This small-cap diagnostic stock may see a correction on expensive valuation

Despite the current buzz in the diagnostic space, amid the resurgence of COVID cases in some parts of the country, ICICI Securities has retained a 'reduce' rating on Vijaya Diagnostic Centre. Nevertheless, the target price has been moved higher from the earlier Rs 530 to Rs 590, marking a potential downside of around 9 per cent from the previous close of Rs 647.1.

PH Diagnostic acquisition- A step in the right direction 

On Thursday (December 21), the diagnostic player in an exchange filing informed that it had completed the acquisition of Pune-based P H Diagnostic Centre for a cash consideration of Rs 147.5 crore. The brokerage sees the acquisition as a step in the right direction, as the acquisition would enable Vijaya Diagnostic to expand its geographical reach outside the Andhra/Telangana region and, at the same time, boost the combined portfolio.

The acquisition of PH can mark its entry into western India and help the company reduce its revenue concentration in southern India to 89 per cent in FY25E, stated the brokerage.

ICICI Securities also pointed out that the outgoing promoter will continue to be with the company for two years, ensuring a smooth transition and integration of this business.

Pricey valuations call for a 'reduce' rating

Furthermore, though the brokerage has a positive stance on the business model and the acquisition, it is of the view that the stock trades at a pricey valuation of 51.3x FY24E and 39.8x FY25E earnings and an EV/EBITDA multiple of 28.3x FY24E and 21.8x FY25E. And amid this background, ICICI Securities continues with a 'reduce' rating, with a raised target price of Rs 590, implying 35.6x FY25E EPS and 19.7x FY25E EV/EBITDA.

As underlined by the brokerage, key upside risks for the stock are better operating leverage for the newly-commenced hub and M&As, which are seen to improvise scale.

Since its listing in September 2021, the stock has gained around 22 per cent from the IPO price of Rs 531 per share.

With a market capitalisation of Rs 6,621 crore, Vijaya Diagnostic is a small-cap company providing professional services ranging from health checkups, home sample collection, and corporate wellness.