Somerset, Kitara to score stellar returns from Krsnaa Diagnostics via IPO exits

 Somerset, Kitara to score stellar returns from Krsnaa Diagnostics via IPO exits

Private equity firms Somerset Indus Capital Partners, Phi Capital Management and Kitara Capital are poised to score stellar returns by selling shares in Krsnaa Diagnostics Pvt. Ltd through its proposed initial public offering.

Pune-based Krsnaa Diagnostics has filed a draft prospectus with the Securities and Exchange Board of India to raise Rs 400 crore in a fresh issue and offer 9.41 million shares in a secondary sale by its PE backers.

The preventive healthcare services provider may also consider raising Rs 200 crore in a pre-IPO offering to private investors.

Krsnaa Diagnostics plans to use Rs 150.81 crore to finance the cost of establishing diagnostics centres in Punjab, Karnataka, Himachal Pradesh and Maharashtra. In addition, it plans to use Rs 125.70 crore to repay loans.

The IPO size is pegged at Rs 1,200 crore (about $165 million), two people in the know told The Capital Quest.

Indian PE firm Somerset, which was founded in 2011 with a focus to invest in Indian healthcare companies, is selling its entire 9% stake (after accounting for conversion of preference shares).

Somerset’s co-investor Lotus Management Solutions, whose bet on Krsnaa is managed by Somerset partner and co-founder Mayur Sirdesai, will also exit the company by selling 21,380 shares after factoring the conversion of compulsory convertible preference shares.

Somerset is likely to take home about Rs 375-380 crore from the complete exit while Lotus Management — via Sirdesai — may fetch Rs 1.85 crore.

Both firms invested in June 2015 and are poised to score about 12.5-13.0 times returns on their six-year investment. This translates into an internal rate of return (IRR), or annualised return, of 52-55% in rupee terms excluding dividend income, as per estimates by The Capital Quest.

PE and venture capital firms typically chase about 20-30% returns in local currency terms.

Oman-headquartered Kitara, co-founded by Umesh Khimji and Sachin Kamath, also invested in Krsnaa Diagnostics in June 2015. It plans to sell three-fourths of its 9% stake in the company for an estimated Rs 280-285 crore.

Kitara would stand to make 6.8-6.9 times returns on its six-year investment with an IRR of 38-40% in rupee terms.

Its remaining 2.2% stake could fetch Rs 95-100 crore, The Capital Quest’s estimates show.

Chennai-based Phi Capital, which counts the UK’s CDC Goup Plc as a limited partner (LP), is selling one-fourth of its stake via the IPO.

The investment firm may fetch about Rs 135-140 crore. It may score a returns multiple of 2.5-2.6 times and an IRR of 43-45% in rupee terms from its two-and-a-half year investment.

Phi Capital specialises in growth investments and turnarounds. It has a pan-India focus and prefers auto, retail, healthcare, manufacturing, financial services and education sectors.

Separate email queries sent to Somerset, Lotus Management, Kitara Capital and Phi Capital did not yield a response till the time of publishing this report.

A successful IPO will see Krsnaa Diagnostics join listed peers Metropolis Healthcare, previously backed by buyout giant The Carlyle Group, and Dr. Lal Pathlabs, backed by homegrown PE firm WestBridge Capital.

JM Financial, DAM Capital Advisors (formerly IDFC Securities), Equirus Capital, and IIFL Securities are merchant bankers mandated to arrange and manage Krsnaa Diagnostics’ share sale.

Incorporated in December 2010, Krsnaa Diagnostics provides a range of diagnostic services such as imaging (including radiology), pathology and tele-radiology services to hospitals, medical colleges and community health centres.

The company says it operates India’s largest tele-radiology reporting hubs that can process large volumes of X-rays, CT scans and MRI scans throughout the year.

As of December 2020, it had deployed 1,781 diagnostic centres. In addition to the public-private partnership segment, it operated across 20 private healthcare providers as of December 2020.

Three-fourths of Krsnaa Diagnostics’ shares in the IPO are reserved for institutional shareholders, or qualified institutional buyers (QIBs) owing to the past three-year profitability track record of the company.

In a typical IPO, 50% of shares are reserved for QIBs while 35% for retail investors and 15% for non-institutional non-retail investors comprising corporate bodies and high net-worth individuals.

The company turned profitable in the last fiscal year owing to a one-time gain on the fair value of preference shares.

It reported a net profit of Rs 195.93 crore for the nine months ended December 2020 on revenue from operations of Rs 300.54 crore. For 2019-20, the company reported a loss of Rs 111.95 crore on revenue of Rs 258.42 crore.

Ankit Doshi

The Capital Quest