SRL Diagnostics poised for growth after Manipal Enterprises picks 20% stake

Even as American investment company TPG Capital-backed Manipal Health Enterprises picks up a 20 per cent stake in India's largest diagnostic chain SRL Diagnostics, and is working to acquire a majority stake in the entity, analysts point out that SRL is aiming to grow at a 15 per cent compound annual rate (CAGR) over the medium term.

SRL, which draws 16 per cent of its revenue from Fortis Healthcare, is set to gain from the merger with Manipal Hospitals, in a deal that makes the combined entity the largest corporate hospital chain in the country.

SRL has grown at a 14 per cent CAGR between 2011-12 and 2015-16, while its earnings before interest, tax, depreciation and amortisation (Ebitda) margins have improved from 10 per cent to 20 per cent during the period, reports Edelweiss Securities. In January SRL said it became the first Indian diagnostics company to cross Rs 10 billion in revenue in 2017, making it the largest diagnostics company in the country in terms of revenue.

Earlier this week, the board of directors of Fortis Healthcare approved the sale of its 20 per cent stake in SRL to Manipal Health. Ranjan Pai, managing director and chief executive of the Manipal Education and Medical group (MEMG), and TPG will invest Rs 39 billion in Manipal Hospitals. The funds will be utilised to finance the acquisition of a 50.9 per cent stake in SRL (20 per cent from Fortis Healthcare and 30.9 per cent from other investors, for which discussions are on). Established in 1995, the diagnostics chain deals with 15 million patients annually in 600 cities and enjoys a 6-7 per cent share of the organised diagnostics market. Edelweiss said SRL had one of the best walk-in ratios in the sector and conducted over 125,000 tests per day.

“Radiology is a capital-intensive business, and hence while the margins are better, SRL was careful not to grow the top line at the cost of the bottom line. Hence, it rationalised the business and shut down non-profitable centres," said a person close to the development.

The company is relying on new collection centres and direct clients under the franchise model to drive growth in the future. It expects the existing centres to grow at 5 per cent.

Deepak Malik, analyst with Edelweiss, pointed out that SRL currently earned 2.5 per cent of its revenue from the public-private-partnership (PPP) agreements that it had with states such as Himachal Pradesh, Jharkhand and Uttar Pradesh.

“Unlike Himachal Pradesh and Jharkhand, where the company has set up its own labs, a different model is followed in Uttar Pradesh, where it operates only through collection centers. Although the Ebitda margins in this model are lower at 8-12 per cent since prices of the majority of the tests are capped, they may also include certain high-end tests outside price control, which could help improve margins,” the Edelweiss report said.

SRL currently earns Rs 200 million in revenue and has the Ebitda margin of 22 per cent in Himachal Pradesh. Edelweiss said the company expected to win new PPP tenders, banking on its track record of operating labs under this model.

SRL currently earns 16 per cent of its revenue from Fortis hospitals. Analysts expect revenue from this stream to grow with the expansion of the Fortis network and now that the combined Fortis-Manipal entity is the largest hospital network in the country.

The deal comes at a time when the founders of Fortis Healthcare, Malvinder and Shivinder Singh, are facing probes over alleged financial irregularities at Fortis Healthcare and Religare Enterprises. The Serious Fraud Investigation Office is investigating the allegation.

SRL might be able to shake off the legacy of the Singh brothers and look forward to life under new promoters.