Krsnaa Diagnostics: IPO analysis

Established in 2010, Krsnaa Diagnostics is a chain of diagnostic centres. It provides imaging (radiology), pathology/clinical laboratory and tele-radiology services in hospitals, medical colleges and community health centres across India. The Indian diagnostic industry, which is estimated to be Rs 72,000 crore, has grown at a CAGR of 14 per cent since 2017. Buoyed by several factors such as the rising prevalence of chronic health conditions, higher income levels, growing government spending, increasing health awareness and higher penetration in Tier-II and Tier-III locations, the sector is expected to continue to grow by 15 per cent over the next three years. The IPO of Krsnaa Diagnostics is set to raise Rs 1,213 crore. Out of the amount, a large portion (67 per cent, i.e., Rs 813 crore) is an offer for sale (OFS), which will be used to give an exit route to existing investors (Phi Capital, Kitara Capital, Somerset Indus, etc.). The promoters are not selling any of their shares. The remaining Rs 400 crore of the primary issue will predominantly be used to expand the company's operations in Punjab, Karnataka, Himachal Pradesh and Maharashtra, as it won PPP contracts from respective state authorities. Besides, the company plans to use Rs 146 crore to repay its existing borrowing, which stood at Rs 232 crore as on March 31, 2021. This should make the balance sheet more robust, thereby paving the way for the company to expand its operations in the future. Strengths Revenue visibility: Due to the long-term contractual nature of the company's PPP business model, the company has a higher amount of revenue visibility. It could also benefit from in-built extension clauses in the contract. Expansion plan: The company is planning to expand its business operations and this could be beneficial in the long run because of the high amount of operating leverage. Large operating footprint: Starting its operations with just two radiology diagnostics centres, the company's operations now span across 1,800 locations in 13 states. Risks/weaknesses Low profits: The company made losses in FY19 and FY20. It has managed to make profits in FY21 only because of an accounting gain on the fair value of compulsorily convertible preference shares. Its average ROCE for the period FY18-FY20 was only 10.2 per cent. If we remove the effect of the notional gain on its profit befo