KRSNAA Diagnostics: Can the OG of price disruption rise above the rest?
A look if Krsnaa's unique business model, opportunities, risks & its game plan make it a good bet in the competitive diagnostic space
At the peak of COVID pandemic with uncertainties all around most business were running for shelter. But not diagnostics. It was making hay as the pandemic ravaged economy. Dizzying valuations & prices were justified with myopic vision. Fintwit coined BAAP (stocks that are ‘buy at any price’) and put some diagnostics stocks in it too!
Thankfully things turned to better for human lives as COVID’s intensity & fear diminished but pain for diagnostic companies accentuated. BAAPs were bitten by SAAP (sell at any price, taking the credit for the acronym only if you liked it). On one hand the COVID business was almost fully gone while on the other increase in healthcare awareness, demand & potential growth runway led many deep-pocketed & large conglomerate backed firms jumping into diagnostics business increasing the competitive intensity. This was mostly price disruption (likes of 1mg etc.) led. Sector was quickly de-rated. As I write this, most of these names are trading at their 52 Week low or very close to it.
But, hey I don’t want to waste your time on what you perhaps already know. So lets dive into a stock of this very sector which may be unique enough to fly above the dark clouds of this sector.
Krsnaa Diagnostic derives around 47% of business from Radiology (MRIs, CT scan) which is starkly different from most large players where almost the entire focus is always on Pathology. It was always been so for Krsnaa since 2011 when it started operation with 2 radiology centers. Today it serves customers in 70+ districts across 14 states with the help of 1488 Radiology & 583 pathology centers.
The Business Model
While most listed players in diagnostic sectors focused on B2C, Krsnaa since inception had its hegemony in the PPP (Public Private Participation) model. In such models players (like Krsnaa) submit their bids for contract of running diagnostic services in government hospitals especially in underpenetrated rural & municipal corporations. Government patients avail such diagnostic services through various health program while private patients who walk-in cover their own fees. As a result doctor referral or rental fees are zero in spite of such players using the hospital premise and patients referred to by these doctors.
Over years Krsnaa has developed superior expertise in bidding, winning and successfully running operations through the contract period. In fact it has 78% bid-win rate historically and a strong track record of contract renewal.
Management Commentary: We expect good strike rate to continue because of two reasons. One is the experience of surveying and bidding for projects. Second, more projects coming with clauses (from government) such that only serious players come in, either through turnover criteria or network criteria. Most players are being eliminated at technical round.
In spite the major source of revenue being from National Health bodies, Krsnaa has maintained a very healthy receivable days. The metric has reduced from 97 days in FY18 to 46 days in FY22.
The sector is marred with price disruption following increasing competitive intensity. While some market pundits believe that healthcare is all about trust and if the doctor doesn’t approve of authenticity & accuracy of reports by these new fly-by-night diagnostic player the patient will eventually need to go back to one of the more established player. While this is true, what is not is that most new players are large, backed by renowned business conglomerates (Tata, Reliance). Any new offering under their umbrella is instantly trusted & accepted.
Disrupting the disruptive pricings
But Krsnaa is well placed to hook this bouncer delivery, in 3 ways:
Radiology - the larger piece for Krsnaa requires more experience, expertise and is capital intensive to set up. As a result it’s been seen that both new and incumbents are primarily battling it out in Pathology space. I was not surprised to find all search results in 1mg App of MRI & CT scans from some tie-up hospitals and not from its own lab.
Krsnaa focuses on bidding, winning & running long term contracts (5-10 years). All these contracts are in-built with price escalation. This gives a superb revenue & cash flow visibility. There is no need for it to get into any price wars or negotiate pricing with government authorities at the end of each year.
Disrupting the disruptive price, before the disruptors existed. Price disruption get a whole new competition from the OG : Krsnaa. Its offering are already priced lower than the cheapest player by 27% - 76% depending on the test.
Krsnaa has been delivering the fastest growth among the listed players. Between FY2017-2020 it clocked 48% CAGR towering well above most established players.
It is interesting to observe that almost all growth has come in only from captive customers - patients who walk in Krsnaa because it happened to be in the same premise of the hospital. It doesn’t need to spend much for marketing or advertisements while having a ready customer base of these established hospitals right for day-1 of its operation.
Financials
COVID boosted the topline of all diagnostic companies, but for Krsnaa it was a lower. In FY21 COVID-19 business was 37%, 78% of which is gone by FY22 thereby leaving behind only the more sustainable part of the business.
It used part of IPO proceeds to pay off the principal debt and is now a net debt company and management believes it will continue to stay so. Any future capex will be funded by internal accruals.
Krssna’s IPO was timed to perfection, right at the middle of earning expansion and sector re-rating. Most PE investors took partial exit after making windfall gains from their investments. Its interesting to note that Phi Capital after selling 1.6 mn shares in IPO OFS raised its shareholding from 15.19% to 15.88% between Dec’21 & March’22 when the price corrected by over 45% from its listing price.
Game plan ahead: Expanding Retail market
Management expects EBITDA to be in the range of 30-35% for FY23 which higher than the range that Krsnaa has usually delivered in the past 4-5 years. In fact it has aggressive business targets for quarters ahead.
Management Commentary: We have started a clear strategic roadmap to double the revenue and triple the profitability in next 2-2.5 years.
For FY2023 specifically it is targeting to up its operational revenue by 40% from the current INR 455 Crore. With most of the Capex already done the balance INR 100 Cr will be from internal accruals.
It intends to achieve this by a number of ways like stepping the gas further on these PPP projects which has a large run growth runway (currently present in 70 districts out of 700) and rolling out new centers.
A new dimension of their strategy is increasing focus on retail market like planning to expand pathology business by capitalizing existing and expensive pathology diagnostic center in Maharashtra, Punjab, Himachal Pradesh, Rajasthan & West Bengal.
In an attempt to go beyond the pool of captive customers for their centers, Krsnaa is on it way create awareness of their offerings at disruptive prices through digital marketing. In a way B2B will used as a foundation for B2C business. This could be double edged sword. While acquisition cost can bump up expenses impacting the margins, receivable days will reduce significantly.
Krsnaa has been categorical in operating in areas where other major players have no or minimal presence. But at some point turf wars are bound to happen with everyone looking for expansion beyond metros & Tier-1 cities. The silver lining, not many B2C players would want to get into B2B business (home ground of Krsnaa) as that will negatively impact the valuation these listed names are commanding even after deep correction of last 6-8 months.
Also, Krsnaa has to solve for lack of enthusiastic growth in the Average Revenue Per Patient which has been devoid of an upward trend.
At the end every prospective & existing investor should be cognizant of the external risk that Krsnaa’s businesses will always be impacted by government policy on healthcare and budget allocation on which it has no influence at all.
Will Krsnaa fly above the dark clouds hovering above diagnostic space with its unique strengths and strategy ? We shall find out in couple of quarters.
Hope you found this article thought provoking & interesting. If you missed listening the podcast HIGH SIDE with Pawan Kaul - Senior Analyst (Emerging Markets), International Family Office by Dalal Street Rafting check it out below
Disclaimer: Views presented in this article is personal opinion of author and doesn’t not represent any firm’s view that he is currently associated or might have been associated in the past. No part of it should not be considered as a recommendation to buy or sell any stocks etc. This is an educational article at best. Although care has been taken for correctness of the data, author does not take any responsibility for any errors or omissions. Readers should consult their financial advisers before taking investment decision.