Medplus Health IPO: Valuations look expensive, subscribe for long-term gain

Medplus Health Services Limited is tapping the capital markets with its issue which opens on December 13 and closes on December 15. The issue is for a fresh issue of 600 crore and an offer for sale of Rs798 crore. The price band is Rs780-796. The company is into the business of pharmacy stores and currently operates in seven states with over 2,300 stores. The company has added 350 stores in the first half of the current year ending September 2021, and would be adding a similar number in the next six months as well. Going forward the planned expansion of stores is to add close to 1,500 stores each year over the next two years.

Earlier the company had allotted 52,51,111 shares to 25 anchor investors comprising of 36 entities. The top allocation was made to four anchor investors equally who were allotted 3,46,086 shares or 6.59 per cent each. These were Abu Dhabi, Blackrock, Fidelity and Nomura. This was followed by five domestic funds being allotted an equal 3,01,518 shares or 5.74 per cent of the anchor book each. The top nine anchor investors were allotted 55.06 per cent of the anchor book. Seven Domestic funds comprising of 18 entities were allotted 17,96,238 shares or 34.21 per cent of the anchor book.

The company believes in a model of adding stores in a contiguous manner and saturating the existing areas it operates in. It would be adding more stores in the seven states it operates and would spend the next couple of years in concentrating in these states and effectively doubling and trebling the store count.

The pharmacy business offers the best growth prospects because of its unique business. It has the highest revenue per square foot compared to other retail formats with revenues of between Rs 30,000-50,000 per square foot per year compared with Rs 25,000 for food and grocery and also food services (QSR). While jewellery is substantially higher at around Rs 1,40,000 it is simply not comparable. It has low store expenses including employee costs, low inventory costs and high inventory turns and also low cost of opening stores.

The shift from unorganised retail to organised retail would continue and the benefit from higher scale will benefit organised retail. Medplus has a market share of 21 per cent of the organised pharmacy business in FY21. The company has an omnichannel business and uses its 2,165 hyperlocal stores to push sales. Online orders are delivered from these stores in less than a couple of hours and in case a product is not available, the customer is given an option to get the balance product later or all products at one go say in 24 hours. This model reduces the cost of delivery, maximises sale and helps in beating the competitor who may not have widespread store presence.

Medplus is the second largest pharmacy player after Apollo and is nine times the size of the third largest player in terms of stores. This signifies the reach and the difference between the top two and the rest in the field. In the metro cities where Medplus operates it has leadership position and the number is a high 29 per cent in Bengaluru and 30 per cent in Chennai where it is the leading player. It has a share of 30 per cent in Hyderabad where it is the number two player and 22 per cent in Kolkata also at number two. The company adds stores in a cluster format and this helps in achieving store density and then expanding the store network I n the surrounding areas of the city.

The company banks on shorter delivery time, higher fill rate and data enabled personalised engagement. It has a three-pronged strategy on discounts with no discounts on orders up to Rs 200. It offers up to 10 per cent on orders from Rs 200-1000 and 20 per cent on orders above Rs 1,000. The company earns a retail discount of 20 per cent and a wholesaler discount of 10 per cent from pharma companies which ensures a steady margin on its sales. In case of products like FMCG, devices and wellness products the commissions earned are in different slabs.

The company also offers diagnostic services like tests etc in Hyderabad which is typically in the morning when stores do not have heavy footfall. Currently this service is managed from labs in Hyderabad and would be extended to other metros in a phased manner. It involves no capex or additional costs and all reports are sent on WhatsApp. The way forward is to improve revenue per store and the contribution from FMCG and private labels. This would help improve the gross margins and result in better profits for the chain. The promoter family is not selling a single share through the current offer for sale which demonstrates their confidence in the business going forward.

Revenues of the company have grown from Rs 2,272 crore in FY19 to Rs 2,870 crore in FY20 and Rs 3,069 crore in FY21. In the first half of the current year FY22, they have grown further to Rs 1,880 crore. Net Profit has grown from Rs 12 crore to Rs 2 crore to Rs 63 crore and Rs 66 crore in the first half of the current year. The company reported diluted EPS of Rs 5.75 for the year ended March 2021. The PE at this EPS would be 135.65-138.43 times. In the current six months ended September 2021, the EPS has improved to Rs 5.99. If one were to annualise this the PE would reduce to 66.44 times. The company has growth and good prospects going forward.

The business model is one of rapid growth and the business highly scalable. While the valuations look expensive, investment is warranted only for the medium to long term.

(The author is the founder of

Kejriwal Research and Investment Services, an advisory firm)