Vijaya Diagnostic Q4 FY22 results

Vijaya Diagnostic Centre’s (Vijaya) Q4FY22 performance was broadly in-line with estimates as revenue grew 3.8% YoY to Rs 1.2bn (I-Sec: Rs 1.1mn) with EBITDA margin of 41.2% (I-Sec: 41.8%). Covid revenue doubled QoQ to Rs 179mn led by Omicron wave; however, non-Covid revenues were impacted, which declined 3.8% QoQ. This was largely due to the fall in radiology segment with lower footfalls at centres; however, demand started to normalise Mar’22 onwards. 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. However, intense competition may affect near-term performance. Maintain BUY with a revised target price of Rs 614/share.

Business review: Revenue grew 3.8% YoY in Q4FY22 driven by 53.0% growth in Covid revenue due to Omicron wave. However, footfalls at the centres declined which impacted the non-Covid tests, mainly in radiology segment. Overall realisation grew 0.8% to Rs 474/per test while the total number of tests grew 2.9% to 2.45mn. Non-Covid revenues almost recovered in March, hence, we expect non-Covid volumes to continue improving in coming quarters. On a high base, we expect 7.7% YoY volume over FY22- FY24E driven by the addition of new centres and increasing footfall in non-Covid segment (ex-Covid, we expect volume to grow 15.4%). Gross margin contracted 90bps YoY to 15.4% due to unfavourable mix. EBITDA margin fell 740bps YoY to 41.2% due to change of mix, new centre addition and increase in employee cost. B2C contribution in Q4FY22 and FY22 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) Guided Rs 900mn of capex for FY23, 3) home collection contribution was ~2.5% of sales in FY22, 3) Hyderabad cluster contributes 83-84% in revenue expected to come down to 70-73% in next 3-4 years, 4) guided 15% YoY growth for FY23 revenues with more than 40% margins and 5) wellness was 8% in Q4FY22. Wellness is expected to increase 10% in near term.

Outlook: With higher contribution from radiology and a B2C focus, Vijaya commands best-in-industry EBITDA margin, which we believe would likely continue and sustain above 40%. However, due to higher base of Covid, we expect revenue to grow at 6.3% CAGR over FY22-FY24E. Due to fall in margin accretive Covid business and cost inflation, we estimate EBITDA to grow at a CAGR of 3.8% over FY22-FY24E with 210bps decline in margins. Despite continuous expansion, the company is likely to generate free cashflow of ~Rs 2.0bn over FY23-FY24E.

Valuation: We cut our revenue and EBITDA estimates by 9-10% and 10-12%, respectively, for FY23E-FY24E to factor in loss of revenue from Covid business, cost pressures and increasing competition. Retain BUY with a revised DCF-based TP of Rs 614/share. Key downside risks: Slowdown in growth in southern region, and regulatory hurdles.

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