Promoter’s low equity stake makes the valuation skeptical.
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KRSNAA DIAGNOSTICS OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 400 Cr |
| Offer for Sale | 85,25,520 shares |
| Face Value | Rs 5 |
| Price Band | Rs 933 – Rs 954 |
| Mkt/Bid Lot | 15 Nos. |
| Implied M-Cap | Rs 2,994 cr |
| Implied Equity Cap | Rs 15.69 cr |
| Free Float | 72.61% |
| Lead Manager | JM Financial, DAM Capital, Equirus Capital, IIFL Securities |
| Registrar | KFin Technologies |
| Listing At | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening :4-Aug-2021 | Closing :6-Aug-2021 |
| Allotment :11-Aug-2021 | Refunding :12-Aug-2021 |
| Demat Credit :13-Aug-2021 | Trading :17-Aug-2021 |
The Offer
Pune-based Krsnaa Diagnostics Ltd (KDL) is going public with an IPO of Rs 1,213 cr. The offer consists of a fresh issue of Rs 400 cr (approximately 41,92,872 shares) from the company and an offer for sale (OFS) of 85,25,520 shares (valued at Rs 813 cr at the cap price) by four private equity investors. The offer is being made through the book-building route with a price band of Rs 933-954 for Rs 5 paid-up share. At the cap price, the quantum of IPO works out to over 127 lakh shares.
Applicants should bid for a minimum lot of 15 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on August 17, 2021. JM Financial, DAM Capital, Equirus Capital and IIFL Securities are acting as managers to the offer and Kfin Technologies has been roped in as registrar to the issue. The bidding opens on Wednesday, August 4 and closes on Friday, August 6, 2021.
The company proposes to utilize the net proceeds of the fresh issue to the tune of Rs 151 cr towards the cost of establishing diagnostics centres at Punjab, Karnataka, Himachal Pradesh and Maharashtra and Rs 146 cr is meant for repayment/prepayment of borrowings. The balance fresh issue amount net of issue expenditure is earmarked for general corporate purposes. However, the objects of the fresh issue have not been appraised by any bank or financial institution.
Lineage
Originally incorporated as Krsna Diagnostics in December 2010, the company went for a name change after four years due to “numerological reasons”. It added one alphabet to its first name. Though, there were two signatories to the Memorandum, as on the date of the Red Herring Prospectus (RHP), Rajendra Mutha is the only promoter of the company. According to the RHP, Mutha is a registered pharmacist certified by the Maharashtra State Pharmacy Council.
KDL is reportedly one of the largest differentiated diagnostics service provider in the country. The company offers 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.
The company focuses on the public private partnership (PPP) diagnostics segment and has the largest presence in the diagnostic PPP segment. KDL claims to operate an extensive network of diagnostic centres across the country. As of June 30, 2021, KDL operated 1,823 diagnostic centres offering both radiology and pathology services in 13 states across the country. The company collaborates with State Governments, Central Government-run initiatives, Municipal Corporations, private hospitals, medical colleges and charitable trusts to deploy and operate diagnostic centres within their hospital infrastructure
KDL’s operating model involves diagnostic centres operated under a hospital partnership model. These diagnostic centres are located within existing facilities of public and private hospitals or community health centres, and operated pursuant to arrangements with public health agencies and private healthcare providers. In Fiscal 2021 the company served 5.18 million patients. In line with its focus of providing inclusive and affordable services, the company claims to offer its diagnostic services at competitive rates and at significantly lower rates than other large players. KDL’s radiology tests are claimed to be priced 45% – 60% lower than market rates while pathology tests are 40% – 80% lower than market rates. The company believes that its brand is associated with quality diagnostic and healthcare services at affordable rates.
Key Management
Promoter Rajendra Mutha (47) is the Executive Chairman and Whole-time Director of KDL responsible for the overall management of the company. Pallavi Bhatevara (43), who has completed just the Higher Secondary education, is the Managing Director of the company responsible for expansion and growth of the company. Yash Mutha (40), B. Com., CA, is another Whole-time Director responsible for internal audit, risk review and development of business processes. Prior to joining KDL, he was associated with BSR & Co. LLP as assistant manager (audit), Deloitte as senior manager (audit), KPMG as a governance and risk compliance services manager and Credit Suisse Services (India) Private Limited as assistant vice president.
Stakeholders
KDL’s present equity is Rs 13.60 cr of which 31.62% is held by the promoter group. Three private equity investors hold over 56% of which 23.42% is with Phi Capital, 16.38% each is held by Somerset and Kitara. Seven other shareholders including directors/employees/ associates hold more than 1% each. The balance 3.4% is held by five shareholders. Post-IPO, the promoter group stake will be 27.39% on the enhanced capital of Rs 15.69 cr.
Business Track
KDL commenced business in 2011 with just two radiology centres. In 2013 it started 12 centres in Himachal Pradesh under public private partnership and reached 50 centres in four states by 2017. The operations were expanded across 13 states in 2018 and by 2020 the company had over 1500 centres across the country.
The company’s continued focus on PPP segment has led it to become a preferred partner for public health agencies, resulting in, since commencement of operations, 77.59% of all tenders (by number) the company has bid for being granted to them. At the end of June 2021, KDL has deployed 1,797 diagnostic centres under PPP agreements with public health agencies. In addition to the PPP segment, KDL has also collaborated with private healthcare providers to operate diagnostic centres within their facilities. From 14 such centres in March 2019, the company has reached 26 diagnostic centres at the end of June 2021.
KDL claims to have an extensive network of integrated diagnostic centres across India primarily in non-metro and lower tier cities and towns. As of June 30, 2021, the company operated 1,823 diagnostic centres offering radiology and pathology services in 13 states. In fiscal 2021 and in the three months ended June 30, 2021, the company has reportedly served 51.8 lakh patients and 18.8 lakh patients, respectively.
Financial Track
KDL has put up an impressive show during the last three years. The company’s revenue has almost quadrupled, from Rs 107 cr to Rs 396 cr. EBIDTA has surged from Rs 30 cr to Rs 106 cr. Profit after depreciation has vaulted from Rs 5 cr to Rs 42 cr. In fact it has more than doubled in fiscal 2021. Nevertheless, the company’s bottom line has highly been influenced in recent years by the fair value movement of compulsory convertible preference shares which amounted to a bumper gain of Rs 252 cr in fiscal 2021. In the previous three years, the same item dragged the bottom line deep into red.
These amounts represent the fair value changes in respect of liability of Compulsory Convertible Preference Share – Series A & Series C which had certain anti-dilution clauses. Preference shareholders have granted waiver in respect of these anti-dilution in July 2020 and hence, necessary accounting adjustments due to significant modification of the instruments were passed in the year ended March 31, 2021. Excluding this exceptional item, the company’s profits were still attractive as compared to its equity base.
Until March 2020, the company’s equity capital was only Rs 5.16 cr and share premium amounted to less than Rs 10 cr. After the conversion of preference shares equity capital has already increased to Rs 13.60 cr and share premium has bulged to Rs 142 cr. Post-IPO, capital will increase to Rs 15.69 cr and share premium will shoot up to Rs 540 cr which significantly reduce the finance costs.
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Krsnaa Diagnost Standalone Financials (in Cr) |
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| Period Ended |
Mar-21 |
Mar-20 | Mar-19 |
Mar-18 |
| Months |
12 |
12 | 12 |
12 |
| Revenue |
396.46 |
258.43 | 209.24 |
107.57 |
| Operating Profit |
93.82 |
62.82 | 57.92 |
27.8 |
| OPM% |
23.7 |
24.3 | 27.7 |
25.8 |
| Other Income |
12.24 |
12.95 | 5.08 |
2.89 |
| EBIDTA |
106.06 |
75.77 | 63.00 |
30.69 |
| Interest |
25.94 |
24.66 | 19.57 |
8.03 |
| Gross Profit |
80.12 |
51.11 | 43.43 |
22.66 |
| Depreciation |
37.44 |
32.41 | 25.64 |
17.51 |
| Profit After Depreciation |
42.68 |
18.70 | 17.79 |
5.15 |
| Exceptional Item* |
252.78 |
-177.03 | -95.52 |
-89.44 |
| Pre-tax Profit/Loss |
295.46 |
-158.33 | -77.73 |
-84.29 |
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Tax |
110.53 | -46.38 | -19.67 |
-24.13 |
| Net Profit/Loss |
184.93 |
-111.95 | -58.06 |
-60.16 |
| Accumulated Loss |
41.23 |
226.16 | 114.21 |
56.15 |
| Equity (Implied) |
15.69 |
5.16 | 5.16 |
5.16 |
| Reserves (Implied) |
540.94 |
8.99 | 9.10 |
13.07 |
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Borrowing |
202.70 | 214.99 | 145.98 |
79.82 |
| Fixed Assets |
311.00 |
282.70 | 264.00 |
187.40 |
| *Gain/(Loss) on fair value movement of Compulsory Convertible Preference Shares | ||||
Valuation
KDL has put price band of Rs 933-954 for Rs 5 paid up share. As compared to the weighted average price at which the shares have been acquired by the promoter and the selling shareholders, in the one year preceding the date of the RHP, the price band indeed looks very steep. Promoter Rajendra Mutha acquired 13,63,200 shares at a cost of only Rs 33.87 a piece within one year.
Among the selling shareholders, Kitara and Somerset acquired 44,52,284 shares each at an average cost of Rs 67.36 a share in last one year. Phi Capital got 63,66,040 shares at a cost of Rs 157.26 each and Lotus Management Solutions acquired 21,180 shares at an average price of Rs 67.41 a share.
However, as compared to the current valuation of diagnostics stocks on the trading screen, KDL’s pricing appears to be reasonable.
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Financials |
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| (Amount in Cr) |
Krsnaa |
Dr Lal | Metropolis |
Thyrocare |
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Market Cap |
2994 | 29609 | 14542 |
6917 |
| Fixed Assets |
311 |
164 | 115 |
138 |
| Revenue |
396 |
1581 | 998 |
495 |
| Other Income |
12 |
51 | 12 |
12 |
| EBIDTA |
106 |
488 | 298 |
184 |
| Equity Cap |
16 |
83 | 10 |
53 |
| Reserves |
541 |
1162 | 698 |
374 |
| Acc. Loss |
41 |
0 | 0 |
0 |
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Stock Features |
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| Current Price (Rs) |
954 |
3555 | 2845 |
1308 |
| Face Value (Rs) |
5 |
10 | 2 |
10 |
| Book Value |
164.31 |
149.46 | 138.52 |
80.82 |
| Promoter Stake % |
27.39 |
55.23 | 50.38 |
66.14 |
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Profitability |
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| OPM % |
23.7 |
27.6 | 28.7 |
34.6 |
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Discounting |
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| Price/Book Value |
5.8 |
23.8 | 20.5 |
16.2 |
| Price/EBIDTA |
28.2 |
60.72 | 48.79 |
37.67 |
| Price/Revenue |
7.6 |
18.46 | 79.56 |
3.38 |
| Price/Fixed Assets |
9.6 |
29.2 | 47.62 |
48.55 |
Concern
- Promoter group proposes to hold only a minority stake of 27%.
- A substantial portion of revenue from operations depends on payments under contracts with public health agencies.
- On corporate governance front, the company scores poorly. There have been inaccuracies in respect of the filings made by our Company with the RoC. Further certain corporate records of the company are untraceable, including the challans.
- Equity Shares held by Phi Capital, a Category II AIF, is exempt from lock-in requirements, except for 288,268 shares acquired by it during the last one year. This may cause selling pressure as their average cost of holding is much lower than the IPO price.
- The premises on which KDL’s Registered and Corporate Office is housed has been obtained on a leave and license basis from Sunita Mutha, the spouse of KDL’s promoter. In terms of the agreement, the company is paying more than Rs 2.5 cr per annum.
- Ruby Diagnocare LLP, a limited liability partnership firm from which the promoter has disassociated is presently in the process of being struck off.