was in non-compliance of the Listing Regulations in the past which have since been rectified. However, it cannot assure that the SEBI or BSE will not take any further action against MDSL due to  such non-compliance.

Company’s CEO, Sura Suprita Reddy, was charged in a criminal proceeding due to an accident resulting in a fire at the Park Hospital, Hyderabad in which several persons were injured, and three persons subsequently lost their lives while undergoing treatment. Matter is currently in Supreme Court of India, any adverse development on this account may lead to company’s CEO not being able to continue in such position.

Valuation

In Q1 FY2022, consolidated sales were up by 137.26% to Rs 122.69 crore aided by increase in covid related testing volume compared to Q1 FY2021. OPM increased by 1957 bps to 46.34% which led to 310.77% increase in operating profit to Rs 93.81 crore. Other income increased 43.91% to Rs 3.28 crore, while interest cost rose 4.95% to Rs 4.03 crore and depreciation increased 2.46% to Rs 11.92 crore. PBT increased 6719.14% to Rs 44.19 crore.Tax expenses for Q1 FY2022 was of Rs 10.89 crore compared to tax credit of Rs 1.16 crore in Q1 FY2021. Net profit rose 1622.01% to Rs 32.94 crore.

For FY 2021, consolidated sales were up by 11.19% to Rs 376.75 crore compared to FY 2020. OPM increased by 492 bps to 44.06% which led to 25.15% increase in operating profit to Rs 165.98 crore. Other income decreased 22.88% to Rs 11.85 crore, while interest cost fell 0.90% to Rs 15.25 crore and depreciation increased 2.61% to Rs 50.45 crore. PBT increased 34.40% to Rs 112.12 crore.Tax expenses for FY2021 was of Rs 27.21 crore compared to tax expense of Rs 20.92 crore in FY2020. Net profit rose 34.74% to Rs 84.26 crore.

The EPS (excluding extraordinary items and relevant tax) on post-issue equity works out to Rs 8.3 for FY2021. On the upper price band of Rs 531, P/E works out to 63.97 for FY2021.

In terms of P/E ratio, among the other listed peers, Dr. Lal Path Labs trades at P/E of 109.23,Metropolis Healthcare at P/E of 75.76, Krsnaa Diagnostics at P/E of 107.49 and Thyrocare at P/E of 58.59. Vijaya Diagnostics' subsidiary Medinova Diagnostics is trading at P/E of 22.77. FY2021 EPS is used in all these calculations, with the share price being used as of 27 August 2021.