Krsnaa Diagnostics: Annual Report Analysis
20-09-2024

Analyzing Krsnaa’s annual report we have compiled a report, with an overview of the sector, growth strategies, balance sheet and management changes as well as our observations. Read our Initiating Note to understand Krsnaa’s business model in depth.   

Profile of the company- 

Krsnaa Diagnostics (KDL) is one of the largest players in the diagnostic sector through Public-Private Partnerships (PPP). The company focuses on making quality diagnostic services accessible and affordable to a large portion of the Indian population. By collaborating with both government and private hospitals, Krsnaa Diagnostics serves communities in urban, semi-urban and rural areas. Its wide range of radiology, pathology, and teleradiology services has allowed it to expand its presence across the country.

Sector tailwinds and increased government allocation aiding PPP diagnostics- 

• Governments’ budgeted expenditure on the health sector reached 2.1 percent of the GDP in FY23. It is expected the Government will increase the expenditure to 2.5 percent by FY25, especially focusing on the underprivileged population.
• The fiscal year 2024 observed a significant 15% increase in budget allocation for healthcare as compared to the previous year. The growth can be attributed to various initiatives undertaken by the Government such as the Pradhan Mantri Atmanirbhar Swasth Bharat Yojana (PMASBY), Pradhan Mantri Swasthya Suraksha Yojana (PMSSY) and Pradhan Mantri Jan Arogya Yojana (PMJAY).
• The National Health Mission (NHM) has become one of the largest initiatives by the Ministry of Health and Family Welfare (MoHFW), with a budget estimate of Rs. 35,947 crores for 2024. As part of NHM, a free essential diagnostic initiative was launched to reduce the high out-of-pocket costs for diagnostics and improve overall healthcare services. This is expected to boost the growth of PPP diagnostics. 
• The diagnostic market is projected to significantly expand between FY23-28, reaching an estimated market size of Rs. 1,20,000 Cr, with a Compound Annual Growth Rate (CAGR) of 8-10%.

Opportunity and threats

Growth Strategies 

• Tapping into New Markets- Krsnaa is participating in new Public-Private Partnership (PPP) tenders to tap into under-penetrated and growing diagnostics markets, creating additional revenue streams for future growth. 
  • The company is focused on the timely and successful implementation of new projects to ensure efficient growth and service delivery. 
  • It plans to expand its presence in Tier I, II, and III cities to meet the increasing demand for quality diagnostic services, which will strengthen its position in these regions. The company also plans to further extend its reach into semi-urban and rural areas.
• Expansion of Pathology Business - By capitalizing on the extensive infrastructure of existing centers and the addition of new collection centers to reach more consumers
• Increasing Visibility- Digital campaigns to increase consumer awareness about Krsnaa’s competitive price offerings

B2C – leveraging existing infrastructure to directly reach customers 

KDL is strategically expanding its retail segment, which currently accounts for only 1-2% of its revenue, revealing significant growth potential. The company plans to leverage its existing infrastructure in key locations like Maharashtra, Punjab, Orissa, and Assam to scale its retail presence. The company will first start by offering pathology services and setting up collection centers using existing labs for testing. This will ensure initial capital outlay will be limited. Pricing for such services will be higher than the B2G segment but will remain competitive compared to the broader market. Margins by year-end are expected to be in line with broader operations once stabilized (~25% EBITDA).

Krsnaa has already inaugurated its first B2C private lab in Mumbai, covering 15,000 sq. ft. To enhance brand recall and customer growth, Krsnaa is focusing on telereporting, effective branding, and marketing initiatives while ensuring affordable, high-quality services. Additionally, it aims to strengthen brand recognition and customer loyalty through efficient service delivery and is expanding its in-home visit services for greater healthcare accessibility. To further this expansion, the company plans to broaden its service portfolio, diversify its reach through a franchisee model, and solidify its Hospital Lab Management (HLM) model.

Profitability to be driven by newly launched and semi-matured centers- 

Source: Moneyworks4me research

Centers operational for over 3 years show higher margins, while those under 3 years tend to be around break-even levels. New centers (less than 1.5 years) face negative margins due to higher initial costs during the ramp-up phase. Revenue growth happens gradually, with investments today laying the foundation for future profitability. Typically, PPP projects take 1-2 years to stabilize, and by year 3, centers reach maturity. Although this can vary by project, this trend indicates performance will improve as projects mature.

Some changes in the balance sheet that are worth highlighting-

• Working capital stretched temporarily 

Source: Moneyworks4me research; Note- Numbers before FY22 are on standalone basis

• At year-end, receivable days stood at 104 due to delays from election-related activities (The same happened in FY19 as well) and increased receivables from Himachal Pradesh. Excluding Himachal Pradesh, receivables were 68 days. Payments from Himachal Pradesh started in April and May, with receivables expected to return to normal. 
  • These extended receivables resulted in short-term borrowings increasing by Rs 96 Cr at the end of FY24.

Source: Annual report

• In Q1 FY25, receivable days were around 100, totaling Rs. 190 crores, with significant collections in June and July post-elections. Full recovery is anticipated by the end of Q2, between June and August.
• Healthy financial position-

Source: Moneyworks4me research

• Net debt stood at Rs. 84 Cr at the end of the financial year. As explained above, the increase in short-term borrowings is due to the receivables increase which is temporarily stretched. 
  • While EBITDA/PAT conversion has fallen in recent times, it is because of the business being in the investing stage. 
  • The company incurred ~Rs. 200 Cr+ capex last year. Next year capex is to be in the range of ~Rs. 150-180 Cr and if the Rajasthan tender comes through then it will be ~Rs. 250 Cr. 
  • As of Q1FY25, the company holds gross debt of Rs. 170 Cr and cash and cash equivalent worth Rs.240 crores. The balance sheet looks healthy with a debt-equity ratio at ~0.2x in FY24.
• Change in useful life and residual value of certain assets
  • Based on the technical expert’s assessment of useful life, certain items of property plant, and equipment are being depreciated over useful lives different from the prescribed useful lives under Schedule II to the Companies Act, 2013.
  • Management believes that such estimated useful lives are realistic and reflect a fair approximation of the period over which the assets are likely to be used.

Source: Annual report

• Due to this change in accounting estimate, depreciation expense is lower and profit before taxes is higher by ~Rs. 4 Cr for FY24. 
  • Our opinion is that this is in line with industry standards and should not be a cause for concern. 
• Utilization of IPO proceeds - The Company appointed ICICI Bank Limited as the monitoring agency, in line with SEBI ICDR Regulations, to oversee the utilization of IPO proceeds. Monitoring reports were obtained and filed with both stock exchanges where the Company’s shares are listed. The IPO proceeds have been utilized according to the objectives outlined in the Company’s prospectus.

Source: Annual report

Changes to the board, CEO and capability highlights- 

Source: Annual report

• Ms. Bhatevara has resigned as Managing Director (on 31^st Mar’24) and will continue as Whole-Time Director, designated as Executive Director of the Company. 
  • Mr. Yash Mutha has been appointed as Joint Managing Director (w.e.f Feb’24) and will also assume the role of Manager of the Company, effective from April 1, 2024.
  • Dr. Prashant Deshmukh was appointed as the Chief Executive Officer of the Company w.e.f. February 12, 2024. He resigned on 1^st July 2024.
  • Mr. Mitesh Dave has been appointed as Group CEO. He brings extensive experience from his career in FMCG (Cadbury), OTC pharmaceuticals (Cipla), telecom, diagnostics (Metropolis Healthcare), and specialty hospitals (ASG Eye Hospital). With a proven track record in driving financial outcomes and managing large-scale operations, his leadership aligns with the company's growth goals. Under his guidance, Krsnaa aims to leverage its existing infrastructure to accelerate its B2C market expansion.
  • The board has a sufficient number of independent directors and is taking steps to add the right people to the team.

In conclusion, Krsnaa Diagnostics continues to strengthen its position as a leading player in the diagnostic sector through strategic initiatives and expansion plans. The company’s focus on Public-Private Partnerships (PPP) and the maturing profile of its centers will drive growth. With increased government support, sector tailwinds, and the expansion of its B2C segment, Krsnaa is well-positioned for the future. The company's financials remain healthy despite temporary working capital challenges, and its leadership changes signal a strong foundation for further growth. Krsnaa’s ability to capitalize on emerging opportunities and deliver affordable, quality healthcare services will be key to its long-term success.