Vijaya Diagnostic Centre IPO: Shares Worth Rs 1,900 Crore On Offer

Vijaya Diagnostic Centre Limited (VDCL) is the largest diagnostic chain in southern India, by operating revenue. It is also one of the fastest-growing diagnostic chains by revenue for the financial year 2020 (FY20). The company is conducting an offer for sale and existing shareholders plan to offload shares worth Rs 1,900 crore.

Business Overview

VDCL acts as a one-stop solution for pathology and radiology testing services. Its extensive operational network consists of 80 diagnostic centres and 11 reference laboratories across 13 cities of Telangana, Andhra Pradesh, the National Capital Region (NCR) and West Bengal.

VDCL offers a wide range of pathology tests and approximately 220 basic and 320 advanced radiology tests that cover several issues. The company has also ventured into value-added services such as home collection, house calls and various delivery or access modes, such as web portals, for test reports.

VDCL’s business has received a boost with the Covid pandemic. Currently, it offers RT-PCR testing and CT scan for Covid diagnosis across 33 testing centres. It also offers Covid-19 vaccination services at the Kolkata and Gurugram diagnostic centres.

VDCL operates through a ‘hub and spoke’ model, whereby samples from customers are collected from multiple locations within a region and delivered to the laboratories for diagnostic testing. VDCL also acquired a majority stake in Medinova Diagnostic Services Ltd, which has an established network in Kolkata. VDCL has managed to successfully integrate Medinova into its operational network.

According to the red herring prospectus, factors including the brand’s strength, quality of the diagnostic services, integrated services model, centre’s infrastructure, convenience and home collection networks in their core geographies are important differentiating factors in customers choosing them as the preferred diagnostics provider.

The company’s strong brand value is visible from the fact that individual consumer business contributed to 92.09 per cent of their revenue from operations for the financial year 2021.

Financials

Revenues have grown at a compounded annual growth rate (CAGR) of 15 per cent over the last three years while profit has grown at a CAGR of 24 per cent. Its operating margins, having averaged around 40 per cent, are also higher than, or at par with most players in the diagnostics space.

It has a net fixed asset turnover of two to three times, implying that a two rupee sale requires investment of a rupee in fixed assets. Therefore, the sector might be capital intensive. With strong cash flows, the company has continually reduced debt over the last three years. The company has also produced free cash flow over the last three years.

Valuations

The price to earnings (PE) ratio of the company stands at around 60 times earnings on the higher band. Though the PE ratio is in line with similar companies in the space, the firm’s earnings for the year might be an anomaly as it has benefitted from the pandemic related diagnostics.

Key Risks

Geographical concentration: VDCL is highly dependent on the states of Telangana and Andhra Pradesh. The company derived 86.2 per cent of its total revenue from operations from Telangana for the financial year 2021.

Intense competition: The diagnostics industry in India is highly competitive and fragmented with several companies present in the market. Therefore, it is quite challenging for VDCL to improve market share and profitability.

Performance anomaly: The company experienced heavy demand for Covid testing due to the pandemic, which has had a positive impact on its overall volumes. However, the level of the demand for Covid related tests in the future remains uncertain.

Non-compliance to listing norms in the past: VDCL’s subsidiary Medinova Diagnostic Services was found to be in non-compliance of the listing regulations in the past. Investors should always look at a company’s track record before investing.