Krsnaa Diagnostics - what is the diagnosis?

[Dev_S]

Is Diagnostic sector bottoming out? Some signs visible in chart but still weak, given it was a fancied sector last year, euphoria is out and valuations are more saner now. With some more consolidation we should get next leg of journey post Q4 nos.

Coming back to Krsnaa , Here is a recent presentation,

58e0fcff-17c1-418f-a517-b662a3b120e3.pdf

Inferences based on past numbers, idea is to get unit economics for longer term and see how it would look like in future( validation of mgmt guidance), pl note numbers are approximation and annualized for FY22

• How has revenue growth and realization fared over last few years for both channels - PPP & Private hospitals, Trend is encouraging and seem to have doubled over last 5 years
  

  

• Let’s look at Radiology vs Pathology for FY 22( again annualized and approx, excluding covid nos) - Radiology center at 2Cr( 130 centers and 220 cr revenue) and Pathology center at 3Cr realization - (46 centers and 150 cr revenue)---- Annual non covid revenue at 420 cr approx
  

  

• If above were to be applied to recent expansion in FY22, what can FY 23 look like, at current runrate a 650 Cr+ is doable( older center maturing and B2C channel can add upside)
  

  

• Margins - last 2 Qtrs company has delivered 30% EBDITA and interest burden going away, Net profit margin is around 14% in Q3

Optimist case - 650Cr-680Cr revenue, 30% EBDITA = 210 cr+, 14% NP = 90 Cr,

Base case- 650 Cr revenue, 28% EBDITA = 180 cr+, 12% NP = 80 cr

Given industry is a high teen growth, high longevity, 20X EBDITA is a optmist case valuations at 4000 Cr+ mkt cap, at 15X EBDITA in base case 2700cr+ mkt cap. Current mkg cap is around 1650 cr. B2C players are at much higher valuations of 30X-35X+ EBDITA at similar margin profiles.

Krsnaa has called out 2X revenue and 3X profits in 3years, to be seen how they deliver in next 2-3 Qtrs.

Invested with minor allocation, plan to build up per execution in coming Qtrs.

Edit - Adding some scuttlebutt online - Pune Krsnaa reviews - ssmple size is good, they are rated inline/better with private peers - on quick glance one can see Radilogy reviews as well( which are complex and still has good reviews - price, facility, service quality, )

Patient reviews on Radiology are quite encouraging and reflects B2C elements playing out as well - word of mouth spreads faster

Politicians pointing issues in PPP model is understandable, esp those in opposition, NGO has agendas as well, most of them wants us to believe nothing is good/improving about India, I have been to a govt hospital recently and was impressed with efforts on , security, cleanliness, almost nil pricing and lab facilities ( not Krsnaa but other local), point is do visit to see the change, may not be at par with private( e.g AC, staff, infra maint like wall paint, lift quality, etc ) but dramatic improvement from what it used to be like going to govt hospitals a decade back. One can visit and see for themselves as most of large and mid size cities have ppp model run setups now.

[Chins]

KR Choksey put out a note following a recent visit to Krsnaa’s tele radiology lab and two diagnostic centers. Full report is available behind paywall at BQ.

Highlights:

• Company is evaluating 6 tenders, should see the results of these tenders by the end of the year.

• Krsnaa claims to see interest from walk in patients on the opening day of any new facility. Will be interesting to compare this information with Q4 margins to see if new centers in Punjab have hurt margins during ramp up.

• Some details about the B2C model: they plan on entering B2C segment directly in FY23, opening 1000 new collection centers in 4 states. They will offer path tests and will take radiology appointments at other centers owned by Krsnaa at a 20% higher price. This looks to be a good way to drive up utilisation.

• Company aims to bring in 200 Cr. of revenue from Mumbai in the next 3 years.

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[Dev_S]

Unabated thrashing by markets, with volumes, doesn’t indicate any strength.

Valuations seem attractive from fundamentals perspective, it would be prudent to let it stabilize before position build up, checked with seniors here I VP and PPP model doesn’t get similar Valuations as peers, also some other different industry players who are in PPP space also seem to be trading at low valuations ( e.g. Antony waste mgmt), that doesn’t imply that Krsnaa will trade low forever, however upside likely depends on( my inferences and could be wrong)

1. Non PPP performance ( pvt hospitals, B2C), while I don’t consider PPP biz bad but mkt and experienced folks seem to disagree
2. Mkt perception on sustainability of biz, cashflows driven growth ( assuming inherent issue of receiable in govt biz doesn’t impact scale up) - both concalls mgmt has indicated cashflow and IPO proceeds enough to fund 3 year growth, mkt may like to see it materialize
3. Sector under derating- all players are close to 52wk lows( lalpath, metropolis etc), deep pockets are not looking at this sector after fabulous 21, unless that money comes in, not much is going to happen. Unfortunately Big players are still at 30X EBDITA TTM and if Q4 &Q1 looks bad ,whole sector may continue to suffer, mkt being forward looking is expecting same - any positive surprises may help else Q2 onwards it should normalize as base effect of Covid goes away.
4. Krsnaa margins- while mgmt claimed 30% sustainability, pre covid they were 25-27% type range, scaling new labs can hit margins in Q4, to be seen between Q4 and Q1.

Considering opportunity cost, plan to keep small allocation , to watch signs of sector stabilization and Q4 results are out

[Malolan_R]

Hello folks

This analysis that Public secor tenders can still be lucrative. dosent really seem to work on the gorund. capacity is not so much of a constraint. its the ability to convert possible footfall in health care into opportunities for tests. This is more likely in Urban pockets … like insights we got from Vijaya Diagnostics.

There is usually an string bidding in public health tenders resulting in un profitable business which has to continue anyway. We also hear of delays in payemnts which impair capital efficiency…

Rural health care will continue to be Government intervention focussed …
Definitely interresting times … since Government is continuing to pour money into heath care schemes

Malolan

[Aman_Aggarwal]

Hello,

While going through the concall (February 03, 2022) and the company’s financials (from RHP), I saw that the Charges paid to 190 radiologists at its Pune Hub are separately reported as “reporting
charges” under OTHER EXPENSES and does not form part of employee cost - the company confirmed it in its concall as well.

The charges are also significant as the highest line item under other expenses which can alter its operating margins if correctly covered under employee cost.

[Malolan_R]

Sahil… Yes it is best to err on the side of caution … Unless you are part of the quation… and you fancy your chances in influencing the outcome. and you are well and truly going to enjoy or ( endure(sic) this bumpy ride …

Malolan

[Malolan_R]

Radiology is the differentiator that Vijaya Diagnostics talks about in terms of thier Integrated model…

[Aditya_Kasera]

Thyrocare was into similar B2G business (compared to Krsnaa Diagnostics)?
If yes… were they facing problem in recovery of trade receivables?

[Dev_S]

Relevant thread on Twitter,

Anish Moonka

[nikhil_chowdhary]

I happen to speak to a doctor who worked for Government hospital and had to co-ordinate with Doctors at Krsnaa, his main concerns were :

Senior Doctors at Krsnaa have left, since the volume is so much, and they have targets to complete the XYZ validation, it at times impacts reporting quality. Diagnosis is a very sensitive part of the entire medical journey, where the a minor variation in reading, can change your dose from 1mg to 2mg (just an e.g.)

At some places (have given final warning to Krsnaa), their contracts wont be renewed. This is why the revenues can be lumpy and can have surprises in the quarters to come.

Krsnaa literally cuts the price to get contract at any cost.

They have hired technicians to learn from the work of doctors, so that in case of any attrition technician is able to handle it.

When you sell cheap, you ought to cut corners somewhere, hire either technicians or fresher doctors since doctors dont come cheap.

MRs at Krsnaa push doctors at government hospital to write tests which is why even doctors at government hospital also get agitated.

Disc : Keep tracking this space, own Dr Lal

Also if one notices their team, head of pathology and radiology who are doctors seem to have joined them recently.

[ankurtalwar]

I think your analysis is way off the mark here. Just my humble opinion. Will reply to your post pointwise.

1. Doctor attrition is very normal in any hospital / medical establishment. Just like in any IT company. No alarm bells here. Every doctor eventually wants to set up their own establishment after a certain period of time.

2. Regarding contracts, I think no doctor or even hospital administration can comment on the renewal etc. This is a tender based process and dependent on state government. Highly presumptive statement.

3. Regarding cutting corners, again I would say more of hearsay and highly presumptive.

4. Regarding technicians - I’ll just say that most Pathology work is automated and done by machines only. Just needs timely calibration. Doctors usually just sign on auto generated reports. However, when it comes to radiology, no technician can take the place of a radiologist. Can you imagine a technician analysing and writing the report of a CT Scan.

5. Fresh doctors quite often are better than the senior ones (not necessarily though) since radiology is a technical field… One needs to upgrade themselves often to stay abreast.

6. Regarding MRs, isn’t that the same with any pharma company or Pathology lab. Nothing new here to agitate the doctors. Isn’t that is what these Salesforce is being paid for?

Regards.
Dr Ankur Talwar

[nikhil_chowdhary]

Hi

Thank you for your inputs. I just shared what i learnt for the benefit of VP community.

We can definitely put across whats the anti thesis pointers, if its normal and not that serious, great for investors.

I have worked on other listed players too, never had such inputs except krsnaa/thyrocare (probably more to do with the B2G nature of business).

Will delete this comment to keep this discussion clean.

[rajpanda]

@nikhil_chowdhary

Will delete this comment to keep this discussion clean.

Hi Nikhil,

It’s OK. I guess no need to delete the post. You posted your concerns and Dr. Ankur has clarified. Both did your part in best interest of community. That’s what VP is about.
Unless seniors and admin tell otherwise.

[Dev_S]

Thyrocare Q4 no are out, they have been at Radilogy/imaging for many years now, with Pharmeasy acquiring them there was expectations on significant ramp up on demand side.

Radiology is still loss making, it’s a tough nut to Crack and master, Mr Velumani has spoken few times, None of the major league players are able to scale this part of biz.

Krsnaa deserves due credit for not only running a prfitable business with good cashflow, scaling it pan India is another layer in execution success.

Also market should be relieved with QoQ stabilizing, though margin performance would be something to watch out for sector as well as Krsnaa.

[stockcollector]

Dev - wrong comparison

Thyrocare’s PET CT (specialised CT scan) business is a very niche radiology business.

Thyrocare are not into x-rays, CT and MRI scans - that is exactly what Krsnaa is doing

[stockcollector]

Ok agreed

But thyrocare is only into PET CT - hence cant compare thyrocare radiology with krsnaa radiology

[ValueV]

@Dev_S sorry but i think you are referring different company altogether. This is Krsnaa and link is for Krishna.

Though you are right they are in this business - you can see DHRP and IR.

Thanks!

[kshitijb]

Correct me if I am wrong, but here, most of the Other Expenses (except ESOP and CSR) are considered under operating expenses to calculate EBITDA. So, Operating Margins would remain unaffected if you recategorize Reporting Charges to Employee costs.

[Khanemc2]

Sharing RK Choksey research report on Krsnaa Diagnostics.

KRChoksey_Krsnaa_Diagnostics_Plant_Visit.pdf

[Deenar_Toraskar]

MRs at Krsnaa push doctors at government hospital to write tests which is why even doctors at government hospital also get agitated.

I was wondering where MRs come into the picture. Can anyone shed some light? I was under the impression currently Krsnaa does not have any sales team in its centres, (there are B2C plans in the pipeline).
Does each centre has some revenue or utilisation targets or is it simply a case of doctors not putting in the right set of tests for the diagnosis expected on the form to be filled in?