Hello All. Sharing my condensed investment thesis & notes on Krsnaa. Most are based on discussions in this thread. Thanks to all contributors.

Business Model Strength / Moat – 7/10
Seems to have cracked the formula for efficiency, thus becoming the lowest provider of services. They have focussed on digitisation and automation from the start. For example, they use SigTuple for automated microscopy process that can also be done remotely.

This moat is hard to replicate as it is a organisational setup.
There is still some uncertainty due to the B2G aspect. However, the company seems to have managed it well.

They are tying up with private health players on a revenue sharing basis. Not much info is available other than Q3FY22 presentation.

Their centers are also NABL accredited which makes sure that the quality is not compromised.

So far, the scuttlebutt by some fellow investors point that Krsnaa’s services are good and might even be better than smaller service providers.

Profit & Margin Sustainability – 5/10
The margins are a bit low as many new centers are being established. They have been falling continuously for a few quarters. This is expected to improve as they become live in FY24. Further, economy of scale is expected to lift the margins.
Pathology division is being scaled up more rapidly. Though the margins are lower in pathology compared to radiology, the capex requirement is lower and hence the ROCE is expected to improve.

Recently CGHS rates have been increased. This would result in hikes in Krsnaa’s diagnostic prices, which is expected to improve the margins going forward.

Since this is a high volume & low margin business model, there is a bit of risk when the operating cost & expense increases.

Competitiveness – 8/10
They have almost no competition in the B2G space. Even in private hospitals, they might be able to replicate the same model and be the cheapest. With their pricing significantly lower, there is no strong competition yet.

Another aspect is that they are present in Tier 2 and Tier 3 cities where the population is very cost sensitive (no problem for B2G). There is only smaller players in those areas and they have a big room to grow.

Management Capability – 8/10
The story of how Krsnaa started is quite heart warming. It is good to know that these promoters are still at the helm of the company and are intending to build the business as they had done so far.
They intend to focus on reducing the cost for the end consumers and figure out how to make the business model work. This focus on customers would definitely ensure a longer leg of growth as well as being competitive as they scale out. They also have managed B2G contracts quite well. In the context of India this is something that is commentable and can’t happen without a very good management team at the helm.

The management has been quite transparent with shareholders and seem to be humble. The interview of Pallavi Jain is a very good one to watch and understand the thought process of promoters.

Governance & Promoter Integrity – 8/10
Even though they are in B2G business we do not hear any issues regarding governance or promoter integrity. There are some related party transactions regarding the rent paid for the office. This doesn’t stand out too much as of now. However, we will need to monitor related party transactions a little closely. There are already some discussions on this topic.
There is always some governance or political risk when dealing with numerous government contracts. So, this needs to be continuously monitored.

Financial Health & Asset Quality – 6/10
They have used the IPO proceeds to pay off the debt and now have no debt in their balance sheet.
It will be interesting to see how they are funding their expansion going forward.
Since they are asset heavy, it is important to track the health of their assets. The outcome of this would typically reflect as increased depreciation and a pressure on ROCE.

Macro & Sectorial trends – 9/10
Indian market is severely under serviced when it comes to healthcare facilities. With the government pushing through many initiatives we can see a good level of tailwind in B2G segment.
India stands to benefit from increased purchasing power and growing middle income category thereby providing more room for premiumisation of services.
With increased penetration of insurance schemes we can also expect high volume and high margin services coming up in healthcare sector.
There will be migration from unorganized / small players to organized players as healthcare ecosystem matures over the next decade.
Recent advancements on AI tech would favor large organized players who are geared to leverage these automations at scale.

Growth prospects – 8/10
The company is poised to grow at more than 20% CAGR over the next few years. This is dependent on growth of B2G segment, expansion into pathology and scaling out their private service offering. So far that doesn’t need seem to be any blocker other than capital requirements in growing their revenue. We will need to keep track of their contract wins and expiries over the next few years.
From LinkedIn insights, the last 12 month employee growth is at 28% which supports the growth story.

Also need to watch how the capital is deployed and utilized for growth without having a significant impact on cash flow & balance sheet.

Stock valuation – 5/10
At current PE of 40 and a potential growth rate of 25%, the stock seems to be fairly valued.
In terms of risk, it is a bit on the high side given that they haven’t yet shown the turnaround in terms of margins. In case the margins keep falling, the cashflow will severely be affected and the company would stagnate quickly with depreciation cost eating up all of the profits.
The risk reward ratio is decent, but not very comfortable at the moment.

Some of the hypothesis / follow-ups:

• Watch out for private hospital partnerships and the margins improvements due to it. This will be a significant boost to the existing business model and profitability.
• Margins will hold for B2G business for established centers and might improve slightly with revision in CGHS rates.
  Margins will expand as they are expanding to private hospitals and many facilities coming online.
• Asset quality and debt profile will remain at a good level going forward. This will be more evident from FY24 annual report which need to be perused thoroughly. A key monitorable is the depreciation cost.
• Pricing of services would see a gradual improvement in the next few years due to various tailwinds.

Disc: Invested from lower levels

The REIT industry has been seen reducing occupancy levels to their SEZ properties because of the preferential income tax exemptions going away.

Brookfield has had dropping occupancy levels for many quarters and they have not been able to renew or sign up new leases to cover up for the expired leases

Plus they added debt to acquire properties jointly with their Singapore sponsor in AMJ/ JAS quarter. Also issued new units at 254 per share through QIP.

This reduced The Dpu per quarter from 4.8-5 range to 3.8 in JAS -CY23 quarter and to 4.4 in OND-CY23 Quarter.

However the government has made some changes to the SEZ policy by allowing demarcation of the area and allowing non SEZ tenants to take up space.

This will help the industry improve occupancy.

The amendment is yet to be formally notified so this may take 2-3 months.

Recently initiated position building in International Combustion (India) Ltd.

Not related to investing but interesting.

EP-126: Rakhigarhi & Sinauli Secrets, Mahabharata ‘Evidence’, Aryan Invasion with Dr. Sanjay Manjul