Today, I present the most satisfying find I have made in 2022.
Short version
Krsnaa has bid for an enormous tender in the state of Rajasthan, comprising a total of 33 districts, 117 hubs and 3009 spokes.
Offering is for pathology + xrays, as an initiative by the state to provide free diagnostics to citizens of Rajasthan.
My highest confidence estimate of the minimum revenue from the contract is 204 Cr. Realistic revenues are much higher, but I leave it to the reader to make their own estimates.
There are three other bidders along with Krsnaa, and results of the tender should be clear in a month.
We have data on the total number of tests ordered by government hospitals in the state of Rajasthan in FY22!!!
The contract is divided into two divisions named Jodhpur and Jaipur, but actually comprises every single district in the state.
Government classifies hospitals into District, Sub-District, Civil Health Centres, Primary Health Centres, etc. The larger labs see more volumes of tests than smaller ones.
These spokes are not merely collection centres, but also have certain amount of blood work done on site. Larger tests are transported to hubs and mother labs through cold storage.
Method for estimating minimum revenue
Contract includes the number of pathology tests ordered by all government hospitals in Rajasthan in FY22 (see below)
Use the CGHS rates for price per test, which are very very low, and multiply this by the volume of each test done. This gives me the revenue accrued by each class of government hospital. Contract includes a list of CGHS rates in Rajasthan for reference.
Sum individual revenue contributions to arrive at a total:
Hospital Type
FY22 Revenue
District
63.27 Cr.
Sub District
22.5 Cr.
Satellite
5.6 Cr.
Civil Health Centre
92.5 Cr.
Primary Health Centre
20 Cr.
Dispensary
0.67 Cr.
Total
204.75 Cr.
Pointers to Upside
This is a conservative estimate. Tests are of different varieties with different costs. Think of X-rays, they come from 100 rupees to 500 rupees per test. I have assumed all tests are at the lowest possible price.
These numbers are limited by government throughput. If Krsnaa can have better asset turns / test per minute / efficiency than the government hospitals, multiply the revenue times Krsnaa’s efficiency factor.
Example: if Krsnaa can do 2x more tests, it’s a revenue potential of 400 Cr.
I have assumed CGHS rates. Krsnaa may bid higher than CGHS, Krsnaa may bid lower than CGHS (very low probability). Using different rates leads to different revenue outcomes.
FY22 had covid lockdowns during Q1. Figures may not be representative of a general year, and we have no data to compare it with another year with the same dataset of hospitals as of now.
We can answer some of these questions once the results of the tender are announced. We will know Krsnaa’s pricing (if they win), and can eliminate some unknowns.
Pointer to Downside
Krsnaa may bid for a portion of the entire contract and not both of the divisions. It’s unlikely, but a non zero probability.
Other details
Those bidding can bid for a portion of the contract, or all of it.
Contract is for 5 + 2.5 years.
Includes annual price hikes of 3%.
Winner of tender must submit number of tests conducted on the 7th of each month, and 90% of the payment will be released within 45 days, and balance 10% after 60 days of receiving this. This amounts to a blended receivable days of ((45 + 7)*0.9 + (60+7)*0.1) = 53.5.
Who else bid?
A total of four players have bid for this tender:
Krsnaa Diagnostics
POCT Services
Hindustan Wellness Pvt. Limited
Genestrings Diagnostic Centre Pvt. Limited
POCT services has a 20% win rate on tenders.
Hindustan Wellness is a regional Rajasthan player with good reviews on Google. Has <100 Cr. in revenue.
Genestrings Diagnostics is a player from Delhi.
These are all smaller businesses in comparison to Krsnaa. I think there’s a high probability that Krsnaa is the winning bid.
This data set to me is very nice, and there are a lot of ways this is useful to us. Will investigate in future posts.
I think this type of searches are common. Somedays ago Hero Motocorp was also subjected to some raid (not search). Nothing happened. Anyway Krsnaa stock price already reacted to the news with 3% fall with minor volume.
100 crores undisclosed income is financially baffling to me! How exactly is that even possible? A 1500 crore company with 68 crores in PAT for fy22 with 100 crores of income off the books is mind boggling. Didn’t expect it to be that high.
Also how do these cases work as I’m unfamiliar with the Indian Tax code. Do they take away the 100 crores? Or do they just charge the tax on it + penalty?
If the income is only taxed isn’t it a financial net gain as it is off the books? Of course on the other side it adds another facet of risk to b2g, but financially? I feel like I’m reading this wrong.
Disc - invested as largest position(35%). Havent sold anything.
If any cash or bullion is found in the premises, it is seized, including in any bank lockers. Apart from that, there is no immediate monetary loss. Business will continue as usual. The undisclosed income is not the actual amount that will have to be paid by the assessee. The assessment will be completed by 31.03.2024 after which the actual demand of tax will be sent to the assessee. Assessee can deposit 20% of the demand and go in appeal which can take several years. If the assessee does appeal, no penalty will be levied till the disposal of appeals-first before the Commissioner (Appeals) and after that the ITAT if the assessee loses the first appeal. If the assessee does not get relief after these two appeal stages, penalty will be levied. The assessee can again appeal the penalty levied after depositing 20% of the penalty amount. The assessee can also go in further appeal before the High Court and Supreme Court against the assessment and penalty orders. That can take years to decades. The total tax+interest+penalty can even be higher than the total undisclosed income found & finally upheld after all the appeal processes.
Since the company is B2G, it probably had to bribe Govt people to win the tenders and get it’s payments release in time. That bribe money was off the books and thus, was paid through unaccounted business income which is being talked about in the media. Most B2G companies, especially those dealing with states and local authorities do this since their tender wins and payment release is all in the hands of Govt officials.
In addition to IT raids, main concerned is illegality exposed of working without having valid tender in force. We need to assess how much it will have adverse effect on future growth. Further Income Tax Act also has stringent provision in form of penalty, prosecution. Just hope they are not wrong side of law.
technically speaking, nothing has been “exposed”. All of these are claims & counter claims. Management would dismiss these claims? How does one know whether to trust management or some unheard of news outlet?
The Department only issues press release for a few cases, mostly with multiple assessees involved. Every other day some or the other search action takes place somewhere in the country. The Department may or may not give a press release in this case. Anyhow, the press release only contains preliminary findings and there is no legal authority to these claims. The actual demand will not be issued before 2024.
Just thinking aloud, did anyone else find the timing of the raid weird. The lock in is just about to expire on 16th and two weeks earlier , this happens.
Disc: Invested and don’t care much for recent event. Partly due to having made the decision to invest in a B2G business(you dont win tenders that easily or cleanly) and having an appetite to expect these small incidents and partly due to business direction.
