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Vijaya Diagnostic IPO: Information analysis

The largest integrated diagnostic chain in southern India is raising Rs 1,895 crore. Should you bid for its shares?

Vijaya Diagnostic IPO: Information analysis

Vijaya Diagnostic IPO: Information analysis

Started in 1981, Vijaya Diagnostic Centre is now one of the largest diagnostic centres in South India. It offers Pathology and Radiology services to its customers in Telangana and Andhra Pradesh. It also has a minor presence in Kolkata through its subsidiary Medinova Diagnostic Service, which it acquired in 2014. The company offers integrated pathology and radiology services to its customers. It has a comprehensive range of 740 routine and 870 specialised pathology tests, and approximately 220 basic and 320 advanced radiology tests covering various specialities and disciplines. All of this is done through its 81 diagnostic centres and 11 reference laboratories. It also offers a broad spectrum of health and wellness packages to the customers as per their requirements.

According to a CRISIL Research report, the Indian diagnostic industry is set to grow at 12-13 per cent CAGR until 2023. South India has a 27-29 per cent market share, of which Andhra Pradesh and Telangana together account for 44-46 per cent. Vijaya Diagnostics has a strong presence in these two states thanks to their well-structured hub-and-spoke model. The company has one main hub centre and various other reference centres known as spokes, wherein specimens are collected across multiple locations and sent to the main hub for diagnostic testing.

Strengths

  • The company uses a hub-and-spoke model, which increases logistical efficiency, thus gaining greater economies of scale. This model also establishes them in their operating locations.
  • The company has some of the best numbers in the industry with Rs 1,214 operating income per patient and a 78 per cent cash conversion, which means it can convert most of its operating revenue to cash immediately, helping them maintain high cash and liquidity.
  • As an integrated diagnostic player, the company offers its customers a one-stop solution for basic to advanced pathology and radiology testing services.

Weaknesses

  • It has a geographically concentrated business, with 86 per cent of the company's revenue coming from the state of Telangana. The lack of geographical expansion may hinder its growth in future.
  • Even though the diagnostic industry has a tremendous growth trajectory, diagnostic chain companies only have 12-17 per cent market share, and standalone diagnostic centres account for 45-50 per cent market share.

Vijaya Diagnostic IPO: Information analysis

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last twelve months?
No, profit before tax for FY21 stands at Rs 44.2 crore.

2) Will the company be able to scale up its business?
Yes, as per CRISIL research, the diagnostic industry is set to grow at 12-13 per cent CAGR on the back of increasing health awareness, higher demand for health insurance, and the increasing role of diagnostic services for providing useful information for correct diagnosis and treatment of diseases. The company also plans to increase its foothold in the East-Indian market in the coming years. High cash balances on the company's book will allow them to scale up their business.

3) Does the company have recognisable brand/s, truly valued by its customers?
Yes, Vijaya Diagnostics is one of the most reputed diagnostic centres in Telangana and Andhra Pradesh.

4) Does the company have high repeat customer usage?
Yes, running a reputed chain of diagnostic centres leads to high brand recall, increasing repeat individual consumer business and customer stickiness.

5) Does the company have a credible moat?
No, the company operates in a highly fragmented industry, and the services provided cannot be differentiated from its competitors.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
No, running a diagnostic centre requires a lot of regulatory approvals.

7) Is the business of the company immune from easy replication by new players?
No. Though the company has a reputation in southern India, it still has competition from other recognisable diagnostic chains and standalone diagnostic centres. Moreover, setting up a standalone diagnostic centre might not require a large investment.

8) Is the company's product able to withstand being easily substituted or outdated?
Yes, diagnostic services are an essential part of healthcare services and play an important role in the treatment of diseases. Thus, the company's product cannot be easily substituted or outdated.

9) Are the customers of the company devoid of significant bargaining power?
No, though the company provides a wide range of services, the customers are not obligated to choose the services of this company. Plenty of other options are available to the customers.

10) Are the suppliers of the company devoid of significant bargaining power?
No, the company relies on third-party suppliers and vendors to procure testing equipment and enters into agreements to purchase minimum quantity or value of purchases.

11) Is the level of competition the company faces relatively low?
No, there are various other similar diagnostic chains and standalone diagnostic centers that compete with the company and diagnostic services in the hospital.

Management

12) Do any of the founders of the company still hold at least a 5 per cent stake in the company? Or do promoters totally hold more than a 25 per cent stake in the company?
Yes, the leading promoter, Dr Sudrendranath Reddy, will hold 32.7 per cent of the shares post issue, and the promoter group will have 54.7 per cent post issue.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes, the executive chairman, Dr S Surendranath Reddy, has been with the company since its inception.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reasons to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
Yes, there is no material litigation that casts doubt on the intention of the management.

16) Is the company's accounting policy stable?
Yes, we have no reasons to believe otherwise.

17) Is the company free of promoter pledging of its shares?
Yes, the promoters have not pledged any part of their shareholding.

Financials

18) Did the company generate the current and three-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
Yes, the company's current year ROE is 26.8 per cent, and three-year average is 25.15 per cent. The current ROCE is 37.97 per cent and the three-year average is 35 per cent as of March 31, 2021.

19) Was the company's operating cash flow positive during the previous three years?
Yes, the operating cash flow of the company was positive during the previous three financial years.

20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
Yes, the company has generated 13.5% CAGR revenue during the last three years.

21) Is the company's net debt-to-equity ratio less than one, or is its interest-coverage ratio more than two?
Yes, the company is net-debt-free as of June 30, 2021. The current debt-to-equity is 0.01, and the interest coverage ratio is 8.35.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
Yes, the company realises its cash before it pays its suppliers. It has a negative 149 working capital days, indicating that it receives from its customers far before it pays its suppliers.

23) Can the company run its business without relying on external funding in the next three years?
Yes, the company has enough reserves and cash to run its business without relying on external funding for the next three years.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes, the company's short-term borrowings decreased from Rs 11 crore in FY20 to just over one crore in FY21.

25) Is the company free from meaningful contingent liabilities?
Yes, the company has a negligible amount of contingent liabilities.

The stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No, its stock will offer an operating earnings yield of just 3.1 per cent on its enterprise value.

27) Is the stock's price-to-earnings less than its peers' median level?
Yes, the stock's price-to-earnings ratio of 46.5 is less than its peers' median level of 47.1.

28) Is the stock's price-to-book value less than its peers' median level?
Yes, the stock's price-to-book value of 13.8 is less than its peers' median level of 15.9.

Disclaimer: The authors may be an applicant in this Initial Public Offering.