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Krsnaa Diagnostics Ltd. - IPO - Heathy Business Outlook with Sound OCF - Reliance Research

Posted On: 2021-08-03 17:21:48 (Time Zone: UTC)


About the Company

Krsnaa Diagnostics Ltd. (KDL) - one of the fastest-growing diagnostic chains in India - offers a wide range of diagnostic services such as imaging/radiology services (x-rays and MRI etc.), routine clinical tests, pathology and tele-radiology services to private and public hospitals, medical colleges and community health centres. The firm has an extensive network of diagnostic centres across India with a key focus on non-metro and lower tier cities/towns. As of June 30, 2021, it was having 1,797 diagnostic centres through PPP agreements with public health agencies. In addition to PPP segment, KDL has been growing its collaboration with private healthcare providers to operate diagnostic centres within its facilities and has expanded to 20 diagnostic centres as on FY21 (from 14 as on FY19), which further increased to 26 as of June 30, 2021. Continued focus on PPP has aided the company to become a preferred partner for public health agencies. It resulted in winning 77.6% of tenders (by number) since commencement of operations. As of June 30, 2021, KDL was having 1,797 diagnostic centres pursuant to PPP agreements.

Financials in Brief

KDL has delivered an impressive growth in revenue and EBITDA (adjusted) over the last two years, mainly led by consistent increase in diagnostic centres. Its revenue and adjusted EBITDA clocked 38% and 30% CAGR, respectively over FY19-FY21. However, it recorded net profit only in FY21 after back-to-back losses over FY19-FY20, which was albeit supported by one-time Rs2.5bn gain on fair value movement of compulsory convertible preference shares (CCPS). Notably, the company's EBITDA margin stood at 26.7% in FY21, which is comparable with its peers like Metropolis Healthcare and Dr. Lal PathLab. Further, its OCF generation has been steady over last three years with cumulative OCF standing at Rs2bn over last three fiscals.

Our View: SUBSCRIBE from Long-term Perspective

The IPO is valued at 16x of FY21 reported earnings, while adjusting for one-time gain due to CCPS, the company remains a loss-making company. However, on EV/EBITDA basis, it is valued at 30.4x of FY21 EBITDA. which looks attractive compared to peers like Dr. Lal PathLab and Metropolis Healthcare. Steady cash flow generation and OCF yield at 3.4% are impressive, in our view. We believe India's healthcare delivery market is expected to see sustained traction hereon led by conducive government policies, rising non-communicable diseases (NCDs), increasing share of aged population, rising health awareness, growing health insurance coverage and improving affordability. Hence, we recommend SUBSCRIBE to the issue from long-term perspective.

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