Vijaya Diagnostic Centre: Expanding its Reach with a Focus on Margins

It is apparent that Vijaya Diagnostic Centre (VDC) has stood out by demonstrating a steadfast growth trajectory, fortified by its robust regional presence and strategic emphasis on radiology services. 

This approach has allowed the company to maintain a competitive edge in an industry marked by intense rivalry and continuous innovation.

Q1FY24: A Glimpse of Promising Performance

In Q1FY24, Vijaya Diagnostic Centre (CMP: Rs 479, Market Cap: Rs 4,893 crore) displayed a commendable upswing in its financials, signalling positive momentum in its operations. 

The pricing environment, despite the prevailing competitiveness, exhibited resilience—a testament to the company's sound market strategy. A noteworthy aspect of VDC's offerings is its comprehensive diagnostic suite, with radiology contributing to around 37 percent of revenue and the remainder stemming from pathology services.

Margin Enhancement and Growth Strategy

One of the pivotal factors propelling VDC's performance is its advanced radiology services, which have contributed significantly to the company's margin expansion. 

As VDC continues to extend its footprint, particularly through the hub-and-spoke model, the medium-term growth prospects appear promising. This expansionary approach aligns well with the company's vision of capturing previously untapped regions.

Q1FY24: Navigating Margin Improvement

In Q1FY24, VDC reported a 16 percent YoY growth in revenue, amounting to Rs 121 crore. This upswing was driven by increased test volumes across both new and existing centers. On a like-to-like basis, excluding COVID-related revenue in Q1FY23, the revenue growth was even more impressive at 19 percent YoY. 

Diagnostic test volumes surged by 17 percent YoY, although a marginal dip of 1 percent in revenue per test was observed.

The traction gained by wellness diagnostic packages, focused on preventive tests, was a significant highlight. 

The share of revenue from these packages expanded to 12.4 percent, a notable uptick from 9.6 percent in the previous year.

Notably, VDC's newly operational hubs in Tirupati, Rajahmundry, and Punjagutta played a pivotal role in boosting EBITDA in Q1FY24. 

Despite higher costs associated with establishing new hubs, the company managed to achieve a 150 basis points YoY improvement in EBITDA margins, reaching 39.8 percent.

Strategic Expansion and Vision

VDC's growth journey continues with the recent launch of a cutting-edge hub in Kolkata. Armed with advanced equipment such as a 3T MRI and 128 slice cardiac CT, this hub underscores the company's commitment to innovation and quality diagnostics. 

The company is strategically targeting a break-even within 12 months of operation in this new region, aiming to replicate its success in its home markets.

In the medium term, VDC plans to adopt the hub-and-spoke model to penetrate Andhra, Telangana, and the new market of West Bengal. 

With a plan to add 15 centers annually, including hub centers, the company is poised for a balanced expansion.

Outlook and Recommendation

As the healthcare landscape shifts with a renewed focus on preventive care, VDC is well-positioned to capitalize on the change. High-end radiology tests and wellness packages are key avenues for growth and product diversification. Despite the competitive environment, VDC has managed to maintain stable pricing, reflecting its strong market position.

VDC's steady growth profile, bolstered by regional branding and a strategic focus on radiology, makes it a compelling investment prospect. 

The company aims for a 13-15 percent growth in core revenue and an EBITDA margin close to 40 percent. However, the increasing share of wellness packages might exert slight pressure on overall margins due to the price-sensitivity associated with this segment.

With the stock trading at 20x EV/EBITDA FY25e—comparable to its peers—VDC's growth potential remains attractive. 

Its strategic expansion plans, reputation for reliable diagnosis, and emphasis on advanced offerings position the company for long-term success. As the market experiences fluctuations, investors could consider leveraging this opportunity to accumulate VDC stock for sustained growth in the future.