Listed group company Medinova Diagnostic’s contrasting track reveals promoter’s intent!

Whereas the closely held Vijaya Diagnostic could add Rs 130 to its top line in three years, its listed subsidiary Medinova Diagnostic could add only Rs 5 cr in five years! This may perhaps explain how indifferent that the promoter would be towards a public company, especially when he has closely held entities operating in similar field.   

 

VIJAYA DIAGNOSTIC OFFER AT A GLANCE
Offer Type	Book Built
Platform	Main Frame
Fresh Issue	Nil
Offer for Sale	3,56,88,064 shares (Rs 1,895 Cr)
Face Value	Re 1
Price Band	Rs 522 – 531
Mkt/Bid Lot	28 Nos.
Implied M-Cap	Rs 5,414 cr
Implied Equity Cap	Rs 10.20 cr
Free Float	45.22%
Lead Manager	ICICI Securities, Edelweiss Financial and Kotak Mahindra Capital.
Registrar	KFin Technologies
Listing At	BSE, NSE

 

INDICATIVE ISSUE SCHEDULE
Opening          : 1-Sep-2021	Closing       : 3-Sep-2021
Allotment        : 8-Sep-2021	Refunding  : 9-Sep-2021
Demat Credit :13-Sep-2021	Trading       :14-Sep-2021

 

The Offer

Hyderabad-based Vijaya Diagnostic Centre Ltd (VDCL) is going public with an offer for sale (OFS) of 35,688,064 shares (5,098,296 shares from the promoter,          29,487,290 shares from foreign venture capital fund Karakoram Ltd and 1,102,478 shares from alternative investment fund Kedaara Capital). The public offer would work out to about 35% of the company’s paid-up equity share capital. The offer is being made through the book-building route with a price band of Rs 522-531 for Re 1 paid-up share. At the cap price, the value of IPO amounts to Rs 1,895 cr.

Applicants should bid for a minimum lot of 28 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on September 14, 2021. ICICI Securities, Edelweiss Financial and Kotak Mahindra Capital are acting as managers to the offer and Karvy’s new avatar KFin Technologies has been roped in as registrar to the issue. The bidding opens on Wednesday, September 1 and closes on Friday, September 3, 2021.

Being an offer for sale, the company would not receive any amount from the IPO. The objects of the IPO are to facilitate the `Offer for Sale’ for the Selling Shareholders and achieve the benefits of listing on the stock exchange.

Lineage

VDCL had historically, in various public documents such as annual reports and secretarial filings, named Dr. Sura Surendranath Reddy, S. Geeta Reddy, Sunil Chandra Kondapally, Sura Suprita Reddy and B. Vishnu Priya as its promoters. However, pursuant to a resolution of the Board in its meeting held on May 27, 2021, it was resolved that Surendranath Reddy will be the promoter of the company.

The company’s genesis is traced back to 1981, when Surendranath Reddy established the first Vijaya Diagnostic Centre in Hyderabad with a vision of providing comprehensive, innovative and high quality diagnostic services under one roof. The business was then carried out under sole proprietorship, which was taken over by VDCL in 2005.

In the year 2014, the promoter initiated the process of acquiring Hyderabad-based Medinova Diagnostic Services Ltd – a listed entity belonged to Standard Medical and Pharmaceuticals Ltd. The acquisition of Medinova was completed in the year 2016 and the company became a subsidiary of VDCL. Same year, Foreign Venture Capital Fund, Karakoram, and Alternative Investment Fund, Kedaara Capital, invested in VDCL and collectively acquired 40% equity capital at an average cost of Rs 99.49 a share.

As regards the promoters’ track in listed domain, the 28-year-old Medinova is under the Vijaya Diagnostic management for the past six years with a majority equity stake of over 62%. Nevertheless, the performance of Medinova, having two diagnostic centres (Hyderabad and Kolkata), is far from impressive. In five years the company’s revenue has grown only about Rs 5 cr. It is only on the eve of VDCL’s IPO, Medinova’s top line has crossed Rs 10 Cr-mark and the company has posted a record profit of Rs 1.91 Cr against its equity base of Rs 10 Cr. The company’s share price, which was at less than Rs 12 last year, is now hovering around Rs 45.  Medinova still has an accumulated deficit of more than Rs 18 Cr, leave alone rewarding the 9500-odd public shareholders.

Medinova Consolidated Financials (in Cr)
Year Ended	Mar-21	Mar-20	Mar-19	Mar-18	Mar-17
Revenue	12.74	7.45	8.97	8.67	8.35
Operating Profit	3.01	1.20	2.93	2.21	1.68
OPM%	23.6	16.0	32.7	25.5	20.1
Other Income	0.14	0.07	0.10	0.00	0.14
EBIDTA	3.14	1.27	3.03	2.21	1.82
EBIDTA %	24.4	16.9	33.4	25.5	21.4
Interest	0.46	0.59	0.66	0.84	1.04
Depreciation	0.72	0.95	1.29	1.88	2.63
Net Profit	1.91	-0.23	1.15	-0.42	-1.75
Accumulated Loss	18.29	20.27	20.01	21.03	19.47
Equity	9.96	9.96	9.96	9.96	9.96
Reserves	1.14	1.14	1.14	1.14	0.00
Borrowing	4.47	5.33	5.87	5.48	6.84
Fixed Assets	1.90	2.40	3.30	4.50	6.70

 

Key Management

Founder-promoter Surendranath Reddy (72) is the executive chairman of VDCL. He holds a bachelor’s degree in medicine from Shri Venkatesvara University and a provisional degree of Doctor of Medicine in Radiology from Osmania Medical College, Hyderabad. As a first generation entrepreneur he has more than four decades of experience in integrated diagnostics business. Surendranath Reddy is also the chairman of Medinova.

Promoter’s son and managing director of Medinova, Sunil Chandra Kondapally (46), is the executive director of VDCL. He holds a bachelor’s degree in science in electrical engineering from Florida State University and has over 17 years of experience in the field of pharmaceutical industry. He founded a pharmaceutical services company Trikona Pharmaceuticals Private Limited in 2016 and QPS Bioserve India Private Limited in 2004.

Promoter’s spouse Geeta Reddy (62), who holds a bachelor’s degree in law from Osmania University, has been designated as a non-executive director. Promoter’s daughter, Sura Suprita Reddy, who holds a bachelor’s degree in commerce from Osmania University and involved in the company’s business and operations since 2003, has been designated as chief executive officer of VDCL. She was the managing director of the company till October 31, 2019.

 

Stakeholders

Presently, of the company’s 10.20 crore equity, the promoter group controls 60% of which the promoter-selling shareholder individually holds 38% at a cost of just 34 paise a piece. The balance 40% is held by the two funds at an average cost of Rs 99.49 per share. Post offer for sale, the promoter-chairman will hold about 33% at a negative cost of more 80 rupees and the selling funds will have a residual holding of 10% at an exorbitantly negative cost of 1195 rupees per share! Moreover, this 10% being out of the purview of lock-in, if they want, both the funds can dump their holdings immediately after listing.

 

Business Track

VDCL is claimed to be the largest integrated diagnostic chain in southern India. The company 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,  the National Capital Region and Kolkata. For the fiscal 2021, the company derived 96.2% of its revenue from its core geographies that is Hyderabad, rest of Telangana and Andhra Pradesh.

 

Financial Track

Even while the listed company Medinova, which is older than VDCL and also operating from the same city of Hyderabad, put up a lack-lustre performance in last five years under the same management, VDCL’s financials have surged considerably in last three years. Against its present equity capital of Rs 10.20 cr, the company notched gross income of Rs 389 cr in fiscal 2021 on which it netted a profit of Rs 85 cr. This yields an EPS of Rs 8.27 which is quite impressive on a paid up value of just Re 1.

However, what’s intriguing is, if the closely-held VDCL whose operations are majorly concentrated in Hyderabad could perform so much, why the widely held public company Medinova whose diagnostic centre is also based in the same city could not excel in last five years under the same management?

 

Vijaya Dignostic Consolidated Financials (in Cr)
Year Ended	Mar-21	Mar-20	Mar-19
Revenue	376.75	338.82	292.59
Operating Profit	165.98	132.62	108.12
OPM%	44.1	39.1	37.0
Other Income	11.85	15.36	10.36
EBIDTA	177.82	147.98	118.48
EBIDTA %	45.8	41.8	39.1
Interest	15.25	15.39	13.53
Depreciation	50.45	49.17	39.63
Net Profit	84.91	62.51	46.27
Equity	10.20	4.53	4.53
Reserves	382.13	270.01	200.44
Borrowing	4.47	23.44	33.49
Fixed Assets	143.90	149.10	146.40

 

Valuation

VDCL has kept a price band of Rs 522 – 531 for Re 1 paid-up share which aims at a market capitalization of about Rs 5,400 Cr. No doubt, as diagnostics chains in the country are currently enjoying good discounting in the stock market, and also the market is at its historical peak, VDCL may command some premium on listing. But, will it sustain long? Well, any IPO that enters the market during the height of the boom is bound to get a beating once the euphoria dies down.

The two funds who have acquired 40% stake at an average cost of Rs 99.49 a share will get a return of about 36% per annum at the cap price of Rs 531. Post-offer, they will still hold 10% that is about 102 lakh shares free from lock-in. In other, since their cost of holding will be extremely negative after the offer for sale, they can sell their holdings at any price in the market after listing. This is bound to have a serious impact on VDCL’s stock price in the coming months.

HOW VIJAYA DIAGNOSTIC COMPARES WITH INDUSTRY PEERS
Financials
(Amount in Cr)	Vijaya Dignost	Dr Lal Pathlab	Metropolis	Thyrocare	Medinova
Market Cap	5414	31656	13739	6575	46
Borrowing	5	0	0	0	5
Fixed Assets	144	164	115	138	2
Revenue	377	1581	998	495	13
Other Income	12	51	12	12	0
EBIDTA	178	488	298	184	3
Interest	15	16	8	1	0
Net Profit	85	297	182	113	2
Equity Cap	10	83	10	53	10
Reserves	349	1162	698	374	-17
Stock Features
Current Price (Rs)	531	3800	2687	1243	45
Face Value (Rs)	1	10	2	10	10
Book Value	35.21	149.46	138.49	80.82	-7.23
Promoter Stake %	54.78	55.23	50.37	66.14	62.14
Profitability
OPM %	44.1	27.6	28.7	34.6	23.6
Net Margin %	21.9	18.2	18	22.3	14.8
Cash EPS	13.21	44.27	44.53	27.13	2.75
Earnings Per Share	8.27	35.01	35.54	21.4	2.04
Return
RONW %	23.7	23.8	25.7	26.5	6.5
ROCE %	35.0	33.0	35.6	35.9	0
Discounting
Price/Earnings	64.2	108.6	75.6	58.1	22.5
Price/Cash EPS	40.2	85.8	60.4	45.8	16.6
Price/Book Value	15.1	25.4	19.4	15.4	-6.3
Price/EBIDTA	30.5	64.9	46.1	35.8	14.5
Price/Revenue	14.4	20.0	13.8	13.3	3.6
Price/Fixed Assets	37.6	193.4	119.3	47.8	24.3
Distribution
Dividend %	0	200	400	250	0
Yield %	0	0.5	0.3	2.0	0.0

 

Concern

Group management scores poorly on the corporate governance front. Listed company Medinova has failed to adhere to the Listing Regulations in the past. Medinova and its group company Park Health Systems have delayed in depositing their undisputed statutory dues. VDCL has made a delayed filing under regulation 31(4) of the Takeover Regulations in relation to the equity shares held in Medinova.

The lease for the diagnostic centre operated by Medinova has expired and the lessors have filed a suit for eviction against the company which in turn has filed a suit for specific performance against the lessors for the renewal of the lease.

VDCL has entered into various transactions with related parties, such as for rental of properties, purchase of consumables, sale of services, loan facilities and laboratory services. As many as 16 diagnostic centres are leased from promoter and his relatives.

During the fiscals 2021, 2020 and 2019 VDCL has spent Rs 46.20 Cr, Rs 50.70 Cr and Rs 45.44 Cr respectively as legal and professional fees under the head `other expenses’ which seem to be strange for a diagnostic chain.