Widely read:
Suraksha Diagnostic IPO (initial public offering) will open for subscription on November 29, 2024, and close on December 3, 2024. We break down the diagnostic company's strengths, weaknesses, and growth prospects to help investors make an informed decision.
Suraksha Diagnostic IPO in a nutshell
-
Quality
: The company reported a three-year average
ROE and ROCE
of 11 per cent each during FY22-24.
-
Growth
: Between FY22 and FY24, its revenue fell nearly one per cent per annum as a slowdown in Covid business dipped overall revenue in FY23. Its net profit, meanwhile, grew around 7 per cent annually over the same period.
-
Valuation
: The stock is valued at a
P/E
and a
P/B
ratio of 97 and 12 times, respectively.
- Overview: The company stands to benefit from consumers' increased willingness to invest in quality healthcare. The rising prevalence of chronic diseases like diabetes, coupled with heightened health awareness following the Covid-19 pandemic, provides a strong foundation for the company to scale its operations. The diagnostic market in East India, where Suraksha primarily operates, is projected to grow at an annual rate of 10.5 to 12.5 per cent. However, the company faces challenges from intensifying competition, not only from established players in the industry but also from new entrants, including hospitals venturing into diagnostic services.
About Suraksha Diagnostic
Suraksha Diagnostic, a leading diagnostic service provider, operates 49 centers across East India, supported by 166 sample collection points and nine laboratories as of June 30, 2024. In FY24, the company generated 53 per cent of its revenue from pathology tests, 46 per cent from radiology, and 0.18 per cent from Covid tests. With around 94 per cent of its revenue coming from retail customers (B2C) and the rest from corporate users (B2B), Suraksha reported an average revenue per patient of Rs 1,922 in FY24, an annual increase of around 21 per cent from FY22.
Strengths of Suraksha Diagnostic
- Industry-leading revenue per patient: The company's diagnostic centers also house polyclinics (small medical clinics), which provide medical consultations to patients. This value addition helped them realise the highest revenue per patient in the industry during FY22-24.
Weaknesses of Suraksha Diagnostic
- High promoter pledging : The promoter group has pledged 67 per cent of its pre-IPO shareholding in Suraksha and about 41 per cent of its total paid-up capital as security for a loan for another group company. This loan was secured through the issuance of 8,000 non-convertible debentures (NCDs) worth Rs 1 lakh each to Vistra ITCL. Although Vistra released the pledged shares to allow the IPO to proceed, it's expected that the shares will be pledged again after the IPO.
Suraksha Diagnostic IPO details
| Total IPO size (Rs cr) | 846 |
| Offer for sale (Rs cr) | 846 |
| Fresh issue (Rs cr) | - |
| Price band (Rs) | 420-441 |
| Subscription dates | November 29-December 3, 2024 |
| Purpose of issue | Offer for sale |
Post IPO
| M-cap (Rs cr) | 2,296.80 |
| Net worth (Rs cr) | 187.10 |
| Promoter holding (%) | 48.80 |
| Price/earnings ratio (P/E) | 97.20 |
| Price/book ratio (P/B) | 12.30 |
Financial history
| Key financials | 2Y per annum(%) | FY24 | FY23 | FY22 |
|---|---|---|---|---|
| Revenue (Rs cr) | -0.9 | 219 | 190 | 223 |
| EBIT (Rs cr) | 4.3 | 37 | 12 | 34 |
| PAT (Rs cr) | 6.9 | 24 | 7 | 21 |
| Net worth (Rs cr) | 10.7 | 179 | 156 | 146 |
| Total Debt (Rs cr) | -5.1 | 90 | 97 | 100 |
|
EBIT is earnings before interest and taxes
PAT is profit after tax |
||||
Key ratios
| Ratios | 3Y average | FY24 | FY23 | FY22 |
|---|---|---|---|---|
| ROE (%) | 11.3 | 14.1 | 4.3 | 15.4 |
| ROCE (%) | 11.0 | 14.1 | 4.9 | 14.0 |
| EBIT margin (%) | 12.9 | 16.8 | 6.4 | 15.4 |
| Debt-to-equity | 0.6 | 0.5 | 0.6 | 0.7 |
|
ROE is return on equity ROCE is return on capital employed |
||||
Risk report
Company and business
-
Are earnings before tax of Suraksha Diagnostic more than Rs 50 crore in the last 12 months?
No. The company reported profit before tax of around Rs 31 crore in FY24. -
Will Suraksha Diagnostic be able to scale up its business?
Yes. A growing number of chronic diseases and the increasing insurance penetration indicate growing awareness and demand for healthcare services including diagnostics, which will help the company scale up its business. -
Does Suraksha Diagnostic have recognisable brands with client stickiness?
No. While the company enters into long-term contracts with its B2B clients, they contribute only 6.5 per cent to its revenue. The company does not enjoy client stickiness in its primary retail customer segment (B2C). -
Does the company have a credible moat?
No. It operates in an industry with no significant entry barriers, crowded by many organised competitors.
Management
-
Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
Yes. The promoter stake will drop to around 48 per cent after the IPO from 61 per cent before. -
Do the top three managers have more than 15 years of combined leadership at Suraksha Diagnostic?
Yes. Somnath Chatterjee (Chairman and Joint Managing Director) and Ritu Mittal (Joint Managing Director and CEO) have more than 15 years of experience at the company. -
Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes. There is no information to suggest otherwise. -
Is the company's accounting policy stable?
Yes. There is no information to suggest otherwise. -
Is Suraksha Diagnostic free of promoter pledging of its shares?
No. About 41 per cent of the total paid-up equity capital has been pledged to Vistra ITCL (debenture trustee).
Financials
-
Did the company generate a current and three-year average return on equity of over 15 per cent and a return on capital employed of over 18 per cent?
No. The company reported a three-year average ROE and ROCE of around 11 per cent each. In FY24, it had an ROE and ROCE of around 14 per cent each. -
Was the company's operating cash flow positive during the last three years?
Yes. The company reported positive operating cash flow during FY22-24. -
Is the company's net debt-to-equity ratio less than one?
Yes. The company's debt-to-equity ratio was 0.5 in FY24. -
Is Suraksha Diagnostic free from reliance on huge working capital for day-to-day affairs?
Yes. The company's working capital requirements are low. Its trade receivables are low and it had working capital days of 14.8 in FY24. -
Can the company run its business without relying on external funding in the next three years?
Yes. The company generated positive free cash flow during FY22-24, so it does not have to rely on external funding. -
Is Suraksha Diagnostic free from meaningful contingent liabilities?
Yes. As of June 2024 the company reported its contingent liabilities as 5 per cent of its equity.
Valuations
-
Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
No. The stock offers an operating earnings yield of 1.6 per cent on its enterprise value. -
Is the stock's price-to-earnings (P/E) less than its peers' median level?
No. The stock is valued at a P/E ratio of 97 times compared to its peers' median level of 69 times. -
Is the stock's price-to-book (P/B) value less than its peers' average level?
No. The stock is valued at a P/B ratio of 12 times, same as its peers' average level.
Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.
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