Vijaya Diagnostic IPO Opens Next Week as IPO Mania Fizzles Out

The stock markets are buoyant these days and IPOs are all the rage.

The year 2021 has seen an IPO frenzy. As many as 38 companies have raised Rs 718.3 bn this year compared with 16 public issues that garnered Rs 311.3 bn in 2020.

The month of August was fully packed with IPOs as eight companies successfully raised funds.

Ample liquidity, along with other factors has boosted sentiment in Indian stock market.

Two companies - Vijaya Diagnostics Centre and Ami Organics are coming out with their public offers next week on the same day.

Among these two, we'll take a close look at the initial public offer (IPO) of Vijaya Diagnostics.

Here are some details about this IPO.

Issue period: 1 September 2021 to 3 September 2021

IPO Size: Rs 18.9 bn - The entire issue is an offer for sale (OFS)

50% is reserved for qualified institutional buyers (QIBs) and 35% for retail investors. The remaining 15% will be reserved for non-institutional buyers.

Price band: Rs 522 to Rs 531 per equity share

Employee discount: Rs 52

Bid lot: 28 shares and in multiples thereof.

Face value: Rs 1 per equity share

Object of the issue: To carry out an OFS and achieve listing benefits.

The stock will get listed on exchanges by 14 September.

About the company

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 specialised pathology tests, 220 basic tests, and 320 advanced radiology tests. It also offers a broad spectrum of customised health and wellness packages to its customers.

Vijaya Diagnostic's operational network consists of 80 diagnostic centres and 11 reference laboratories spread across 13 cities and towns.

During fiscal 2021, the company conducted approximately 6.2 m pathology tests and 0.9 m radiology tests for approximately 2.6 m customers.

Arguments in favour of the business

Strong presence in Southern India

Vijaya Diagnostics is the largest integrated diagnostic chain in southern India by operating revenue.

For the three months ended June 2021, the company derived 87.2% of revenues from Telangana. Andhra Pradesh accounted for 8.7%.

If compared for fiscal 2021, 86.2% of the total revenue was derived from Telangana and 10% from Andhra Pradesh.

According to CRISIL's report, the Indian diagnostics market was valued at approximately Rs 710 bn to Rs 730 bn in fiscal 2021. The rating agency has projected the diagnostics market to grow at a CAGR of around 12% to 13% to reach approximately Rs 920 bn to Rs 980 bn by fiscal year 2023.

The diagnostics market in Telangana and Andhra Pradesh is projected to grow to approximately Rs 120 bn to Rs 130 bn by fiscal year 2023. Vijaya Diagnostics has a dominance in these states and is set to benefit.

Brand

Over the last four decades, Vijaya Diagnostics has received many awards.

Due to its strong brand, majority of Vijaya Diagnostic's customers are individuals. For the fiscal 2021, Vijaya Diagnostics has over 92.1% of its revenues from individual consumers.

Risk factors

The company has listed out as many as 58 risk factors in its red herring prospectus (RHP). But that's the case nowadays. Companies point out even the worst of possibilities if anything is to go wrong.

Here are few important risk factors which one should look out for.

Ability to maintain brand image

Since Vijaya Diagnostics derives most of its revenues from walk-in customers, maintaining brand and reputation is critical.

Any delay or inaccuracies in the results or wrong interpretation of test results may result in the wrong treatment being prescribed to a patient which would cause potential harm and induce negative publicity.

Criminal proceedings

The company's chief operating officer (CEO) Sura Suprita Reddy was charged in a criminal proceeding wherein the state alleged that she had committed offences under Sections 304-A, 336, and 338 of the Indian Penal Code, 1860 due to an accident resulting in a fire at the Park Hospital, Hyderabad.

Apart from this, there are also certain outstanding legal proceedings against the company.

Huge exposure to south India

Given that the company has presence in 13 cities and towns, a significant portion of operations are concentrated in the states of Telangana and Andhra Pradesh in south India.

The company derived 87.2%, 86.2%, 89.8%, and 88% of its revenue from operations from Telangana for the three months ended June 2021 and the financial years 2021, 2020, and 2019, respectively.

If in any case there is a regional slowdown in the economic activity in south India, the demand for services would reduce, adversely affecting company's business.

Highly competitive industry

Indian diagnostics industry is highly competitive with several strong companies like Dr Lal Path Labs already present in the market. It would be quite challenging to improve market share and profitability.

There's also the pricing pressure.

External risks

There are always the external risks related to political, social or other factors beyond company's control. These risks include increase in interest rates, lockdowns, government policies, etc.

And then there's Covid-19. A worsening of the current pandemic would result in a halt of economic activity.

Coming to the financials...

Vijaya Diagnostic has a decent financial performance as of June 2021 and for the previous 3 fiscals.

For the June 2021 quarter, the company's operating revenue per test was Rs 562.31 and operating profit before depreciation, interest, and taxes (OPBDIT) per test was Rs 260.59.

The operating revenue per customer was Rs 1,298.96 and OPBDIT per customer was Rs 601.39.

For the fiscal year 2021, the company has recorded total revenues of Rs 3.9 bn, representing a CAGR of 13.3% for fiscal years 2019 to fiscal year 2020.

As per the RHP, Vijaya Diagnostic's OPBDIT margin is ranked second among other major diagnostics players.

For the financial year ended March 2021, the company posted a profit of Rs 849.1 m compared to Rs 625 m in the preceding fiscal. This translates into 37% growth.

Here's a table comparing the company's financials over the past three years.

Financial Snapshot

(Rs m)	FY19	FY20	FY21	Jun-20	Jun-21
Revenues	3,029.4	3,541.8	3,885.9	539.9	1,259.7
Revenue Growth	-	17%	10%	-	133%
Expenses	2,376.2	2,707.6	2,764.7	533.4	817.6
EBITDA	1,184.8	1,479.8	1,778.8	161.2	601.4
Net Profit	461.1	623.8	849.0	16.1	333.0
Net Profit Margin (%)	15%	18%	22%	3%	26%
Net Worth	2,070.1	2,741.4	3,592.3	2,758.3	3,929.1
Return on Net Worth (%)	22%	23%	24%	1%	8%

Data Source: RHP

For more details, check out Vijaya Diagnostic's RHP.

Conclusion

The financials of Vijaya Diagnostic seem decent but it faces tough competition from already strong companies which are listed in this space.

Comparative Analysis

Company	Revenues	Net Profit
Vijaya Diagnostics	3,886	849
Dr LalPath Labs	16,326	2,965
Metropolis Healthcare	10,100	1,833
Thyrocare Technologies	5,071	1,132

Data Source: RHP
Data as on March 2021

Vijaya Diagnostic will be the second IPO of a diagnostic lab chain to hit the market in less than a month.

Krsnaa Diagnostics came out with its IPO and was subscribed 64.4 times.

The business model of Vijaya Diagnostics is different from Krsnaa which focuses on government contracts.

Vijaya gets over 90% of its revenues from walk-in customers.

The grey market premium of Vijaya Diagnostics Centre stands at Rs 35. This indicated the issue was trading at a premium of Rs 557 to Rs 566 per equity share on the unlisted market.

Is the IPO mania fizzling out?

Note that demand for IPOs is fizzling out as newly listed companies have been encountering losses after making impressive debuts.

The most recently listed Nuvoco Vistas, Chemplast Sanmar, and Aptus Value Housing opened on a discount to issue price. This has led to a dip in investor sentiment.

Earlier, investors were hands down applying to any IPOs hoping for strong listing gains. But with HNIs losing money in a few IPOs and listing pop disappearing, they have become wary.

Given that there's enough liquidity in the market, investors are likely to try their luck with the upcoming IPOs available at attractive valuations.

Richa Agarwal, editor of the smallcap recommendation service Hidden Treasure, recently shared her take on IPOs.

Here's what she wrote in a recent editorial.

• While successful venture capital bets make good stories, theirs is a game of probability. They bet their money on multiple high risk ventures, knowing a lot of them won't survive.
  
  Through IPOs, they extract, and not create value. They have deeper insights and experience into these businesses than retail investors. In the IPO they exit at a price much higher than what they paid to enter. It would be naive to assume this transaction will be in your favour.
  
  Here's what I truly believe.
  
  If any of the loss making Internet companies is going to be the future Amazon, rest assured the market will give you enough opportunities to get in. The IPO may not be the best time.
  
  So have patience and invest mindfully. You will do well.

You can read the entire editorial here: Tech Stocks, Upcoming IPOs, and the Internet Economy

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...