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Buy This Healthcare Stock For Good Gains In Medium-Term Says HDFC Securities

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Investors should be extra careful when choosing stocks during a volatile period of the market, but some sectors, such as metal, healthcare, and oil and gas, are expected to perform well despite market volatility, according to equity researchers. However, with a medium-term target period, the prominent brokerage company HDFC Securities has initiated a buy recommendation on Krsnaa Diagnostics Ltd's shares, with a target period of Rs 790. The stock's current market price is Rs. 658, and the brokerage expects it to reach its target price in 6 months. Krsnaa Diagnostics Ltd is India's largest diagnostic services company, offering services in both radiology and pathology. The company operates in 14 states and has over 1800 facilities around the country.

 

Q2FY22 results of Krsnaa Diagnostics Ltd
 

Q2FY22 results of Krsnaa Diagnostics Ltd

In its latest research report, the brokerage has analysed that "Krsnaa Diagnostics Ltd (KDL) reported a decent topline of Rs 108.3cr, down 27.9%/18.3% YoY/QoQ. Revenue saw a de-growth mainly due to falling in covid volumes and revenue; Covid business contributed 4.6% of topline in Q2FY22, while it was 61.3% in Q2FY21 (~18% in the previous quarter). The non-covid business saw strong test volumes of 4.1 mn, +78.3% YoY/34% QoQ. The company posted an EBITDA of Rs 31.9cr in Q2FY22. It reported EBITDA margins of 29.5% in Q2FY22 (+102bps/-183bps YoY/QoQ). PAT stood at Rs 12.5cr, and the PAT margins were 11.6% (vs 15.1% in Q2FY21)."

As per HDFC Securities "Radiology business reported robust growth on the back of decent volume growth; the segment reported revenues to the tune of Rs 61cr (up ~80%/4.8% YoY/QoQ). Pathology business posted revenue of Rs 42.3cr (+74.8%/-16.4% YoY/QoQ); pulled down by lower average revenue per test. The average revenue per test saw a decline for both radiology (21.1% QoQ) and pathology (37.8% QoQ) due to lower Covid volumes which are lucrative. Test/patient improved on YoY and QoQ basis. Core Business (Radiology and Pathology) saw an increase in both, number of tests and average revenue per test in H1FY22."

According to the research report "The company plans to reach 150+ CT scans and 50+ MRI machines in the next two-three years. Currently, the capacity utilization for CT scans and MRIs is around 40%. Operations in Punjab are expected to operationalize by Q4FY22 or Q1FY23 and are expected to generate margins in line with existing levels. The company has repaid debt of Rs. 178cr in H1FY22 from IPO proceeds (Rs 143cr) and internal accruals. Krsnaa Diagnostics has earmarked Rs 150cr CAPEX for recently awarded projects, which according to management is expected to generate an additional topline of Rs 200cr in FY23-FY24. The management guided an annual CAPEX outlay of Rs 100-150cr."

Buy Krsnaa Diagnostics Ltd With A Target Price Rs. 790

Buy Krsnaa Diagnostics Ltd With A Target Price Rs. 790

According to the brokerage "Krsnaa Diagnostics has recently won 5 new PPP and private projects across Punjab, Maharashtra, Himachal Pradesh and Karnataka which offers near-term topline visibility as new projects would contribute meaningfully from FY23. It also participated in a few state tenders, results for which are expected in the near term. With more states moving towards the PPP segment, we believe Krsnaa would be a big beneficiary due to its cost competitiveness and past track record. The company is also actively exploring strategic tie-ups in the private space owning to increase inquiries especially post a listing. New tender executions (Punjab, Maharashtra, Himachal Pradesh and Karnataka), improvement in utilization of exiting tenders, likely roll-out of franchisee model coupled with its optimal cost structure could support healthy growth over the next few years."

HDFC Securities in its research analysis has claimed that "We expect revenue/EBITDA/PAT to grow at CAGR of 21.7%/33%/60.2% over FY21-24E. Further, the company has a sizeable CAPEX plan in progress to set up diagnostics centers; timely ramp-up of new projects shall be closely monitored over the medium term. Considering strong tailwinds in the sector, the huge growth potential of the PPP market and comfortable valuation (steep discount to its peers mainly due to concerns over the tender business and insufficient brand pull), we believe Krsnaa Diagnostics is a good bet in this space. Though the revenue growth seems assured due to new tenders won, margins expansion and valuation rerating may happen gradually. A faster shift to pay per use for its new equipments could lead to lower CAPEX intensity, faster expansion in return ratios and faster rerating. We think the fair value of the stock is Rs 734 (20x Sep'23E EPS) and the bull case fair value is Rs 790 (21.5x Sep'23E EPS) over the next two quarters. Investors can buy the stock in the band of Rs 658-662 (18x Sep'23E EPS) and add on dips to Rs 585-590 band (16x Sep'23E EPS)."

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

Story first published: Wednesday, December 22, 2021, 8:25 [IST]
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