Largest integrated diagnostic chain in South India
Vijaya Diagnostic Centre (VDCL) is one of the largest integrated diagnostic chain in South India, having a dominant market share and brand recall in the Telangana and Andhra Pradesh. After starting in 1981, the company has 81 diagnostic centres in 13 cities / towns. It has 7% share in Telangana and Andhra non-hospital diagnostic market. Promoted by S. Surendranath Reddy, promoters own 60% stake while rest is owned by PE firm Kedaara Capital. After OFS, Kedaara would own 10%.
One of the highest B2C contribution amongst organized chains
Vijaya Diagnostics has the highest B2C revenue with 93% of its revenue coming from B2C segment in FY20. The company has ensured that the focus will remain on building a strong B2C presence in and around the geographies it is present ion along with new geographies it is looking to grow. VDCL's network includes 1 flagship centre, 20 hub centres and 60 diagnostic centres. The company also has 11 reference laboratories (including a national reference laboratory). The 'hub and spoke' model implemented by the company, collects specimens across multiple locations within a catchment area for shipment to their reference laboratories. Since company also offers radiology services across the network, it has higher realisation and tests per patient compared to DLPL and METROHL.
Focus on growing in existing adjacencies and East India
VDCL has a market share of 7% in the organized out of hospitals diagnostic space in Telangana and AP. The management estimates the size of this market to be ~Rs.51bn and Vijaya is well placed to capture a larger piece of this market. The company is focusing on expanding in Tier 1 and 2 cities/towns which is underpenetrated and will help them cater to nearby villages also. VDCL is also looking to expand its footprint in the East India and has acquired Medinova in 2015 which has a good presence in Kolkata. Management reckons East India is largely underpenetrated and has better scope of growth. Company has guided for Rs650mn-750mn capex which will be funded through internal accruals.
Early teens growth in past 2 years with best in class margin
VDCL has delivered 13% CAGR Revenue growth from FY19 to FY21 and is expecting to grow considerably faster than the industry average of 10-12%. EBITDA Margins of ~40% in FY20 are impressive largely a result of the company catering to the B2C segment which is less impacted by pricing erosion compared to B2B sourcing of samples. A new centre breaks even in the quarter of its inception. Strong return ratios coupled with negative working capital due to higher B2C revenues is another positive we like. Promoter owns land housing some of the diagnostic centres and receives rent from company.
Subscribe to a retail-footfalls driven franchise
At a post-issue market cap of Rs54.1bn, OFS is priced at ~64x FY21 P/E. On a forward basis, a steady growth and margin profile would translate in to valuation which would be at a marginal discount or in line with the 55-60x FY23 multiples commanded by DLPL and METROHL. Vijaya owns a retail footfall-driven business which would take time to scale up in newer geographies but then precludes pricing pressure due to lack of a sizable B2B business. We note that other listed peers like DLPL and METROHL have a significant B2B presence. Also, there appears to be a lot of scope to grow market share in existing markets given the large potential. Recommend Subscribe on a medium term basis though cognizant that near term triggers or surprises on growth after a COVID-fueled Q1 FY22 appear unlikely.