The initial public offering (IPO) of South India-based diagnostic chain operator Vijaya Diagnostic Centre has opened for subscription today (September 1). Four out of six brokerages assigned a subscribe rating to the issue given its dominant position in South India, reasonable valuations, strong brand recall, customer stickiness, and one-stop solution at an affordable price.
The company mobilised Rs 566.12 crore out of its total issue size of Rs 1,895 crore from anchor investors on August 31. The IPO involves a complete offer for sale by promoter S Surendranath Reddy, and investors Karakoram and Kedaara Capital Alternative Investment Fund – Kedaara Capital AIF 1. Hence, all the money will go to the selling shareholders.
The price band for the offer, which will close on September 3, has been fixed at Rs 522-531 per equity share.
“At the IPO’s upper price band of Rs 531, Vijaya Diagnostic Centre is being valued at 64.3x earnings, offering a potential upside relative to the industry average of 89x. Considering strong brand recall, integrated model, high share of B2C, customer stickiness and sector leadership in southern India, we recommend a subscribe with a long term perspective for IPO,” said KRChoksey Research.
Marwadi Financial Services also assigned a ‘subscribe’ rating to the IPO as the company is one of the fastest growing diagnostic chains, with a dominant position in South India and well positioned to leverage high growth in the Indian diagnostics industry. “Also, it is available at a reasonable valuation compared to its peers.”
Vijaya Diagnostic Centre is the largest integrated diagnostic chain in southern India and also one of the fastest-growing diagnostic chains in FY20.
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The company has a one-stop solution for pathology & radiology testing services. It offers 740 routine and 870 specialised pathology tests and 220 basic and 320 advanced radiology tests through its extensive operational network, which consists of 81 diagnostic centres and 11 reference laboratories across 13 cities and towns.
Vijaya Diagnostic Centre derived 96.20 percent of its operational revenue from its core geographies, namely Hyderabad and the rest of Telangana and Andhra Pradesh in FY21. During FY20, the company’s tests per customer visit stood at 2.83, while its operating revenue per customer was Rs 1,213.72 and operating revenue per test was Rs 428.14, All of these are higher than those to its listed regional peers.
Arihant Capital Markets likes the company as Vijaya Diagnostic for the above reasons and because it is well positioned to supplement organic growth with selective acquisitions and expand into adjacent geographies and East India. “Based on the above factors we recommend subscribe for listing gains for the issue.”x`
Mehta Equities advised investors to ‘subscribe’ to the issue only with a long-term perspective. “This IPO is a pure secondary offer and offer for sale papers don’t attract more investor interest, especially retail investors, who have a 35 percent issue allocation.”
Choice Broking has assigned an ‘avoid’ rating to the issue.
“Vijaya Diagnostic has a presence in both the diagnostic and radiology segments; however its peers mainly have a presence in the diagnostic business only. The company is a regional player, deriving around 95 percent of its business from Andhra Pradesh & Telangana region, while its peers are largely multi-regional. The company primarily derives almost all of its business from walk-in customers, which is much higher than its peers,“ Choice Broking noted.
The brokerage added: “The diagnostic sector will continue to have a secular growth trend with good cash-flow generation capabilities. However, rising healthcare costs may put stress on the profitability of the sector. At the higher price band of Rs 531, it is demanding a trailing twelve months (TTM) P/E multiple of 47x, which is in line with the peer average. Thus the issue seems to be fully priced.”
Over the FY19-FY21 period, the company reported a 13.5 percent CAGR rise in consolidated revenue to Rs 376.7 crore in FY21, and profit increased by 35.5 percent CAGR to Rs 84.3 crore in FY21.
“Based on our quick estimate, we are forecasting an 8.2 percent CAGR higher topline over FY21-24. Earnings before interest, tax, depreciation and amortisation (EBITDA) and PAT margins are estimated to contract by 578bps and 456bps, respectively, to be at 38.3 percent and 17.8 percent in FY24. Earnings are likely to be flat over the period,“ said Choice Broking.
Angel Broking assigned a neutral recommendation to the Vijaya Diagnostic Centre IPO.
“The company already has a higher market share in key geographies like Hyderabad and we do not expect the Covid-related benefit to continue in coming years. We believe that at Rs 531, all the near-term positives are priced in and leave a limited upside for investors,“ the brokerage reasoned.
Vijaya Diagnostic shares traded at a premium of Rs 20 or 3.8 percent over the upper price band of Rs 531 per share, IPO Watch and IPO Central data showed.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.