Vijaya Diagnostic: Beats estimates; volume recovery drives Q3

Vijaya Diagnostic Centre’s (Vijaya) Q3FY22 performance exceeded our expectation, mainly due to better-than-expected covid revenues and margins. Revenues grew 10.9% YoY to Rs1.1bn (I-Sec: Rs855mn), driven mainly by a strong recovery in non-covid volumes. Revenue from covid tests fell 20.4% QoQ to Rs86mn (I-Sec: Rs28mn) with a drop in the number of cases and realization, while non-covid revenue grew 19.5% YoY to Rs1.0bn (I-Sec: Rs855mn) due to a strong recovery in volumes. EBITDA margin shrunk 330bps YoY to 43.2%, though it was more than our estimate of 41.8%. Adj. PAT grew 2.3% to Rs253mn, in line with the operational performance. We remain positive on the stock mainly due to the company’s: 1) B2C focus, 2) highest margin within the industry and 3) continuous focus on deeper expansion in its dominant regions. These strengths synergise with supportive macro factors, including the likelihood of a faster shift of market to organised players. Further expansion in east, especially Kolkata, may drive medium- to long-term growth. Maintain BUY.

Business review: Revenues grew 10.9% YoY in Q3FY22, driven by a continuous recovery in base business aided by an improvement in volumes, partly offset by a decline in covid revenues. Overall, test volumes improved 21.5% YoY, while realisation fell to 8.8%. Realisation on non-covid remained flat YoY at Rs472-474/per test. Revenues from covid tests declined 20.4% QoQ to Rs86mn with a drop in cases and realisation. We expect non-covid volumes to continue improving in the coming quarters. Overall, we expect 30% YoY volume growth in FY22E on the low base of FY21 with a decline in realisation to 6.4% mainly due to a fall in covid realisation. Gross margin contracted 220bps YoY to 16.2%, mainly due to lower non-covid realisation. EBITDA margin shrunk 330bps YoY to 43.2%, largely as a result of lower growth in gross margins and higher other expenditure. B2C contribution in Q3FY22 and 9MFY22 stood at 95% and 94% respectively.

Key concall highlights: 1) Reiterated intent to add 14-15 centres every year, including 11 spokes and 3-4 hubs. 2) Cash and equivalents stood at Rs2.5bn as of 9MFY22. 3) Started nine centres in 9MFY22 and plans to add six more in Q4FY22. 4) Guided for 15% YoY growth in FY23 revenues with more than 40% margins. 5) Guided for capex of Rs800mn for FY23 for opening of new centres and Rs40mn-50mn for digitalisation.

Outlook: With a higher contribution from radiology and a B2C focus, Vijaya commands best-in-industry EBITDA margin, which we believe would likely continue and sustain at ~42-43% in the near-to-medium term. We expect revenues to grow at 15.1% CAGR with EBITDA/PAT CAGR of 13.7%/13.3% over FY21-FY24E. Despite continuous expansion, the company is likely to generate free cashflow of ~Rs3bn over FY21-FY24E. We expect RoIC to improve to 40.8% by FY24E from 35% in FY21.

Valuation: We increase our earnings estimates by ~1.5% for both FY23E and FY24E mainly due to a change in our margin estimates. The stock currently trades at 50.4x FY23E and 41.3x FY24E earnings, and 22.9x FY23E and 19.2x FY24E EV/EBITDA. Retain BUY with an unchanged DCF-based TP of Rs700/share. Key downside risks: Slowdown in growth in southern region, and regulatory hurdles.

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MB Bureau