This brand may not be well known in other parts of India but in the states of Telangana and Andhra Pradesh, Vijaya Diagnostics is almost a household brand. It is not just the largest diagnostic chain in South India but it is also the fastest growing chain. In terms of product offerings. Vijaya Diagnostics offers end-to-end solutions for pathology and radiology testing. Vijaya offers over 740 routine tests and over 870 specialized pathology tests at its centres.
Unlike many of the other diagnostic centres that are affiliated to hospitals and medical institutions, Vijaya is largely a B2C brand. In fact, over 90% of its revenues come from customers who directly walk into one of its diagnostic centres for a test. This strong B2C focus ensures higher profit per client and profit per test for Vijaya Diagnostics.
In order to give an exit to early shareholders, Vijaya Diagnostics is tapping the primary market with an IPO of Rs.1,895 crore. The IPO is priced in the band of Rs.522-531. The entire issue is an offer for sale (OFS), so no fresh funds come into the company from this IPO.
As part of the OFS, while promoter, Surendranath Reddy, will be selling a part of his stake, two other early investors; Karakoram Fund and Kedaara Fund will be exiting a big chunk of their holdings via this IPO.
Important Financials of Vijaya Diagnostics
The B2C model of Vijaya Diagnostics has helped them with better retentions on a per client basis and on a per test basis; both in terms of revenues and in terms of EBIT. That explains why the net margins and ROCE have expanded sharply with the increase in revenues.
As can be seen from the above table, the multiplier impact on profits is visible from the ROCE expanding from 30.06% to 42.01% between FY19 and FY21. As per a recent CRISIL report, Vijaya Diagnostics earns approximately Rs.1,214 as operating revenue per customer and Rs.428 as operating revenue per test. This is higher than the industry peer group.
Vijaya also scores in growth and customer penetration. Patient volumes for Vijaya Diagnostics have growth at 14% between 2017 and 2021. This is better than 13% for Dr. Lal Pathlabs, 13% for Metropolis and 10% for Thyrocare. In terms of penetration, Vijaya has reported tests per patient at 2.7X. This is again superior to 2.4X for Dr. Lal Pathlabs, 2.1X for SRL and 1.9X for Metropolis. The B2C focus has surely helped in better retention for Vijaya.
What should investors do with the Vijaya Diagnostics IPO?
At a macro level, this segment is catching on as people become more health conscious with the rise in lifestyle ailments. In addition, the recent pandemic has once again highlighted the need for people not to ignore symptoms and focus on pre-emptive health check-ups. All these are positive trends for Vijaya Diagnostics. If you look at the post-listing performance of other diagnostic players, it has been nothing short of fantastic.
- At a macro level, diagnostics is fast emerging as a critical segment of healthcare. It is not just pharma and hospitals. Now diagnostic testing is emerging as the third important leg of healthcare outlays and that is positive for Vijaya Diagnostics.
- We had mentioned earlier that Vijaya enjoys the best operating revenue per customer and per test. That is because of its B2C/B2B ratio of 93:7, compared to 23:77 for Thyrocare, 44:56 for Metropolis and 60:40 for Dr. Lal Pathlabs.
- In terms of P/E ratio, Vijaya Diagnostics is expected to have a post-IPO indicative valuation of Rs.5,414 crore. That is a P/E ratio of 60X, which is still lower compared to 74X for Metropolis and 107X for Dr. Lal Pathlabs.
Vijaya Diagnostics surely has its bells and whistles in place but the only risk is the narrow room for error in this business. Also, in this business, it is essential to continuously expand either organically or inorganically and that can take a toll on cash flows. From a long term perspective, Vijaya Diagnostics is a good play on changing healthcare trends.
The article is for informative purpose and does not suggest to buy or sell or hold. Decision or investing is to be taken by individuals.
Evaluate investing in the IPO based on your individual risk tolerance, investment Span etc.