Krsnaa Diagno IPO review (May apply)

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Review By Dilip Davda on August 1, 2021

•    KDL is one of the largest differential diagnostic service providers.
•    The company is on an expansion spree with more centres opening.
•    Due to onetime gains, it posted profits for FY21, which may not occur again.
•    Based on all parameters, the issue appears aggressively priced.
•    Cash surplus/risk seekers may consider investment, others can avoid.

PREFACE:
Off late we are observing a mad rush for loss-making company's IPOs as it has just a 10% retail quota and vested interest are playing their game to lure them with their grey market activities. Perhaps hand in gloves operations from concerned parties is also giving some returns on listing as well and that's the base as of now to try one's luck with IPO allotment and make short term gains.

On 4th August 2021, we have four IPOs coming together for their fund mobilizing plans and all of them are having secondary offers. The fourth company Krsnaa Diagnostic though opening its IPO on August 04, 2021. We are also witnessing hush-hush for a mad run to bring IPOs. Everybody wants to make hay while the sun is shining. No doubt our markets are now gearing for a bigger global play with floats from loss-making corporates and SEBI as a regulator cannot do anything except regulating them.

For Krsnaa Diagnostics IPO, the company has made good profits for FY21 after posting losses for FY19 and FY20. The top and bottom lines witnessed a boost simply because of one-time special gains made by the company. No doubt it has been reporting growth in its topline otherwise, but it has been incurring losses as well.

Well, the planned grey market game is sure to lure investors for this IPO to have listing gains. But on a fundamental basis, it's a pure long term play and cash surplus/risk seekers may park their funds.

ABOUT COMPANY:
Krsnaa Diagnostics Ltd. (KDL is one of the largest differentiated diagnostic service providers in India (Source: CRISIL Report). It provides a range of technology-enabled diagnostic services such as imaging (including radiology), pathology/clinical laboratory and teleradiology services to public and private hospitals, medical colleges and community health centres Pan-India. It claims to be the fastest-growing diagnostic chain in India on multiple parameters including operating income, operating profit before depreciation, interest and tax ('OPBDIT') and profit after tax between Fiscal 2017 and Fiscal 2020 and volume of tests conducted between Fiscal 2018 and Fiscal 2021 (amongst players with revenues exceeding Rs. 150 cr.) (Source: CRISIL Report). According to CRISIL Report, KDL also operates one of India's largest teleradiology reporting hubs in Pune that is able to process large volumes of X-rays, CT scans and MRI scans round the clock and 365 days a year, and allows it to serve patients in remote locations where diagnostic facilities are limited.

The company provides quality and inclusive diagnostic services at affordable rates across various segments. Since its inception, it has served more than 23 million patients. It focuses on the public-private partnership ('PPP') diagnostics segment and has the largest presence in the diagnostic PPP segment (Source: CRISIL Report). KDL's PPP agreements are typically long-term in nature and ensure the predictability of revenues from operations. Its continued focus on this segment has led to becoming a preferred partner for public health agencies, resulting in, since the commencement of operations, 77.59% of all tenders (by number) the company has bid for being granted to it. As of June 30, 2021, it has deployed 1,797 diagnostic centres pursuant to PPP agreements with public health agencies. In addition to the PPP segment, KDL has been growing its collaboration with private healthcare providers to operate diagnostic centres within their facilities, and have expanded from operating 14 diagnostic centres, as of March 31, 2019, to 17 diagnostic centres, as of March 31, 2020, and to 20 diagnostic centres as of March 31, 2021, while it operated 26 such diagnostic centres as of June 30, 2021.

KDL has an extensive network of integrated diagnostic centres across India primarily in non-metro and lower-tier cities and towns. As of June 30, 2021, it operated 1,823 diagnostic centres offering radiology and pathology services in 13 states across India. 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.

As of June 30, 2021, KDL had a team of 190 radiologists, 30 pathologists, eight microbiologists and more than 2,800 qualified professionals including clinicians, technicians and operators. The company continues to make investments in equipment and in technology platforms, to ensure they meet requisite industry standards and accreditations like NABL and NABH.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans of funding for establishing diagnostics centres at Punjab, Karnataka, Himachal Pradesh and Maharashtra (Rs. 150.81 cr.), repayment/prepayment of certain borrowings (Rs. 146.08 cr.) and general corpus funding, KDL is coming out with a maiden book building process IPO comprising fresh equity issue worth Rs. 400 cr. (approx. 4192875 shares at the upper cap) and an Offer for Sale (OFS) of 8525520 equity shares (approx. Rs. 813.33 cr. at the upper cap). Thus KDL mulls raising approx. Rs. 1213.33 cr. from the issuance of 12718395 equity shares. The issue opens for subscription on August 04, 2021, and will close on August 06, 2021. KDL has fixed a price band of Rs. 933 - Rs. 954 per share of Rs. 5 each. Minimum application is to be made for 15 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 40.52% of the post issue paid-up capital of the company.

The company has reserved shares worth Rs. 20 cr. for its eligible employees and offering them a discount of Rs. 93 per share. From the residual portion, it has allocated 75% for QIBs, 15% for HNIs and 10% for retail investors.

Book Running Lead Managers (BRLMs) to this offer are JM Financial Ltd., DAM Capital Advisors Ltd., Equirus Capital Pvt. Ltd. and IIFL Securities Ltd. KFin Technologies Pvt. Ltd. is the registrar to the issue.

Having issued initial equity at par, KDL raised further equity in the price range of Rs. 10.00 to Rs.  164.48 between October 2013 and July 2021. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 17.79 / Rs. 67.35 and Rs. 157.26 per share.

Post issue KDL's current paid-up equity capital of Rs. 13.60 cr. will stand enhanced to Rs. 15.69 cr. Based on the upper price band, KDL is looking for a market cap of Rs. 2994.07 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, KDL has posted turnover/net profit (loss) of Rs. 214.32 cr. / Rs. - (58.06) cr. (FY19), Rs. 271.38 cr. / Rs. - (111.95) cr. (FY20) and Rs. 661.48 cr. / Rs. 184.93 cr. (FY21). Turnover and profits for FY21 include one-time gain from fair value movement of CCPS (Compulsory Convertible Preference Shares) amounting to Rs. 252.78 cr. According to seasoned players, this is an eyewash.  If we ignore it, then KDL has posted a loss for even FY21.

For the last three fiscals, KDL has posted an average EPS of Rs. - (12.41) and an average RoNW of 9.54. The issue is priced at a P/BV of 11.19 based on its NAV of Rs. 85.27 and at a P/BV of 4.74 based on its post-issue NAV of Rs. 201.19 (at the upper price cap). Thanks to the collection of hefty premiums that helps the company showing a quantum reduction in the P/BV ratio.

Based on average negative earnings the issue has a negative P/E. Even if we attribute FY21 earnings (including onetime gains) on fully diluted post issue equity, then the asking price is at a P/E of 80.91, thus it is aggressively priced.

COMPARISON WITH LISTED PEERS:
As per the offer documents, KDL has shown Metropolis Healthcare and Dr. Lal Pathlabs as its listed peers. They are currently trading at a P/E of 73.66 and 79.08 (as of July 30, 2021). However, they are not truly comparable on an apple to apple basis.

DIVIDEND POLICY:
The company has not declared any dividend so far. It will follow a prudent dividend policy post listings based on its financial performance and future prospects.

MERCHANT BANKER'S TRACK RECORDS:
The four BRLMs associated with this offer have handled 32 public issues in the past three years, out of which 10 issues closed below the offer price on the listing date.

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