Vijaya Diagnostic Centre Ltd Q3 FY25 concall analysis

Financial Performance Highlights

Revenue Contribution: Flagship centers contribute approximately INR 60 crores annually (INR 5 crores per month), now accounting for less than 10% of monthly revenue (down from 15% at IPO).
EBITDA and PAT Impact: The shift to Indian GAAP reduced PAT by INR 1.6 crores in Q2 FY’25, a 0.9% impact. Reported PAT margin was 23%, which would have been 23.9% under Indian GAAP.
Test per Footfall: Increased to 3.4–3.5 tests per patient, driven by the hub-and-spoke model and PH Diagnostics integration, with wellness contributing modestly (13% of business).

Growth Strategy

Vijaya Diagnostic Centre emphasized a multi-pronged growth strategy focused on organic expansion, technological integration, and leveraging its hub-and-spoke model:

Organic Network Expansion:
- Bangalore: Identified as a key growth market due to its prominence in South India alongside Chennai and Hyderabad. The company aims to build a dense network organically over time, capitalizing on the fragmented market (2–5 center chains). No immediate aggressive target (e.g., 5 centers in one year) was set; instead, a gradual investment approach was outlined to establish a strong foothold.
- Gurgaon: An existing mature center (12,000 sq. ft.) was upgraded from a wellness-only facility to a fully integrated diagnostic center with advanced technology. No immediate plans for further expansion in Gurgaon were mentioned, focusing instead on enhancing the customer experience at the current location.
- Hyderabad: Business concentration has reduced to the 70s (percentage not fully specified), freeing capacity to explore new markets like Bangalore.
Hub-and-Spoke Model:
- The integration of PH Diagnostics (3 hubs, 3 spokes) has bolstered the hub-and-spoke model, driving higher test volumes per footfall at hub centers. Future growth in test per patient metrics will depend on the mix of hubs versus spokes opened.
Technology Integration:
- Introduced an AI-powered platform connecting 200–250 radiologists across the network. This system assigns cases based on sub-specialty expertise (e.g., pediatric or cardiac radiology), improving report quality, reducing turnaround time (TAT), and enhancing customer experience. It also aims to boost radiologist throughput and reduce attrition by aligning tasks with their interests.
Wellness Business:
- Wellness remains an integrated part of Vijaya’s offerings (13% of revenue, up from 10–11%). Growth is seasonal and not aggressively pushed via upselling, with a stable outlook of 13–14% contribution.
Market Shift:
- The company noted a shift from unorganized to organized diagnostics, supporting volume growth. However, the organized sector remains less than 20% of the total diagnostic market, indicating significant room for expansion.

Future Outlook

Growth Guidance: The management reiterated confidence in achieving double-digit revenue growth of 15–16% annually, driven by network expansion and volume increases. Efforts are underway to exceed this baseline target.
Bangalore Potential: Seen as a Tier-1 city with a fragmented diagnostic market, Bangalore offers a long-term growth opportunity. The focus is on organic growth rather than acquisitions, leveraging Vijaya’s brand and operational expertise.
Profitability: New regions like Bangalore and upgraded centers like Gurgaon are expected to maintain similar profitability levels as existing operations, though no specific timeline or profitability metrics were detailed.
Test per Footfall Stability: Expected to stabilize at 3.4–3.5, with fluctuations based on the hub-and-spoke mix. Wellness growth is not seen as a major driver beyond the current 13–14% range.
AI Benefits: Enhanced operational efficiency, higher report quality, and faster TAT are anticipated, potentially improving margins and customer retention over time.

Question and Answer Session Highlights

1. Growth Guidance and Seasonality

Question by Amey Chalke (JM Financial):

Q: The company delivered 22% organic growth in Q2. Is there scope to increase the organic growth guidance from mid-teens to high teens? What is driving the high volume growth apart from PH Pune?
A (Siva Rama Raju):
- The growth is partly seasonal, but the company has consistently delivered strong growth over the past 8 quarters.
- The shift from unorganized to organized healthcare is a key driver, especially in large markets like Hyderabad, Bangalore, and Delhi.
- The company’s dense network and integrated model are contributing to volume growth.
- The management is confident of delivering 15-16% growth but is striving to achieve higher growth.

2. Expansion Plans in Gurgaon and Bangalore

Question by Amey Chalke (JM Financial):

Q: What are the plans for Gurgaon and Bangalore over the next 2-3 years? Will profitability in new regions be similar to existing ones?
A (Suprita Reddy):
- Gurgaon: The center is being upgraded to match the company’s most sophisticated hubs. It is a mature center with repeat customers, and there are no immediate plans for further expansion in Gurgaon.
- Bangalore: The company plans to enter Bangalore organically, building a dense network over time. The market is dominated by small, semi-branded chains, and Vijaya sees significant potential for growth. The management is confident of replicating its success in other Tier 1 cities like Hyderabad and Kolkata.

3. Samples per Patient and Wellness Business

Question by Anshul (Emkay Global):

Q: The samples per patient metric has grown by over 25% in the last three quarters. Is this driven by the wellness business? How sustainable is this growth?
A (Siva Rama Raju):
- The increase in samples per patient is primarily due to the addition of PH Pune, which has hub centers with higher test volumes.
- The wellness business contributes 13% of revenue, and the company does not plan to aggressively grow this segment. It is expected to remain stable at 13-14%.

4. Capex and Hub Additions

Question by Anshul (Emkay Global):

Q: What is the capex guidance for FY’25 and FY’26? How many hubs are planned, and will Bangalore be included in the expansion?
A (Narasimha Raju):
- The company plans to add 10-12 hubs over the next two years, with a capex of INR 200 crores.
- 75% of the capex will be allocated to radiology equipment.
- The company is open to adding Bangalore to its expansion plans by FY’26, depending on market conditions.

5. PH Pune Margins

Question by Sumit Gupta (Centrum Broking):

Q: What are the margins for PH Pune, and how will they trend in the future?
A (Narasimha Raju):
- PH Pune’s margins are 40%, in line with the company’s overall margins.
- New hubs may experience a slight drag on margins in the initial quarters (1-2%) but are expected to break even within 3-4 quarters.

6. Gross Margin Dip

Question by Rishi Mody (Marcellus Investment Managers):

Q: Why did gross margins dip in Q2? Is this a structural issue or a one-off?
A (Narasimha Raju):
- The dip in gross margins is due to a higher proportion of pathology revenue (which has higher material consumption) and an increase in the wellness segment.
- Gross margins are expected to remain in the range of 87-88%, which is industry-leading.

7. Operational Bandwidth for Expansion

Question by Rishi Mody (Marcellus Investment Managers):

Q: Does the company have the operational bandwidth to manage expansion into new geographies like Bangalore, Pune, and Kolkata?
A (Suprita Reddy):
- The company has invested in mid-level and senior-level talent over the past 2-3 years, increasing the number of cluster managers and operations heads.
- The management is confident in its ability to execute expansion plans without overstretching resources.

8. AI-Powered Pathology System

Question by Deven (Marcellus Investment Managers):

Q: Can you elaborate on the AI-powered pathology system and its benefits?
A (Suprita Reddy):
- The AI system assigns cases to radiologists based on their specialization, improving turnaround times and report quality.
- It also enhances radiologist productivity and reduces attrition by allowing them to focus on cases that align with their expertise.

9. Bangalore Entry Strategy

Question by Bhavesh Gandhi (YES Securities):

Q: Why did the company choose to enter Bangalore organically instead of through acquisitions?
A (Suprita Reddy):
- The company evaluated both organic and inorganic opportunities but found that building a dense network from scratch would be more financially viable and aligned with its long-term strategy.
- The management is confident in its ability to grow organically in Bangalore, given the market’s potential and the company’s strong brand in the South.

10. Kolkata Performance

Question by Pranav Chawla (Antique Stockbroking):

Q: Why was Kolkata’s revenue lumpy in Q2, and does this impact future plans?
A (Siva Rama Raju):
- Kolkata’s performance was affected by strikes and external factors (e.g., Bangladesh-related issues), leading to a temporary dip in revenue.
- The company remains committed to its expansion plans in Kolkata, with new centers expected to open in the next 1-2 years.

11. Hyderabad Market Growth