Suraksha Diagnostic IPO review (May apply)

•    The company is a one-stop pathology and radiology testing, and medical consultation services solution provider having East region centric play. 
•    It has a market share of around 1.26% in the area of its operation and that is scaling up with its new centre opening.
•    New centres take long time to contribute in its bottom lines and their new centre opening process will start contributing in coming years. 
•    The company is back on track as indicated by FY24 performance and is poised for bright prospects ahead.
•    Based on FY25 annualized earnings, the issue appears fully priced discounting all near term positives. 
•    Well-informed investors may park funds for long term.

ABOUT COMPANY:
Suraksha Diagnostic Ltd. (SDL) is a one-stop integrated solution for pathology and radiology testing, and medical consultation services to its customers through extensive operational network, consisting of flagship central reference laboratory, 8 satellite laboratories (co-located with its diagnostic centers) and 215 customer touchpoints which include 49 diagnostic centres, and 166 sample collection centres (primarily franchised), as of June 30, 2024 across the states of West Bengal, Bihar, Assam, and Meghalaya. 

SDL's central reference laboratory has an accreditation from the College of American Pathologists, 3 of its laboratories hold National Accreditation Board for Testing and Calibration Laboratories ("NABL") and 3 of its advanced diagnostic centres hold National Accreditation Board for Hospitals & Healthcare Providers ("NABH") accreditations. As of June 30, 2024, 44 of diagnostic centres also housed 126 polyclinic chambers hosting 750+ specialized doctors for patient convenience.  During the three months' period ended 2024, it conducted approximately 1.58 million tests serving approximately 0.28 million patients and derived 95.34% of its revenue from operations from core geography, Kolkata and the rest of West Bengal. 

During the Fiscal 2024, the company conducted approximately 5.98 million tests serving approximately 1.14 million patients and derived 95.48% of revenue from operations from core geography, Kolkata and the rest of West Bengal. SDL's radiology equipment consists of 24 CT and 13 MRI machines. As of June 30, 2024, its operational network comprises a diagnostic center network of (i) 13 hub centres, which are equipped to conduct all pathology sample collections, basic and advanced radiology tests; and (ii) its 'spoke' diagnostic centres which include 11 medium centers, 23 small centres and 2 centres operated under public-private partnership ("PPP") model, which are equipped to conduct all pathology sample collection and certain basic radiology tests, further supported by 166 sample collection centres (primarily franchised); and a laboratory network of (i) flagship central reference laboratory; and (ii) 8 satellite laboratories which are co-located with certain hub centres. 

Company's market share in the diagnostics services market in Eastern India was 1.15% to 1.30% in Fiscal 2024 whereas peers such as Dr Lal Pathlabs Limited have a market share of 5.30% to 5.70% in its major market i.e., north India and Vijaya Diagnostic Centre Limited, a market share of 2.20% to 2.50% in its major market, i.e. South India. (Source: CRISIL Report, as replicated on page 201). The company offers a comprehensive range of 2,300+ tests that cover a range of specialties and disciplines, as of June 30, 2024. Its diagnostic test menu included (a) 788 routine pathology tests ranging from basic biochemistry and hematology to 664 specialized pathology tests such as advanced biochemistry, histopathology, and molecular pathology, and (b) 766 basic/intermediate radiology tests ranging from basic x-rays, ultrasonography ("USG"), and computerized tomography ("CT") scans to 119 advanced radiology tests such as magnetic resonance imaging ("MRI") scans and specialized CT scans, as of June 30, 2024.

For three-month period ended June 30, 2024, the company derived 49.75% of revenue from pathology, 46.52% of revenue from radiology and 0.03% of revenue from COVID-19 tests. For Fiscal 2024, it derived 53.30% of revenue from pathology, 46.03% of revenue from radiology and 0.18% of revenue from COVID-19 tests. The company believes combined offering of pathology and radiology tests enabled it to provide 5.26 tests per patient. SDL also provides vaccination services, and a broad spectrum of customized test packages, aimed at prediction/early detection of diseases.

In addition to integrated pathology and radiology testing services, it also offers Omni channel medical consultation services via online and offline modes to customers under a single roof through 44 of diagnostic centres which house 126 polyclinic chambers hosting 750+ doctors, as of June 30, 2024. The doctors at polyclinics range across specialties and super-specialties such as cardiology, pediatrics, dermatology, rheumatology, oncology, and nephrology. Its model of polyclinic chambers housed in diagnostic centres providing medical consultation services enables patient convenience through holistic integration of services and offering it the first right to a patient's prescription leading to higher cross-selling opportunities.

The company derives the majority of revenues from the B2C segment (i.e., individual patients, who either walk into customer touchpoints or use home collection services or avail medical consultation services through polyclinics. Its B2C segment contributed to 93.83% of revenue from operations for the Fiscal 2024 and 93.48% of revenue from operations for the three-month period ended June 30, 2024. 

As of June 30, 2024, its operational network comprises a diagnostic center network of (i) 13 hub centres, which are equipped to conduct all pathology sample collections, basic and advanced radiology tests; and (ii) 'spoke' diagnostic centres which include 11 medium centers, 23 small centres and 2 centres operated under public private partnership ("PPP") model, which are equipped to conduct all pathology sample collection and certain basic radiology tests, further supported by 166 sample collection centres (primarily franchised); and a laboratory network of (i) flagship central reference laboratory; and (ii) 8 satellite laboratories which are co-located with certain hub centres.

As of June 30, 2024, SDL had 1506 permanent employees and contractual employees/consultants on retainer basis, including 23 laboratory doctors, 255 radiologists/other reporting doctors and 529 technical staff. Its laboratories are managed by qualified scientific staff and supervised by a team of pathologists with specializations in relevant fields of laboratory medicine.

According to the management, though it's an East centric company, considering the dense population of West Bengal and its penetration in Tier-II, Tier-III cities, they are poised for bright prospects ahead. As their new centres take some time to start contributing to its bottom lines, in coming years, it will scale up new centres opening that will over the period contribute to its top and bottom lines. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 19189330 equity share of Rs. 2 each worth Rs. 846.25 cr. at the upper cap). This is a pure secondary offer. The company has announced a price band of Rs. 420 - Rs. 441 per share. The issue opens for subscription on November 29, 2024, and will close on December 03, 2024. The minimum application to be made is for 34 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The IPO constitutes 36.84% of the post-IPO paid-up equity capital of the company. This being a 100% Offer for Sale (OFS), no funds going to company. This offer is being made for listing benefits and to provide exit to some of its existing stakeholders.

The joint Book Running Lead Managers (BRLMs) to this issue re ICICI Securities Ltd., Nuvama Wealth Management Ltd., and SBI Capital Markets Ltd., while KFin Technologies Ltd. is the registrar to the issue. 

The company has issued/converted entire equity shares at par value so far. It has also issued bonus shares in the ratio of 1 for 4 in June 2024. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 1.60, Rs. 45.50, Rs. 49.76, and Rs. 94.38 per share. 

Post IPO, company's current paid-up equity capital of Rs. 10.42 cr. will remain same as this is a pure OFS. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 2296.76 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit Rs. 225.77 cr. / Rs. 20.82 cr. (FY22), Rs. 193.69 cr. / Rs. 6.07 cr.(FY23), and Rs.  222.26 cr. / Rs. 23.13 cr. (FY24). For Q1 of FY25 ended on June 30, 2024, it posted a net profit of Rs. 7.67 cr. on a total income of Rs. 61.85 cr. It posted a setback for FY23 in its top and bottom lines. 

For the last three fiscals, the company has reported an average EPS of Rs. 3.27, and an average RoNW of 11.05 %. The issue is priced at a P/BV of 12.57 based on its NAV of Rs. 35.09 as of June 30, 2024, and is at a P/BV of 12.28 based on its post-IPO NAV of Rs. 35.92 per share (At upper cap). 

If we attribute annualized FY25 earnings to post-IPO fully diluted equity base, then the asking price is at a P/E of 74.87 and based on FY24 earnings, the P/E stands at 99.32. Thus the IPO appears fully priced. 
 
For the reported financial periods, while PAT margins data is missing from the offer document, it has posted RoCE margins of 23.11% (FY22), 9.05% (FY23), 21.46% (FY24), 6.32% (Q1-FY25).

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It adopted a dividend policy in July 2024, based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Dr Lal Path Labs, Metropolis Health, Thyrocare, and Vijaya Diagnostics, as their listed peers. They are trading at a P/E of around 63.9, 74.6, 61.1, and 87.6 (as of November 27, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The three BRLM associated with the offer has handled 72 public issues in the past three fiscals, out of which 21 issues closed below the offer price on listing date.