Krsnaa Diagnostics: Healthy margins

Krsnaa Diagnostics Limited is tapping the capital markets with its fresh issue for Rs400 crore and an offer for sale of 85,25,520 shares in a priced band of Rs933-954. The issue has opened on Wednesday (August 4) and would close on Friday (August 6).

The company is a diagnostic chain and working with public and private institutions. The company currently has 26 centers under private model and 1,797 centers under PPP model. About 1/3rd of the revenue comes from private centers, while 2/3rd comes from public centers. The company follows a differentiated business model where there is long term revenue visibility, and yet is cost competitive. The model that the company follows makes the cost of setting up the center substantially lower as it is set up in the premises of the private or public partner. This effectively means that time to set up gets reduced and also significant costs involved with land and rent.

The business model allows the company to have a disruptive pricing and makes the bouquet of services very attractive. e.g where a normal MRI Brain scan would cost between Rs 7,000 to 8,000, Krsnaa offers the same at an affordable price of Rs 3,500, which is half of the competitor. The company makes healthy margins and is able to better utilize its machinery and manpower. It has decent margins and is comparable with the industry on these parameters.

Krsnaa has India's largest tele-radiology reporting hub, which reduces cost, turnaround time and in instances of complicated cases, offers patients an alternate view on the case from a radiologist. This center is located in Pune and makes the offering from Krsnaa, a difficult to compete and achieve for its competitors.

Krsnaa has been bidding for government tenders in the PPP model and has recently won the Punjab Government tender. It is present in many states and is currently executing orders in Andhra Pradesh, Assam, HP, J&K, Karnataka, MP and Maharashtra besides 5 others. PPP orders vary from state to state, but the new orders are for a period of 10 years with an extension of two years. They also have a renewal/extension clause. This ensures that once the tender is awarded, and a good job is done by the private vendor, renewal is automatic or ensured. It is very difficult to break an existing vendor and for someone new to enter as this is essential medical services. Even in the worst case of the contract not being renewed, it's easy to relocate the equipment to another location. Finally with deprecated machinery and having sweated the machines, the outgoing vendor can always thwart competition with cheaper pricing.

Krsnaa believes in buying standard equipment from the best in class of suppliers and having AMC contracts for the life of the machine so that it involves 100% automatic maintenance and virtually zero down time. Currently the company has 1,797 centers in 13 States under the PPP model.

The company had revenues of Rs 396 cr for the year ended March 21 which had grown from Rs 258 in the previous year. The adjusted EBITDA was Rs 106 cr for FY21 which had grown from Rs 75 cr in the previous year. The profit for the year mentioned includes gains on account of CCPS (conversion of compulsorily convertible preference shares) of a sizeable sum of Rs 253 cr. Adjusting for this gain and the loss on this account over the previous years, the diluted EPS for the year is Rs 12.25 per share.

Based on the above diluted EPS, the PE multiple based on fully diluted earnings for year ended March 2021 is in a band of Rs76.16-77.86 times. This compares with its peers such as Metropolis Healthcare and Dr Lal Path Labs.

The company is a niche player which has entered the lucrative and under penetrated diagnostic healthcare business. With its disruptive pricing policy possible because of the PPP model, the opportunity to scale up exists. The company offers a scope for listing pop and also an opportunity for the medium and long term.

(The author is the founder of

Kejriwal Research and Investment Services, an advisory firm)