Vijaya Diagnostic Centre: Take a measured call

Vijaya Diagnostic Centre Private Limited (VDC) is tapping the capital markets with its Offer for Sale of 3,56,88,064 equity shares in a price band of Rs522-531. The issue opens on Wednesday (September 1) and closes on Friday (September 3).

The company is into the business of healthcare diagnostics and is a chain with 81 diagnostic centres in 13 cities and towns in Telangana, Andhra Pradesh, NCR and Kolkata. The company is very strong in Hyderabad or Secunderabad and roughly 4/5th of the revenues comes from this single city. It is the largest diagnostic chain in Southern India even though it is primarily located in two States.

The company offers over 1,600 types of different pathological tests and also radiology services. The revenue mix between Pathology and Radiology is roughly 70-30 where 70 per cent of the total revenues comes from pathology.

The company in 2014 acquired a 62 percent stake in BSE listed entity, Medinova Diagnostic Services Ltd. The company operates one clinic in Kolkata and is a well-known name. The revenues of this company for the year ended March 2021 were Rs 12.88 crs. One wonders why the company did not expand its footprint in Kolkata which is a very strong market for diagnostics and the brand Medinova is a powerful one.

Coming to the performance of the company going public, Vijaya Diagnostic, it is a strong brand, highly profitable, but the growth seems to be lacking. The fact that they are a leading player in South India based on their strong performance in Andhra Pradesh or Telangana and overbearing presence and domination in Hyderabad or Secunderabad, one would have expected the company to grow very aggressively. The company is cash rich and has over Rs300 crore cash on its books. Yet the growth whether it be in the form of new branches or laboratories, and incremental revenues has been poor and below expectation from such a powerful brand. The company reported revenues of Rs376.7 cr for the year ended March 2021 which was Rs 338.8 crores in the previous year. The profit after tax was Rs 84.9 crore for March 21 against Rs 62.5 crore in the previous year. The PAT margin was 22 per cent which had improved from 18 percent in the previous year.

In the first quarter of FY2021-22, the company reported revenues of Rs122.7 crores against Rs51.7 crores in the corresponding quarter. While the rise looks phenomenal, the number is not comparable. One needs to factor in that during this period last year, the company had not received permission to do RT-PCR tests. Normalising the effect, one could say that the company has grown in a 10-12 percent range.

The company is promoted by Dr S Surendranath Reddy and is now being run professionally with his daughter Suprita Reddy its CEO. The company has a mix of professionals from the medical and financial world running the company.

The EPS of the company for the year ended March 2021 was Rs8.26. The PE multiple for the company at the price band of Rs522-531 is 63.20-64.29. While the band compares favourably with the listed peers like Dr Lal Path labs and Metropolis Healthcare, the company's business model is vulnerable which would make the same a cause for concern. The NAV of the company is Rs 38.53 as of June 30 which means that the price-to-book of the issue at the top end is 13.78 times.

Recently listed healthcare company Krsnaa Diagnostics Limited which had allotted shares at Rs954 is into the PPP (public private partnership) model in healthcare. Krsnaa is executing projects in a number of States and this would take the diagnostic business to a new level in terms of quality and affordability. Being an asset light model, costs for Radiology would reduce significantly by 35-50 percent as is witnessed in many of the States where the scheme is operational. The company, Krsnaa has been awarded the contract for Andhra Pradesh and is currently being implemented. It should come as no surprise if the State of Telangana also floats a PPP model. The possibility of such an event could be a disruption for the company going public. It becomes imperative for them to de-risk such an eventuality.

There could be two ways of doing this. The first would be to expand in adjoining areas of their business in South India and also expand to neighbouring States like Orissa and Maharashtra. The second would be to increase the penetration in the existing States and cities where they are located.

The anchor book allocation comprises a healthy mix of FPI and domestic mutual funds. The top ten anchor investors have been allotted about half the anchor book which augurs well for the company.

While Vijaya has the money power to expand, the desire or the fire in the belly seems to be missing. The issue is richly valued and there is not much on the table for the retail investors. While the retail portion would get oversubscribed for sure with about 4.5 lakh applications required for one time subscription, returns on listing day are not certain.

Considering the fatigue factor and overcrowding of IPOs in recent times and their performance on listing, investors should take a measured call on this primary issue which is entirely an offer for sale.

(The author is the founder of

Kejriwal Research and Investment Services, an advisory firm)