Vijaya Diagnostic IPO review (May apply)

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Review By Dilip Davda on August 28, 2021

•    VDCL is an integrated diagnostic service provider with south centric play.
•    It has posted good margins so far, but rising competition raises concern.
•    The issue is purely a secondary offer only for listing benefits.
•    Based on financial parameters, the issue is fully priced.
•    Recent listing of Krsnaa Diagnostics likely to overshadow this IPO.

ABOUT COMPANY:
Vijaya Diagnostic Center Ltd. (VDCL) is the largest integrated diagnostic chain in southern India, by operating revenue, and also one of the fastest-growing diagnostic chains by revenue for the fiscal year 2020 (Source: CRISIL Report). It offers a one-stop solution for pathology and radiology testing services to customers through its extensive operational network, which consists of 81 diagnostic centres and 11 reference laboratories across 13 cities and towns in the states of Telangana and Andhra Pradesh and in the National Capital Region and Kolkata as on June 30, 2021. For the three months ended June 30, 2021, and the fiscal year 2021, it derived 95.91% and 96.20% of revenue from operations from its core geographies, Hyderabad and the rest of Telangana and Andhra Pradesh, respectively.

VDCL offers a comprehensive range of approximately 1,610 pathology tests, which are organized into approximately 740 routine tests and 870 specialized tests, as well as approximately 220 basic and 320 advanced radiology tests that cover a range of specialities and disciplines, as of June 30, 2021. The company's test menu includes pathology tests ranging from basic biochemistry and clinical pathology to cytogenetics and high-end molecular diagnostic tests, and radiology tests ranging from basic echocardiograms, X-rays and ultrasounds to advanced radiology tests including computerized tomography ("CT") scans, magnetic resonance imaging ("MRI") scans, single-photon emission computed tomography ("SPECT") and advanced positron emission tomography CT ("PET CT"). It also offers a broad spectrum of health and wellness packages to customers as per their requirements.

VDCL focuses on a customer-centric approach to enhance the overall quality of services for optimal customer satisfaction. For the convenience of customers, it provides value-added services such as home collection of specimens, house calls and various delivery or access modes (i.e., at diagnostic centres, SMS, email and web portal) for test reports. Several factors, including the strength of its brand, integrated services model, quality of diagnostic services, center infrastructure and customer experience, the convenience of operational network and home collection in core geographies are important differentiating factors in customers choosing it as their preferred diagnostic service provider, which helps it in retaining customers and sets apart from competitors. It has implemented a 'hub and spoke' model, whereby specimens are collected across multiple locations within a catchment area or a region for delivery to reference laboratories for diagnostic testing. This model provides greater economies of scale and enhances the consistency of testing procedures and results.

As of June 30, 2021, its operational network consists of a diagnostic centre network of (i) a flagship centre located in Hyderabad, which is its main 'hub' and equipped to conduct all of pathology specimens collection, basic and advanced radiology tests; (ii) 20 hub centres, which are equipped to conduct all of pathology specimens collection, basic radiology tests and certain advanced radiology tests; and (iii) 60 diagnostic centres, which are equipped to conduct a majority of pathology specimen collection and certain basic radiology tests; and a laboratory network of (i) a national reference laboratory co-located with flagship centre; and (ii) 10 reference laboratories co-located with certain hub centres and diagnostic centres. Its diagnostic services are provided by a medical professional team consisting of 74 laboratory doctors, 19 physicians, 105 radiologists and 1,027 well-trained technical staff in the operational network, as of June 30, 2021.

As of June 30, 2021, all of its laboratories hold National Accreditation Board for Testing and Calibration Laboratories ("NABL") and three diagnostic centres hold Patient Safety & Quality of Care ("NABH") accreditations. For the last 15 months period, its individual consumer business contributed of around 92% of the total revenue.

ISSUE DETAILS/CAPITAL HISTORY:
To provide an exit to few existing stakeholders and avail listing benefits, VDCL is coming out with a maiden book building route IPO via secondary issue i.e. by way of Offer for Sale of 35688064 equity share of Re. 1 each. The issue is opening for subscription on September 01, 2021, and will close on September 03, 2021. The company has fixed a price band of Rs. 522 - Rs. 531 per share for this offer and mulls raising Rs. 1895.04 cr. (at the upper price band). The application is to be made for a minimum of 28 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 35% of the post issue paid-up capital of the company.

The company has reserved 150000 equity shares for eligible employees and offering a discount of Rs. 52 per share to them. From the residual portion, it has allocated 50% for QIBs, 15% for HNIs and 35% for retail investors. Book Running Lead Managers (BRLMs) to this offer are ICICI Securities Ltd., Edelweiss Financial Services Ltd. and Kotak Mahindra Capital Co. Ltd. while KFin Technologies Pvt. Ltd. is the registrar to the issue.

Having issued initial equity at par, the company raised further equity in the price range of Rs. 5.75 and Rs. 332.76 per share (on the basis of Re. 1 paid-up value) between May 2014 and March 2017. It has also issued bonus shares in the ratio of 1 for 1 in December 2007 and 5 for 4 in May 2021. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.34/ Rs. 99.49 per share.

Post this issue, VDCL's current paid-up equity capital of Rs. 10.20 cr. will remain the same as this is a pure secondary offer. Based on the upper price band, the company is looking for a market cap of Rs. 5414.39 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, on a consolidated basis, the company has posted turnover/net profits of Rs. 302.94 cr. / Rs. 46.27 cr. (FY19), Rs. 354.18 cr. / Rs. 62.51 cr. (FY20) and Rs. 388.59 cr. / Rs. 84.91 cr. (FY21). For the first quarter ended on June 30, 2021, it has earned a net profit of Rs. 33.33 cr. on a turnover of Rs. 125.97 cr. Thus the company has posted the growing pattern for its top and bottom lines for all these periods.

For the last three fiscals, the company has posted an average EPS of Rs. 6.92 and an average RoNW of 23.14%. The issue is priced at a P/BV of xx based on its NAV of Rs. 38.53 per share as of June 30, 2021.

If we attribute annualized EPS for FY22 on the post issue equity, then the asking price is at a P/E of 41.10. Thus based on its super earnings, the issue appears fully priced.

COMPARISON WITH LISTED PEERS:
As per the offer documents, VDCL has shown Dr Lal Pathlabs and Metropolis Healthcare as its listed peers. They are currently trading at a P/E of around 85.02 and 57.29 (as of August 27, 2021). Recently listed Krsnaa Diagnostic is trading at a P/E of 15.48 as of said date. However, they are not truly comparable on an apple to apple basis.

DIVIDEND POLICY:
The company has not declared any dividend for the last three years. However, it will follow a prudent dividend policy post listing based on its financial performance and future prospects.

MERCHANT BANKER'S TRACK RECORDS:
The three BRLMs associated with this offer have handled 44 public issues in the past three years out of which 15 issues closed below the offer price on the day of listings.

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