Krsnaa Diagnostics IPO opens today: All you need to know about its business model

Krsnaa Diagnostics operates 1,797 centers under PPP.

Krsnaa Diagnostics’ initial public offer (IPO) opens on August 4. The price band of the offer at Rs. 933 to Rs. 954 per equity share. The IPO will close on August 6.

The pan-India diagnostics chain, which offers both imaging and pathology services, plans to raise Rs 1,213.33 crore, including Rs 400 crore through a fresh issue, out of which almost 150 crore are earmarked for financing and establishing diagnostics centres in Punjab, Karnataka, Himachal Pradesh, and Maharashtra other states; and Rs 147 crore for repaying the debt, while balance will be utilised for general corporate purposes.

Krsnaa operates 1,797 centers under PPP.

Krsnaa Diagnostics IPO opens today: Should you subscribe?

Krsnaa's Executive Director Yash Mutha, in a recent interview to Moneycontrol told that following the issue, the company will be debt free and plans to utilise the cash generated to expand operations across multiple states, including some bolt on acquisition opportunities.

PPP lifeline

Krsnaa had revenues of Rs 396.5 crore in FY21, about 60 percent from pathology and the rest from radiology (or imaging). Krsnaa, unlike other diagnostic chains, depends disproportionately on public private partnership (PPP) tenders of state governments, which is a high volume, low-value business model.

Under the PPP model, Krsna will set up and operate pathology and radiology centres in government hospitals. Nearly two-thirds of its revenue depends on PPP tenders from states such as Punjab, Karnataka, Himachal Pradesh and Brihanmumbai Municipal Corporation (BMC). The balance comes from private hospitals.

Mutha says that while there is a perception that the government doesn't pay on time and can be arbitrary, but in reality, he didn't see any such risk.

"We have zero bad debt from our PPP projects, and our PPP side receivables have come down from 97 days to 66 days. Healthcare as a sector is very sensitive for government," Mutha said.

Mutha added that the industry has touched the top of the ice-berg in terms of PPPs.

The size of the PPP market is Rs 13,000 crore, out of the total diagnostic market of Rs 70,000 crore, Mutha said.

High volume, not so low margin

Krsnaa explained how the company has been able to deliver healthy margins despite offering tests at 40-60 percent lower compared to other organised diagnostic chains. Its operational profit before depreciation, interest and tax margins as on June 30, FY22 stood at 35 percent, better than its peers Dr Lal Pathlabs, 26 percent; Metropolis, 25 percent; and SRL, 17 percent.

"It is primarily we have various cost synergies compared to other models, we leverage on partnerships with hospitals wherein we get customers from day 1, secondly unlike standalone diagnostic centres there are no rents to be paid, the marketing spends are low, given that we get captive customers - other diagnostic chains have to spend significant amount on marketing or reaching out to doctors, and then we have created tele-reporting hub that brings down the cost significantly. In addition Krsnaa hires radiologists on commission basis versus fixed salaries, bringing down the reporting cost per test to Rs 200," Mutha explained.

"All this gives us sufficient room to increase prices without affecting the customer," Mutha said.