Krsnaa Diagnostics: Navigating Challenges, Setting New Benchmarks

In the fast-paced world of Indian healthcare, where access to quality diagnostic services can be a challenge, Krsnaa Diagnostics emerges as a niche player making waves in the public-private partnership (PPP) diagnostics space. 

Since our initial coverage report in April 2023, the stock has surged approximately 38%, and we're here to tell you why this growth is just the tip of the iceberg for Krsnaa.

Transforming Indian Healthcare Infrastructure

Krsnaa has positioned itself as a pivotal player in transforming India's healthcare infrastructure, particularly at the grassroots level. Their track record of execution and unique market position sets them apart in the industry. 

Let's delve into some key developments that illustrate Krsnaa's potential.

The Rajasthan Contract Drama

In March 2023, Krsnaa secured a significant contract with the National Health Mission in Rajasthan, initially estimated to yield an annual revenue potential of Rs 150-200 crore. 

However, the stock experienced turbulence in August 2023 due to disputes between related parties regarding additional performance security, leading to the tender's cancellation.

Krsnaa's response was swift; they sought legal opinion, and the Rajasthan High Court ruled in their favor. This decision not only reinstated the contract but significantly broadened its scope in terms of revenue potential, types of tests and services, and the number of centers.

As per the latest update, Krsnaa anticipates adding approximately Rs 300 crore in annualized revenue from this project, nearly doubling the initial estimate. Due to negotiation and execution delays, revenues from the Rajasthan project are expected to start accruing from Q4 FY24 or Q1 FY25.

Q1FY24 Earnings Highlights

In Q1FY24, Krsnaa demonstrated impressive growth, with total revenue increasing by 24% YoY, reaching Rs 140 crore. This is notable considering the higher revenue base of the previous year, which included ~Rs 20 crore from the old Rajasthan contract that expired in August 2022.

However, gross and EBITDA margins faced challenges, declining by 930 basis points (bps) and 40 bps, respectively. This was partly attributed to the costs associated with setting up new centers during the quarter and higher employee expenses.

Krsnaa's robust balance sheet remained a highlight, boasting a net cash position of Rs 175 crore at the end of Q1. Moreover, the company managed to reduce receivable days from 86 to 79 compared to the previous year.

Ramping Up for Growth

In FY24, Krsnaa is poised to execute five recently acquired projects, with an estimated combined annual revenue contribution exceeding Rs 200 crore. The management anticipates a substantial 30-35% revenue growth for FY24, fueled by these new contracts from Assam, Odisha, Maharashtra, Mira Bhayandar, and BMC (Mumbai).

As the Rajasthan contract gears up, FY25 could see even greater YoY growth, and EBITDA margins could range from 25-30%. Krsnaa is committed to aggressive investments, with plans to add 6 new pathology labs and approximately 252 pathology collection centers in Q1. 

They intend to utilize internal accruals for capex totaling Rs 120-130 crore each year in FY24 and FY25 for new projects. Additionally, the company aims to hire around 3,000 employees by the end of FY24.

Valuations and Recommendations

Despite its remarkable run in the past six months, Krsnaa Diagnostics still presents an appealing proposition for long-term investors. Trading at an EV/EBITDA of approximately 9x its FY25 estimates, the valuation remains reasonable, especially considering the solid tender pipeline and the recent surge in project implementation.

Backed by its differentiated business model and a vast untapped market in underserved regions, Krsnaa is poised for further growth. As the company navigates challenges and sets new benchmarks in the healthcare sector, it's a stock worth watching for those looking to invest in India's evolving healthcare landscape.