Krsnaa Diagnostics
Krsnaa Diagnostics is coming out with a 100% book building; initial public offering (IPO) of 1,28,36,498 shares of Rs 5 each in a price band Rs 933-954 per equity share.
Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
The issue will open for subscription on August 04, 2021 and will close on August 06, 2021.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 5 and is priced 186.60 times of its face value on the lower side and 190.80 times on the higher side.
Book running lead manager to the issue are JM Financial, DAM Capital Advisors, Equirus Capital and IIFL Securities.
Compliance Officer for the issue is Manisha Chitgopekar.
Profile of the company
The company is one of the largest differentiated diagnostic service provider in India. It provides a range of technology-enabled diagnostic services such as imaging (including radiology), pathology/clinical laboratory and tele-radiology services to public and private hospitals, medical colleges and community health centres pan-India. It is the fastest growing diagnostic chain in India on multiple parameters including operating income, operating profit before depreciation, interest and tax (OPBDIT) and profit after tax between Fiscal 2017 and Fiscal 2020 and volume of tests conducted between Fiscal 2018 and Fiscal 2021 (amongst players with revenues exceeding Rs 1,500 million) It also operate one of India’s largest tele-radiology reporting hubs in Pune that is able to process large volumes of X-rays, CT scans and MRI scans round the clock and 365 days a year, and allows it to serve patients in remote locations where diagnostic facilities are limited. It provides quality and inclusive diagnostic services at affordable rates across various segments. Since inception, it has served more than 23 million patients.
The company offers range of diagnostics imaging services and clinical laboratory tests that include both routine and specialized tests / studies and profiles, which are used for prediction, early detection, diagnostic screening, confirmation and/or monitoring of diseases. Its diagnostic imaging/radiology services include conducting X-rays, computed tomography (CT) scans, magnetic resonance imaging (MRI) scans, ultrasounds, bone mineral densitometry and mammography. In its pathology segment, its primary focus includes biochemistry, haematology, clinical pathology, histopathology and cytopathology, microbiology, serology and immunology. A suite of diagnostic equipment is located at its tele-radiology hub along with a team of radiologists which provide it significant operating efficiencies and scalability.
Proceed is being used for:
Financing the cost of establishing diagnostics centres at Punjab, Karnataka, Himachal Pradesh and Maharashtra.
Repayment/pre-payment, in full or part, of borrowings from banks and other lenders availed by the company.
General corporate purposes.
Industry overview
The Indian diagnostic industry has grown consistently over the past three fiscals and is projected to grow at a CAGR of approximately 15% between fiscals 2021 and 2023. The size of the diagnostic industry is estimated to be approximately Rs 710 billion to Rs 730 billion in Fiscal 2021, registering a healthy CAGR of 13% to 14%, echoing the growth from healthcare delivery services, over Fiscal 2017’s industry size of approximately Rs 472 billion. The industry is expected to grow at approximately 15% and achieve a value of Rs 920 billion to Rs 980 billion in Fiscal 2023 (gaining a gentle push from government expenditure on testing). There was a significant decline in revenue in April and May 2020, however, the demand experienced a certain amount of revival from June 2020. The pending demand of healthcare contributed to revenues during a traditionally lean quarter from the diagnostic perspective. There was a recovery to pre-COVID-19 levels in the third quarter, with a shift towards specialised testing, increased home collection business and business to customers (B2C).
The industry can also be broadly separated into urban and rural centres, on the basis of provision of services in different areas. Urban centres typically have modern facilities and higher prices for tests. These facilities are usually located at public and private hospitals, clinics or are in the form of standalone centres or diagnostic chains. Rural centres are largely primary health centres, government dispensaries and private dispensaries that have small-scale facilities and carry out basic tests. For more advanced diagnostic tests, rural patients are referred to the nearest urban centre, therefore, also proving that there is a huge gap within healthcare services to be served in rural India. India’s rural population (approximately 70% of India’s total population) is expected to contribute only 26% of revenue of the overall diagnostic market.
The Government’s share in the overall hospital-based diagnostic centres was approximately 35% to 40% amounting to approximately Rs 95 billion in Fiscal 2020, having grown at a CAGR of approximately 13% from its value in Fiscal 2017. Going forward, the Government’s share within the diagnostic industry is projected to grow at a CAGR of 14% to 17% amounting to Rs 125 billion to Rs 135 billion in Fiscal 2023, driven by government-led programmes, extensive PPP models to ensure higher penetration of diagnostic facilities in underpenetrated rural India and increasing focus towards healthcare at municipal corporation level.
Pros and strengths
Unique and scaled diagnostics company: The company is one of the largest differentiated diagnostic service provider in India. It provides a range of technology enabled diagnostic services such as imaging (including radiology), pathology/clinical laboratory and tele-radiology services to public and private hospitals, medical colleges and community health centres pan-India. In the PPP segment, it collaborates with central, state and municipal government operated health and medical facilities for the deployment and operation of its diagnostic centres. It also partner with several private sector hospitals and health centres to establish diagnostic centres within their premises. Since inception and as of June 30, 2021, it has been awarded 38 contracts on a PPP basis, of which 32 projects have been executed while in the private healthcare segment, it has 26 active collaborations. It operates a hospital partnership model where diagnostic centres it operate are located within existing premises of hospitals and health centres and support them with onsite testing.
Strong brand equity: Krsnaa brand is associated with providing quality and reliable healthcare services at affordable prices. It provides quality services at competitive rates while following accreditations and protocols in line with best industry practice. For example, the cost of radiology tests it provides is 45% - 60% lower than market rates while the cost of its pathology tests are 40% - 80% lower than market rates. The range of diagnostic services it offer, together with the scale of its operations allows it to achieve economies of scale and provide competitive pricing for its operations. A number of its diagnostic centres are accredited with NABL or NABH. It ensures that the look and feel of its diagnostic centres is consistent which helps brand visibility and increase brand recall.
Extensive footprint across India with robust infrastructure: The company’s network of diagnostic centres spans 13 states across India and as of June 30, 2021 were present in over 1,800 locations. It commenced operations in Fiscal 2011 with two radiology diagnostic centres and as of June 30, 2021, it has established 1,370 radiology diagnostic centres and 487 pathology diagnostic centres including 443 collection centres. It has a significant presence in each state where it operate and as part of the diagnostic centres it establish, it has deployed and operate diagnostic centres across multiple locations within a particular state. It attribute the growth of its diagnostic centres across India primarily to its ability to understand and analyse new markets and to its project management and execution capabilities. Its technology infrastructure is designed to support the growth of its business and helps ensure reliability of its operations. Its ability to deploy latest equipment and technologies ensure that its processes are efficient and scalable with minimal errors.
Business model with robust revenue visibility: The company’s operations across radiology and pathology provide it with diversified sources of revenue. Its PPP agreements, to deploy diagnostic centres for its radiology and pathology services are typically long-term contracts that ensure visibility of revenues for its operations. The term of its contracts with public health agencies ranges between two years and 10 years and typically include a term extension clause based on performance and mutual agreement. Further, considering its services at competitive rates, public health agencies have expanded the coverage of the scope of its services to additional centres without any additional bidding process. Pursuant to the terms of its PPP agreements, the medical facility typically provides rent-free space and access to its utilities and other infrastructure for installation and operations of its diagnostic centres. Certain agreements also include price escalation clauses that allow it to revise the rates its services periodically during the tenure of the contract.
Risks and concerns
Business interruption at diagnostic centres and tele-radiology reporting hub could result in significant losses: The company operated over 1,823 diagnostic centres across 13 states as of June 30, 2021. It also operates its tele-radiology reporting hub in Pune. Each of its diagnostic centres and particularly its tele-radiology reporting hub is critical to its operations. Any risk of business interruption at its diagnostic centres or at its tele radiology reporting hub on account of any external factors such as adverse weather, remote geographical locations, natural disasters, fire, riots, terrorism, acts of war, vandalism, extended power failures, internet failures or other unforeseen events could have a material adverse impact on its business operations and results of operations. Further, there may be instances where the network connectivity of its tele-radiology hub to its diagnostic centres is disrupted on account of the aforementioned reasons. Business interruption could also be the result of internal factors such as failure to comply with regulatory requirements and the resulting loss of authorisation to operate the facility, labour conflict or termination or non-renewal of leases.
Derive substantial portion of revenue from states of Maharashtra, Rajasthan and Karnataka: While the company has an extensive network of diagnostic centres across 13 states in India, as of June 30, 2021, a significant number of its diagnostic centres are located in the states of Karnataka, Rajasthan and Maharashtra. As of June 30, 2021, the company operated 614, 61 and 15 diagnostic centres in Maharashtra, Rajasthan and Karnataka, respectively, which comprised 24.74%, 3.35% and 0.88% of its total network of diagnostic centres, respectively. Further, it derived revenues of Rs 1,552,82 million, Rs 1,698.77 million and Rs 2,791.77 million or 74.21%, 65.74% and 70.42% of its total revenue from operations from these three states in Fiscals 2019, 2020 and 2021, respectively. In the event of a regional slowdown in the economic activity in these regions, or any other developments including political or civil unrest, disruption or sustained economic downturn that reduce the demand for its services in these regions, could adversely affect its business, financial condition and results of operations, which are largely dependent on the performance and other prevailing conditions affecting the economies of these regions.
Face significant competition from standalone diagnostic centres: In addition to diagnostic healthcare service providers in India and hospital-based diagnostic centres, the company also face competition from independent and standalone diagnostic centres. Standalone diagnostic centres, which have a single centre, make up for 45-50% share of the market. Low entry barriers and the absence of stringent regulations have enabled small pathology labs and radiology centres to grow. They carry out basic tests that require minimal investment and space and typically have a conventional X-ray and an ultrasound machine. Standalone diagnostic centres could potentially operate in areas where it may not otherwise be able to operate given the equipment that it deploy and resources required by it to establish and operate its diagnostic centres. If the number of standalone diagnostic centres were to continue to increase, its business, results of operations and financial condition could be adversely affected.
Requires significant amount of working capital: The company’s business requires significant amount of working capital. A considerable amount of time may elapse between setting up a diagnostic centre including requisite equipment and generating revenues from diagnostic services it provide. There may be circumstances where funds available with it may not be sufficient to fulfil its business commitments, and it may need to incur additional indebtedness, or utilize internal accruals to satisfy its working capital needs. It will continue to require substantial capital in connection with the maintenance and development of its business network and infrastructure.
Outlook
Incorporated in 2010, Krsnaa Diagnostics is one of the fastest-growing diagnostic chains in India. The company offers a wide range of diagnostic services such as imaging/radiology services (X-rays, MRI, etc.), routine clinical laboratory tests, pathology, and tele-radiology services to private and public hospitals, medical colleges, and community health centres. It operates diagnostic centres under a hospital partnership model, within public and private health care facilities. It attribute its growth to the experience of its Promoter and senior management team. Its operations across radiology and pathology provide it with diversified sources of revenue. Its PPP agreements, to deploy diagnostic centres for its radiology and pathology services are typically long-term contracts that ensure visibility of revenues for its operations. On the concern side, the company depends on third-party vendors and suppliers to procure its imaging equipment, testing equipment and reagents and it enters into contractual arrangements with them. However, it cannot assure you that it will be able to continue to obtain adequate supplies of equipment, reagents and test kits, in a timely manner and without any defects, in the future. Besides, the company’s operations are human capital intensive and it is dependent on its large work force for operating its diagnostic centres and tele-radiology hub.
The issue has been offered in a price band of Rs 933-954 per equity share. The aggregate size of the offer is around Rs 1197.64 crore to Rs 1224.60 crore based on lower and upper price band respectively. On the performance front, total income increased from Rs 2,713.79 million in Fiscal 2020 to Rs 6,614.76 million in Fiscal 2021 primarily due to an increase in revenue from operations and gain on fair value movement of compulsory convertible preference shares. It has recorded a profit for the year of Rs 1,849.29 million in Fiscal 2021 compared to a loss of Rs 1,119.51 million in Fiscal 2020. The company intends to continue to expand its network of diagnostic centres and services within India and in particular increase its presence in geographies where it is currently present. It intends to grow its network across all states in India by leveraging its experience of deploying and operating diagnostic centres. The company proposes to explore vendor financing, whereby it intends to leverage its relationships with its equipment vendors to reduce financing costs of equipment.
