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Thursday, 9 December 2021
CM RATING47/100
 

Medplus Health Services

Second largest pharmacy retailer

Well placed to capitalise onshift from unorganized to organized retail of pharmaceutical products

MedplusHealth Services is the second largest pharmacy retailer in India, in terms of (1) revenue from operations for the financial year 2021, and (2) number of stores as of March 31, 2021.Company offers a wide range of products, including (1) pharmaceutical and wellness products, including medicines, vitamins, medical devices, and test kits, and (2) fast-moving consumer goods, such as home and personal care products, including toiletries, baby care products, soaps and detergents, and sanitizers.

Company was founded in 2006 by Gangadi Madhukar Reddy, its Managing Director and Chief Executive Officer, with the vision to set up a trusted pharmacy retail brand that offers genuine medicines and delivers better value to the customer by reducing inefficiencies in the supply chain using technology.

Company has grown from operating initial 48 stores in Hyderabad to over 2,000 stores distributed across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal, and Maharashtra.As of September 30, 2021, company operated 546 stores in Karnataka, 475 stores in Tamil Nadu, 474 stores in Telangana, 297 stores in Andhra Pradesh, 224 stores in West Bengal, 221 stores in Maharashtra and 89 stores in Odisha.

For FY2021, revenue from operations, in Chennai, Bangalore, Hyderabad and Kolkata stood at approximately 30%, 29%, 30% and 22% of total revenue respectively.

For the financial year 2021, company’s average revenue per store was approximately Rs 1.59 crore, as compared to the average revenue per store in the domestic pharmacy retail industry of approximately Rs 0.23 crore.Further as of September 30, 2021, Mature Stores had a median payback period of less than 3 years and demonstrated a compounded average same store sales growth of 8.30% on maximum retail price (MRP) from financial year 2019 to financial year 2021.

Company is the first pharmacy retailer in India to offer an omni-channel platform. Through this omni-channel model, company seeks to (1) deepen and extend its customer reach for each of its stores, (2) enhance “convenience” as a core customer value proposition, and (3) retain customers.

Company’s revenue from online sales channel has steadily increased. For the financial year 2021, 2020 and the six months ended September 30, 2021, online sales accounted for 8.98%, 6.99% and 8.44% of total revenue from operations, respectively.

As of September 30, 2021, Company has a primary warehouse, in each of Bangalore, Chennai, Hyderabad, Vijayawada, Kolkata, Pune, Bhubaneshwar, Mumbai and Nagpur. These warehouses are supported by smaller warehouses in cities where it has higher store density.

Company intends to capitalize on the shift from unorganized to organized retail of pharmaceutical products in India, taking advantage of the low base of organized pharmacy retail penetration. Company plans to strengthen its market position by (1) increasing store penetration and customer reach in existing clusters and (2) developing new clusters in other states and cities.

Company also intends to enter one to two new states every year. To establish its presence in new geographies, company intends to use cluster-based approach and replicable store roll-out process, as well as concurrently develop the required supply chain and distribution infrastructure, including establishing primary warehouses in these states to serve as distribution hubs, building fleets of delivery vehicles and hiring delivery personnel.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 600 crore and an offer for sale of Rs 798.30 crore by existing shareholders.

Price band for the IPO is Rs 780 to Rs 796 per equity share of face value Rs2 each.

Objectives for the fresh issue areFunding working capital requirements of Material Subsidiary, Optival for Rs 467.17 Crore of and remaining amount to be used for general corporate purposes.

Promoters of the CompanyareGangadi Madhukar Reddy, Agilemed Investments Private Limited and Lone Furrow Investments Private Limited.Promoters hold an aggregate of 48,233,135 equity Shares, aggregating to 43.16% of the pre-Offer issued and paid-up Equity Share capital.The post-IPO shareholding for the same is expected to be around 40.43%.

The issue, through the book-building process, will open on 13 December 2021 and will close on 15 December 2021.

Strengths

Company has a track record of delivering strong financial performance. Between financial year 2019 and financial year 2021, its total revenue from operations grew at a compound annual growth rate (CAGR) of 16.21% from Rs 2272.73 crore to Rs 3069.26 crore, as opposed to the Indian pharmacy retail industry, which grew at a CAGR of 7.3% for the same period.

Company is second largest pharmacy retailer in India, in terms of (1) revenue from operations for the financial year 2021, and (2) number of stores as of March 31, 2021. For FY 2021, its total revenue from operations represented approximately 15% share of the organized pharmacy retail market in India.

Company has extended its leadership position from offline sales of pharmaceutical products to online sales of pharmaceutical products. For FY 2021 and the six months ended September 30, 2021, company derived Rs 275.74 crore and Rs 158.63 crore of revenue from its online sales channel, respectively.

Company offers value proposition to a wide range of customers, including (1) Value Pricing: involves cutting inefficiencies in the supply chain using technology to deliver better value to the customers (2) Convenience and Fulfilment: offering wide range of products available across offline and online channels and (3) Engagement: stores are operated by trained staff, aided by real time data of customer analysis.

Company can deliver its customers’ online purchases within two hours of purchase in select cities. These services were started in FY 2021, and recent pilots conducted in July 2021 showed promising results where 93% of online delivery purchases were delivered within two hours in select micro-markets of Hyderabad.Company expects to expand its ability to deliver online purchases within two hours of purchase in Mumbai by December 31, 2021.

India’s e-commerce pharmacy retail market is expected to grow at a CAGR of approximately 42% between FY 2021 to FY 2025, from Rs 5625 crore to Rs 23,000 crore. Company is well-positioned to benefit from a fast-growing India e-commerce pharmacy retail market, especially given its significant existing online operations, pricingand last mile delivery capabilities.

Company followslean cost structure which helps in cost efficient procurement.It has alsodeveloped strong relationships with its suppliers over time, which has enabled it to procure products at more favorable rates than competitors.

Company has a Successful Track Record of Expansion Using a Distinct Cluster-based and Replicable Store Unit Expansion Approach. Company has grown from operating initial 48 stores in Hyderabad at the conception of business in 2006 to operating India’s second largest pharmacy retail network of over 2,000 stores, distributed across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal, and Maharashtra, as of March 31, 2021.

Company intends to increase the range of private label products, as it generally derives higher gross margins from sales. By offering wide range of private label products can potentially increase its customer wallet share and increase gross margins.

Company’s large scale of operations and dense store network allows higher efficiency in product distribution to its stores and can enjoy significant economies of scale by leveraging cost efficient procurement, warehouses, vehicles, and delivery personnel.

Weaknesses

For each of FYs 2019, 2020, 2021 and the six months ended September 30, 2021, more than 75% of revenue from retail sales was attributed to sales of branded pharmaceutical products, manufacturing, and sale of which is tightly regulated by various laws and regulations. Any changes to such legislation could have a material adverse impact on its business, sales, and profitability.

One of company’s Corporate Promoters, Lone Furrow had pledged 1,676,418 Series B2 CCPS held by it in favor of Zash Traders aggregating to 7.64% of the pre-Offer equity share capital of Company, on a fully diluted basis which have since been converted into 8,543,340 Equity Shares (Pledged Shares). Any exercise or enforcement of such pledge could dilute the shareholding of Lone Furrow Investments Private Limited, which may adversely affect business.

There have been instances of negative cash flows in the past. Cash flow from operations was negative Rs 6.59 crore in FY2020.

Company has issued a corporate guarantee to lenders on account of a loan of Rs 185 crore availed by Optival, for funding Optival’s working capital requirements. Certain covenants in these agreements impose restrictive conditions.

Company’s operations are subject to extensive regulation governing the drug and dispensary markets. Any non-compliance with and changes in drug and dispensary laws and other applicable regulation may adversely impact business.

Company has applied additional trademarks, under various classes with the Controller General of Patents, Design and Trademarks, Government of India, of which, some of these applications are currently pending approval. Until such registrations are granted, company may not be able to prevent unauthorized use of such trademarks by third parties, which may lead to the dilution of goodwill.

The profitability of pharmacy retail business depends, for a large part, on the utilization of prescription drugs. Utilization trends are affected by introduction of new and successful prescription drugs as well as lower-priced generic alternatives to existing brand name drugs generallydue to higher gross margins on the sale of generic alternatives. Inflation in the price of drugs can also adversely affect utilization.

Company has previously delayed in complying with certain provisions of FEMA (Foreign Exchange Management Act). Consequently, it may be subject to regulatory actions and penalties for any past or future non-compliance.

Valuation

For FY 2021, consolidated sales were up by 6.92% to Rs 3069.27 crore compared to FY 2020. OPM increased by 240 bps to 7.06% which led to 62.09% increase in operating profit to Rs 216.67 crore. Other income increased 24.65% to Rs 21.55 crore, while interest cost rose 17.20% to Rs 54.85 crore and depreciation increased 18% to Rs 88.27 crore.PBTafter EOincreased 223.97% to Rs 95.10crore.Tax expenses for FY2021 was of Rs 31.99 crore compared to tax expense of Rs 27.57 crore in FY2020. Net profit rose 2836.05% to Rs 63.86 crore.

For H1FY2021, consolidated sales were up by 28.54% to Rs 1879.92 crore compared to H1 FY2020. OPM increased by 173 bps to 8.44% which led to 61.65% increase in operating profit to Rs 158.65 crore. Other income increased 30.60% to Rs 10.99 crore, while interest cost rose 15.66% to Rs 31.32 crore and depreciation increased 29.73% to Rs 54.76 crore.PBT after EO increased 124.19% to Rs 83.56crore.Tax expenses for H1 FY2021 was of Rs 17.19 crore compared to tax expense of Rs 15.01 crore in H1 FY2020. Net profit rose 196.15% to Rs 66.91 crore.

The TTM EPS(excluding extraordinary items and relevant tax) on post-issue equity works out to Rs 9.07. On the upper price band of Rs 796, P/E works out to 87.76.There are no listed companies in India that engage in similar business.

At the higher price band of Rs 796, the offer is made at Post-issue EV/ TTM Sales of 2.71times, on a post-issue equity share capital of Rs 23.85 crore of face value of Rs 2each.

 

Medplus Health Services: Issue highlights

For Fresh Issue Offer size (in no of shares )

 

- On lower price band

7692307

- On upper price band

7537688

Offer size (in Rs crore)

600

For Offer for Sale Offer size (in no of shares)

 

- On lower price band

10234551

- On upper price band

10028831

Offer size (in Rs crore )

798.29

Price band (Rs)

780-796

Minimum Bid Lot (in no. of shares )

18

Post issue capital (Rs crore)

 

- On lower price band

23.89

- On upper price band

23.85

Post-issue promoter & Group shareholding (%)

40.43

Issue open date

13/12/2021

Issue closed date

15/12/2021

Listing

BSE, NSE

Rating

47/100

 

Medplus Health services: Consolidated Financials

 

1903 (12)

2003 (12)

2103 (12)

2009 (6)

2109 (6)

Sales

             2,272.74

             2,870.60

             3,069.27

             1,462.56

             1,879.92

OPM (%)

5.24%

4.66%

7.06%

6.71%

8.44%

OP

                119.17

                133.67

                216.67

                  98.15

                158.65

Other inc.

12.20

17.28

21.55

8.41

10.99

PBIDT

                131.37

                150.96

                238.21

                106.56

                169.64

Interest

                  50.03

                  46.80

                  54.85

                  27.08

                  31.32

PBDT

                  81.34

                104.16

                183.37

                  79.48

                138.32

Dep.

                  58.59

                  74.81

                  88.27

                  42.21

                  54.76

PBT

                  22.75

                  29.35

                  95.10

                  37.27

                  83.56

Share of Profit/(Loss) from Associates/JV

                       -  

                       -  

                       -  

                       -  

                       -  

PBT  before EO

                  22.75

                  29.35

                  95.10

                  37.27

                  83.56

Exceptional items

                       -  

                       -  

                       -  

                       -  

                       -  

PBT after EO

                  22.75

                  29.35

                  95.10

                  37.27

                  83.56

Taxation

                  10.83

                  27.57

                  31.99

                  15.01

                  17.19

PAT

                  11.92

                    1.79

                  63.11

                  22.27

                  66.37

Minority Interest

                    0.00

                   (0.39)

                   (0.75)

                   (0.33)

                   (0.53)

Net Profit

                  11.92

                    2.18

                  63.86

                  22.59

                  66.91

EPS (Rs)*

                    1.00

                    0.18

                    5.36

 #

 #

* EPS is annualized on post issue equity capital of Rs 23.85 crore of face value of Rs 2 each

 

 

# EPS is not annualized due to seasonality of business

 

EO: Extraordinary items. EPS is calculated after excluding EO and relevant tax

 

Figures in Rs crore

 

Source: Capitaline Corporate Database