Vijaya Diagnostic Centre coming with an IPO to raise upto Rs 1895 crore

Vijaya Diagnostic Centre

• Vijaya Diagnostic Centre is coming out with a 100% book building; initial public offering (IPO) of 3,56,88,064 shares of Rs 1 each in a price band Rs 522-531 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 1, 2021 and will close on September 3, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 1 and is priced 522 times of its face value on the lower side and 531 times on the higher side.
• Book running lead manager to the issue are ICICI Securities, Edelweiss Financial Services and Kotak Mahindra Capital Company.
• Compliance Officer for the issue is V. Sri Lakshmi.

Profile of the company

The company is the largest integrated diagnostic chain in southern India, by operating revenue, and also one of the fastest-growing diagnostic chain by revenue for fiscal year 2020. It offer a one-stop solution for pathology and radiology testing services to its 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 and in the National Capital Region and Kolkata as on June 30, 2021.

The company offers a comprehensive range of approximately 740 routine and 870 specialized pathology tests and approximately 220 basic and 320 advanced radiology tests that cover a range of specialties and disciplines, as of June 30, 2021. Its test menu includes pathology tests ranging from basic biochemistry and clinical pathology to cytogenetics and high-end molecular diagnostic tests, and radiology tests ranging from basic echocardiograms, X-rays and ultrasounds to advanced radiology tests including computerised tomography (CT) scans, magnetic resonance imaging (MRI) scans, single photon emission computed tomography (SPECT) and advanced positron emission tomography CT (PET CT).

It also offer a broad spectrum of health and wellness packages to its customers as per their requirements. The company focus on a customer centric approach to enhance the overall quality of its services for optimal customer satisfaction. For convenience of its customers, it provide value-added services such as home collection of specimens, house calls and various delivery or access modes (i.e., at diagnostic centres, SMS, email and web portal) for test reports. Several factors, including the strength of its brand, integrated services model, quality of its diagnostic services, center infrastructure and customer experience, convenience of its operational network and home collection in its core geographies are important differentiating factors in customers choosing it as their preferred diagnostic service provider, which helps it in retaining its customers, and sets it apart from its competitors.

Proceed is being used for:

• Achieve the benefits of share listing on the Stock Exchanges.
• Making an offer for sale (OFS) of 35,688,064 shares.

Industry overview

Evidence-based treatment has become the norm for many doctors, as diagnosis enables prescription of correct therapy, and, thereby, faster recovery. Hence, in the spectrum of healthcare delivery services, diagnostic services play the key role of information intermediary, providing useful information for correct diagnosis and treatment of diseases. Diagnostic services currently have an 8 to 14% share in the overall healthcare spending on account of variation between rural and urban across institutions such as government-owned, charitable/trust-based and private. With diagnostic services becoming the cornerstone for recommending requisite treatments, as well as monitoring recovery posttreatment, the industry has posted healthy growth over the past few years. The diagnostic industry achieved a healthy CAGR of 13 to 14% from fiscal years 2017 to 2020, tracking the growth of healthcare delivery services. However, in fiscal year 2021, CRISIL Research estimates the industry’s growth rate will sharply decelerate to approximately 4% on-year to Rs 710 to Rs 730 billion, owing to the fallout of the COVID-19 pandemic.

In fiscal year 2021, COVID-19 put the brakes, albeit temporarily, on the growth story of the diagnostic sector, especially for small laboratories. With treatments at hospitals being deferred, outpatient footfalls dropping and lockdowns in quarter 1 of fiscal year 2021, the regular volume of diagnostic services took a hit. According to industry players, after a sharp fall in revenue in April and May 2020, there was some revival in demand from June 2020 onwards. Pent-up healthcare demand contributed to revenue during a traditionally lean quarter from a diagnostic perspective, with recovery to pre-COVID-19 levels occurring in the third quarter of fiscal year 2021. However, between fiscal years 2020 and 2023, the industry is expected to return to a healthy growth trajectory of 12 to 13% CAGR, reaching ? 920 to 980 billion. The industry is however expected to achieve a higher CAGR between fiscal year 2021 and fiscal year 2023 in the range of 14 to 16% on account of a low growth in fiscal year 2021 due to the COVID-19 pandemic impact on the industry.

Pros and strengths

Largest and fastest growing diagnostic chain with dominant position in south India: The company is the largest integrated diagnostic chain in southern India, by operating revenue, and also one of the fastest-growing diagnostic chain by revenue for fiscal year 2020. It has built an extensive operational network consisting of 81 diagnostic centres including a flagship centre located at Hyderabad, and 11 co-located reference laboratories, including a national reference laboratory at its flagship diagnostic centre, across 13 cities and towns in the states of Telangana and Andhra Pradesh and in National Capital Region and Kolkata, as of June 30, 2021. The industry has witnessed a shift from standalone centres to diagnostics chains due to increasing trend of patients’ reliance on organized diagnostic providers for quality services and unavailability of complex tests with standalone centres, not only on an overall country level but also at the regional markets level. The combination of company’s strong brand position driven by its long operating history in its core geographies, its extensive operational network and its reputation for providing quality diagnostic services positions it well to continue to grow the scale of its business in Telangana and Andhra Pradesh market and take advantage of growing Indian diagnostic market.

Integrated diagnostics provider that offers one-stop solution at affordable price: The company offer a comprehensive range of approximately 1,610 pathology tests, which are organised into approximately 740 routine tests and 870 specialized tests, as well as approximately 220 basic and 320 advanced radiology tests that cover a range of specialties and disciplines, as of June 30, 2021. Its test menu includes (i) pathology tests ranging from basic biochemistry and clinical pathology to cytogenetics and high-end molecular diagnostic tests, including protein chemistry, cellular immunology, flowcytometry, genetics, cytogenetics, immunohistochemistry and advanced microbiology tests, and (ii) radiology tests ranging from basic echocardiograms, X-rays and ultrasounds to advanced radiology tests such as MRI, HRCT, SPECT and PET CT. It currently also offer RT-PCR testing and/or CT scan for COVID-19 diagnosis across 33 diagnostic centres in 11 cities and towns and COVID-19 vaccination services at its Kolkata and Gurugram diagnostic centres. The company focus on providing customers quality, hygienic and reliable diagnostic services at affordable prices in India. Its ‘hub and spoke’ model allows specimens to be collected across multiple locations within a catchment area or a region for delivery to its reference laboratories for diagnostic testing, that provides greater economies of scale and enhances consistency of its testing procedures.

Robust technical capability and state of the art technology with strong IT infrastructure: The company’s strong technical capability and ability to adopt to the latest technologies in the diagnostic industry allow it to provide high quality and reliable diagnostic services to its customers. As of June 30, 2021, its radiology testing operations are supported by radiology equipment including 15 CT machines, 18 MRI machines and five PET CT/Gamma machines, which represent the leading technology used in the field, and a team of 105 radiologists across its diagnostic centres. Diagnostic centres have to constantly upgrade their technology to stay ahead of the competition which involve significant capital investment and maintenance cost. Owing to its continuous investment and the long standing relationships it enjoy with certain medical technology vendors, it has been at the forefront of introducing new tests by adopting the latest medical technologies across its operational network. The company’s diagnostic centre operations are supported by front-end centralized information technology platform. It use Laboratory Information Management System (LIMS) to automate laboratory workflows, manage samples, test results and associated data for pathology tests, a fully integrated Radiology Information Systems (RIS) - Picture Archive and Communication Systems (PACS) to manage radiology workflows, archive and access images from multiple modalities and locations for radiology tests.

Dedicated management team with significant industry experience: The company is led by a strong and dedicated team of experienced professionals with skill sets that are complementary and, requisite for the fast-growing Indian diagnostic market. Members of its management team have experience in the healthcare industry, and, under their leadership over the last several years, it has grown rapidly and increased both the productivity and efficiency of its network. The company’s Board of Directors, includes a combination of management executives and experts from healthcare industry. The combination of company’s experienced Board of Directors and its dynamic management team positions it well to capitalize on future growth opportunities.

Risks and concerns

Operations concentrated in south India: While the company has presence across 13 cities and towns in India, as of June 30, 2021, a significant portion of its operations are concentrated in the states of Telangana and Andhra Pradesh in south India. It derived 87.18%, 86.21%, 89.83% and 88.04% of its revenue from operations from Telangana for the three months ended June 30, 2021 and the financial years 2021, 2020 and 2019, respectively. It also derived 8.73%, 9.99%, 6.62% and 6.64% of its revenue from operations from Andhra Pradesh for the three months ended June 30, 2021 and the financial years 2021, 2020 and 2019, respectively. Further, as of June 30, 2021, 64 out of 81 of its diagnostic centres are in Hyderabad. In the event of a regional slowdown in the economic activity in south India, or any other developments including political or civil unrest, disruption or sustained economic downturn that reduce the demand for its services in the states of Telangana and Andhra Pradesh, could adversely affect its business, results of operations and financial condition, which are largely dependent on the performance and other prevailing conditions affecting the economies of south India.

Depend on third-party vendors and suppliers: The company depends on third-party vendors and suppliers to procure its testing equipment and reagents and it enter into lease agreements and rental agreements with fixed term with them. Certain of these agreements require it to purchase minimum quantity or value of purchases. It cannot assure you that it will be able to continue to obtain adequate supplies of equipment, reagents and test kits, in a timely manner and without any defects, in the future. Any disruption in its business may also result in it not meeting its minimum purchase obligations under these agreements resulting in an event of default and leading to potential disruption to its supply of equipment or reagents. Any such reductions or interruptions in the supply of equipment or reagents, defects in reagent and test kits and any inability on its part to find alternate sources for the procurement of such items, may have an adverse effect on its ability to provide its services in a timely or cost effective manner.

Operate in highly competitive business environment: The diagnostics industry in India is highly competitive with several companies present in the market, and therefore it is challenging to improve market share and profitability. Its competitors include diagnostic healthcare service providers in India, hospital-based laboratories, independent clinical laboratories, other smaller-scale providers of diagnostic services (with more established local and regional presence in certain geographies) such as pathology, radiology laboratories and preventive care providers as well as international service providers, which may establish and expand their operations in future. It compete on the breadth of its test offerings, the geographical reach of its network, its ability to accurately process specimens and report data in a timely manner and its customer relationships. Some of its competitors may have greater financial, research and development, marketing and other resources, broader service offerings, more experience in obtaining regulatory approvals or greater geographic reach or economies of scale.

Require certain approvals, licenses, registrations and permits for conducting business: The company’s operations are subject to extensive government regulation and it is required to obtain and maintain a number of statutory and regulatory registrations, permits and approvals under central, state and local government rules in India, generally for carrying out its business and for each of its facilities. The company has made applications for the renewal of certain licenses, such as trade licenses granted by the Greater Hyderabad Municipal Corporation for some of its branches and it await the receipt of such licenses. Its diagnostic centres are located on properties leased by it, and it is the responsibility of the lessors to procure occupancy certificates. An absence of such certificates on accord of the lessors could also adversely affect its business and operations. Its licenses and approvals are subject to various conditions, including periodic renewal and maintenance of standards that are subject to inspection and may require it to incur substantial expenditure.

Outlook

Established in 1981, Vijaya Diagnostic Centre is one of the fastest-growing diagnostic chains in Southern India. The company offers a one-stop solution for pathology and radiology testing services. The company offers around 740 routine tests, 870 specialized pathology tests, 220 basic tests, and 320 advanced radiology tests. The company also offers a broad spectrum of customized health and wellness packages to its customers. The company has built a trusted, high quality and reliable brand of choice over the last four decades. Over the years, it has received awards that recognize the strength of its brand and its focus on offering superior diagnostic services. The combination of company’s strong brand position driven by its long operating history in its core geographies, its extensive operational network and its reputation for providing quality diagnostic services positions it well to continue to grow the scale of its business in Telangana and Andhra Pradesh market and take advantage of growing Indian diagnostic market. On the concern side, the company’s operations are subject to risks inherent in the use of complex medical equipment. It has experienced routine breakdowns and may experience breakdowns and failures or there could be injury to its employees or others either because of defects, faulty maintenance or repair, or improper use or lack of timely servicing of its equipment. Besides, the delivery of diagnostic services involve certain inherent risks. 

The issue has been offered in a price band of Rs 522-531 per equity share. The aggregate size of the offer is around Rs 1862.91 crore to Rs 1895.03 crore based on lower and upper price band respectively. On the performance front, the company’s total income increased by 9.72% to Rs 3,885.93 million for the financial year 2021 from Rs 3,541.82 million for the financial year 2020, due to an increase in revenue from operations, which was partially offset by a decrease in other income. The company’s profit for the year increased by 35.84% to Rs 849.11 million for the financial year 2021 from Rs 625.07 million for the financial year 2020. The company intends to strengthen its presence in regions in which it operate, with emphasis on the states of Telangana and Andhra Pradesh. The company intends to deepen its penetration and increase customer base to consolidate leading position in its core markets by (i) expanding service network by opening additional diagnostic centres; (ii) enhancing its laboratory capacity and test menu by adding latest technologies; (iii) increasing its business from individual customers by offering a portfolio of additional services; (iv) physician engagement through medical awareness initiatives and meetings with medical practitioners; and (v) increased focus on preventive and wellness offerings. It also plans to selectively explore franchisee opportunities with strong local entrepreneurs to augment own centres.