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Private diagnostic players minted great sums of money during the covid-19 scare.
However, there's one listed company which follows a slightly different business model than others in the diagnostics space. The company is Krsnaa Diagnostics and is one of the largest players operating on the PPP (Public Private Partnership) model.
We decided to understand the working of the PPP model to understand the company better.
Hope you find the insights useful for your own investments or to add the stock to your watch list.
It's a food processing company, virtually debt free, compounded profits at 20% + consistently, maintained returned ratios like ROE and ROCE at 20% +, doubled its market share in exports in its segment in the last 6-7 years and yet available at less than 7 times Pre-tax earnings.
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PPP model in Diagnostics industry
The diagnostic market in India is around Rs 75,000 crore divided into two parts — private and government.
Out of this, pathology and radiology in private sector is about Rs 45,000 crore (60%) and government sector is about Rs 27,000- 28,000 crore (40%).
PPPs are fast becoming a preferred mode of delivery across various geographies of the country with main focus on rural, remote areas and semi urban areas.
What is PPP (Public Private Partnership) Model in Indian Diagnostics Industry?
In PPP Model, Central & State Governments invite the private established & qualified diagnostic players to perform the diagnostic services (pathology & radiology) under tender based pre-approved long-term contract of 5-10 Years.
The government contributions can vary from providing land/space, upfront capital infusion, basic facilities and giving financial concessions on the capital infused by the private players.
Finer points of the PPP model:
Center/State governments float the tenders for providing affordable diagnostic services in rural and remote areas especially for economically backward people.
The private diagnostic players submit the bids for lower testing rates which are generally 50-60% lower than standard private facilities. PPP model provides for a yearly 3-7% price escalation in the contracts.
The private player performs free diagnostic services for those who are covered under Central or state govt health insurance scheme, having BPL Card, etc. The diagnostic charges are reimbursed by the Central Govt, State govt or National Health Mission scheme.
For others, the govt approved rates are applicable and collected on cash or digital basis.
The land or the space for setting up the diagnostic services are generally provided free of cost by the govt.
How are private players able to offer such low testing rates?
Large addressable customer base from Day 1 of operations, as majority of the population is treated at government hospitals.
Zero doctor referrals fees for patient acquisition and limited expenses incurred in marketing and promotion.
Zero rentals to government hospitals for providing the space and availability of subsidized utility and electricity rates.
Disclaimer: This is not a recommendation to buy/sell Krsnaa Diagnostics. These notes are as announced by the companies on exchanges and only for the purpose of information and education.
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