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Vijaya Diagnostic IPO: Facts, Stats, Opportunities and Risks

Editor, TRANSFIN.
Sep 1, 2021 4:08 AM 4 min read
Editorial

Today, the IPO of Vijaya Diagnostic Centre (VDC) opens for subscription, the 39th issue so far this year. The ₹1,895cr ($258.4m) offer is entirely an offer for sale (OFS) of 35,688,064 equity shares.

Fast Facts

  1. As an OFS, VDC’s offer will see the offloading of shares by the promoter Dr. S Surendranath Reddy (who owns 37.78%) and investors Karakoram Ltd. (38.56%) and Kedaara Capital Alte­rnative Investment Fund (1.44%).
  2. The promoter shareholding post-issue is slated to reduce to 54.78% from 59.78%.
  3. Half of the net offer has been reserved for Qualified Institutional Buyers (QIBs), 35% for retail investors and the remaining 15% for Non-Institutional Investors (NIIs). 
  4. The price band has been set at ₹522-531 ($7.11-7.24) per share.
  5. As of Monday, the stock was commanding a grey market premium of ₹20 ($0.27).
  6. The IPO opens on September 1st and closes on September 3rd. The listing date is September 14th.
  7. Link to DRHP

 

About the Company

Founded in 1981, the company is the largest diagnostic chain in South India in terms of operating revenue. It provides a wide array of testing services, including pathology and radiology. Overall, it offers around 740 routine tests, 870 specialised pathology tests, 220 basic tests and 320 advanced radiology tests. The company also offers customised health and wellness packages.

Vijaya Diagnostic Centre has a comprehensive diagnostic network with over 80 centres spread across 13 cities. 63 of these centres are in Hyderabad while there are other branches in Sangareddy, Warangal, Hanmakonda, Karimnagar, Nizamabad, Kurnool, Nellore, Visakhapatnam, Kolkata and Gurgaon.

VDC would be the second diagnostic lab chain to aim for the bourses in less than a month. On August 4th, Krsnaa Diagnostics opened for subscription (FYI: it ended up being subscribed 64.4 times). Other listed peers include Dr. Lal Path Labs and Metropolis Healthcare.

 

Macro and Money Matters

VDC, a debt-free company, reported a 37% jump in net profit at ₹84.9cr ($11.57m) for FY21 from ₹62cr ($8.45m) in FY20. Revenue during this period rose by 9.7% to ₹388.5cr ($52.97m) compared with ₹354cr ($48.27m) YoY. FY21 EBITDA margins stood at 44%, compared to peers’ 25-35%.

 

The company is unique for its customer-centric model: 93% of its revenues come from its B2C business. The weighted average return on net worth for the last three fiscals has been 23.14%. Meanwhile, the P/E ratio (based on basic and diluted EPS) for FY21 at the higher end of the price band is 64.29x, at a discount to Dr. Lal Path Labs, which trades at 80.83x and Metropolis at 57.28x.

 

Industry Overview

Diagnostics is basically the industry that deals with the investigation and identification of diseases and their symptoms. In India, favourable trends such as increased urbanisation, growing health insurance penetration, awareness about the importance of healthcare, a rise in health ailments among the populace etc. Are contributing to the diagnostics market’s healthy growth.

Moreover, the private sector accounts for a lion’s share of broader healthcare expenditure, which is only expected to go up! 

IBEF and the Ministry of External Affairs estimate the diagnostics sector in particular to be valued at $32bn by the end of next year. The market is overwhelmingly skewed in favour of pathology, which accounts for nearly 80% of the same. It is also heavily concentrated in tier-1 cities: urban Indians contribute c. 74% of the overall diagnostics market revenue.

From a broader perspective, the domestic healthcare industry, despite still being underdeveloped and assailed by the COVID-19 pandemic, has shown promising potential. It is expected to grow at a 17-18% CAGR until FY24, aided by Government stimulus, rising incomes, medical tourism and the large pool of medical talent.

Coming to VDC, the company has announced intentions to expand its presence in its core markets - Andhra Pradesh and Telangana. It also intends to expand into adjacent states and Eastern India, with Kolkata as its epicentre. (In 2014, VDC acquired Kolkata-based listed firm Medinova Diagnostics Services.)

The risk concentration runs high, though. In the past three fiscal years, about 88% of the company’s revenue from operations came from Telangana alone (86.21%, 89.83% and 88.04% respectively).

However, investor sentiment for the healthcare sector as a whole is expected to remain optimistic. Alongwith the Krsnaa Diagnostics issue (which debuted at a 5% premium), four other companies (Emcure Pharma, Supriya Lifesciences, Windlass Biotech and VDC itself) could together raise as much as ₹8,300cr ($1.13bn) together. This correlates with the positive trends in the larger market, where 2021 is turning out to be a banner year for IPOs.

 

So Far, So Good... 

But IPO fatigue seems to be catching on. Most of the companies that had their IPOs over the last two months have faltered despite relatively strong debuts, with some having fallen by as much as 23% (Zomato being a notable exception).

At least five listings this month saw share prices dip below the issue price on the first day of trade. GMPs are falling. The BSE IPO index has plateaued. The mid-cap and small-cap indices are losing steam. This month’s primary market doldrums have caused the average listing premium for this year to fall to 23% from what could have been 28%.

To ascertain how the market may welcome VDC, it may be pertinent to look at how its peer Krsnaa Diagnostics is doing. As of market close today, its shares were trading about -0.39% below the issue price of ₹954 ($13).

Ergo, despite its attractive numbers and a healthy balance sheet, VDC’s IPO success isn’t necessarily a done deal. 

FIN.
 

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