Medplus Health Service second largest pharmacy retailer

Stock Opportunities
21

It isn’t much. If you need 6mn to build the store from group up, the maintenance capex can safely assumed to be very low and very minimal. Avg store operating EBITDA margins (after factoring in rental expenses are >10% for mature stores). MedPlus has 15mn of avg annual sales per store. Can safely assume an annual operating EBITDA of 15 lacs per store.

I doubt if the depreciation (25% at best for 1st year) would be so high. For depreciation (proxy to maintenance capex) to eat up the entire store level EBITDA, the annual capex would have to be equal to setting up costs from ground-up.

That said, I can’t think of what kind of annual capex would a store need - annual painting of walls etc? Maybe some annual wood work? Man all of it would be under 2/3 lacs at best and that gives you an annual depreciation of 75k per store or reduces operating EBITDA to 13 lacs. Hardly a dent given the huge store growth that’s in offing.

imo, PAT would be the incorrect metric here since with higher growth, PAT growth would be hockey stick since the corporate costs would be absorbed over a larger base. We can’t predict PAT with much accuracy.

Now if you look at sales growth, MedPlus was able to grow revenues by 16% between 2019 and 2021. In these two years they only opened 200 stores.

They’ve opened around 250 in H1FY22 and were opening around 60 per month in H2FY22 (wave 3 will slow this rate down a little). Assuming a conservative number of 600 stores per annum for next 2 years, we have 1200 new stores. That’s a 60% growth over the base of FY21 store count.

H1FY22 revenue was 1800crs. H2FY22 will likely be higher than H1FY22 and hence we’re looking at sales closer to 4000crs in FY22. FY23 will have even better sales growth and assuming 25% growth (industry growth rate but MedPlus is likely to grow higher), we can see ~5500crs of revenue.

The company plans to open 1k stores a year going forward and I do foresee MedPlus clocking a higher revenue than what I’m estimating. Their internal accruals will continue to aid their growth.

Current PAT margins are 4.5%. Increasing share of private label and better absorption of semi-fixed costs (corporate costs mainly) will see this inch closer to 6%, which gives us an estimated PAT of 330crs in FY24.

So current valuation would be 36x FY24 earning.

Seems richly priced to me and I’m waiting for a 5/10% dip to enter :slight_smile:

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22

Personally I don’t like current valuation and the environment of investing in general as most company have very less margin of safety.

Personally have not seen MedPlus much in North Indian where I live but have seen appollo pharmacy and also have contacts as my relative’s have rented 1 store to them and also to add know there staff a little bit.

Looking at the model it is quite sticky in nature as when we just see the amount of bills that most can generate like many people have been buying from same store for more then 5 year straight and they only buy from different if they are not able to buy at there store and mostly they order new inventory According to there needs also like when we buy some special medicine they are mostly not available at most stores but there network enable to get it within a day or two that other can not compete as everyday investory is filled up and also the quantity they keep is quite small that make inventory cycle to be very high.
We also see that these shop need trust as medicine many times is a matter of life and death and people don’t look over prices that much.

But as a disclaimer if we look at long term margin and pe ratio alone we can see places like usa and Europe most pharmacy like cvs trade at 18-20 that is less then most retail giants as it has a higher amount of dead materials chances loss and also is very fragmented in nature(you will drive 10km+ to buy grocery but will not want to do the same with pharmacy so it need to have more stores).

Market opportunities is very big as many pharmacy shop that is unorganised will shift, whole pharma consumption is increasing.

So this industry have a chance to not only gain market share but also to leverage the power increase spending.

There will be many winners but will not invest as margin of safety is quite low right now + the company is new so need to see results before investing so this could be a long term compounder as story is quite big and pragmatic

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23

Following is my understanding/ take:

In FY20 they opened 306 stores and in Fy21 they opened 245 stores (not 200)

Every one tries to show case their best before the IPO, so i would discount the run rate for H1 FY 22 significantly.

New clusters will take some time to establish hence may not result into 1.59 cr/ store that they are getting from a matured store.

If the company itself is indicating 5% EBIDTA, will not consider PAT more than 2.5%

As a result, I am assuming not more than 4000-4200 cr TOI for FY23 and around 100 cr PAT

24

Not sure where is this info coming. The first post in this thread is from DRHP per which stores opened in FY21 = 306 and FY 20 = 122. In the pre-IPO meet, Mr. Reddy explained the slow growth on lack of funding at that point of time. I believe Warburg Pincus invested sometime post 2019.

In H1FY22, they’ve opened around 250 stores and were opening around 60/month in Q3FY22. Safe to assume that they’ll add atleast 300 more stores (conservative) which takes the total store addition in FY22 to 550+ (more than FY21 and FY20 combined)

Where is this coming from? The company has an EBITDA of around 8/9% and PAT of 4.5%.

Sure you can make your own calculations. But let me point out that you are saying that the Company will actually grow in single digit %. Sure I mean. I disagree.

As for PAT, pretty sure they’d be around 130crs of PAT in FY22 itself. FY23 should more be like closer to 180 to 200crs or maybe more. Time will tell.

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25

Medplus has Key competitiveness when compared to online pharmacy players even when they are backed by big players due to below reasons as per me

  1. MedPlus is able to offer 20% discount which is not linked any payment method or any gimmick just linked to the amount you shop. All e pharmacy players will find difficult to beat this value as there are higher customer acquisition cost and there cost of goods will higher as MedPlus will be having better pricing due to high volume.

2)omni channel presence is the way to go forward, all other e pharmacy are adopting this stategy by one or the other way. But they will need put efforts establish shop which won’t be easy as online platform sales. Will require substantial time for them. ( 1mg is planning for 500 stores in 3 years time compared 1000 stores per year by MedPlus ). I feel netmeds can take advantage of reliance fresh outlet in this case.

3)MedPlus strategy to concentrate on existing location and penetrate deep will be an good strategy as this will cement the leadership position in those areas killing the competition.

4)as per my opinion chronic diseases patients who are in general above 35+ age will opt for in-store experience because why order online when u can find same experience near your home which is a walk away. Also this age group will opt for in-store experience than the digital shopping. Hence it will be difficult to disrupt MedPlus business their location.

5)MedPlus chooses locations based on the density of population all the location which choosen now are th most densely populated areas in the country and they will be trying to penetrate the Delhi and maharastra market which are in their portfolio. This was commented by their CEO in some interview during IPO.

6)Have used MedPlus Mart application it’s comparable to other apps it is good…

Thanks you for some of the insightful threads. If some one can put out valuation comparision between e pharmacy players and also if we can compare with cvs and Walgreens also it may help to understand the valuation. ( Tried to do it but not able gather all the info )

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26

  1. Apollo Pharmacies has signed an agreement with Amazon to list their pharmacy on amazon.

  2. Apollo already has its own healthcare platform called Apollo 24/7 which offers secure on-line consults, consultation bookings and medicine orders from an Apollo Pharmacy close to their home for delivery at their doorstep in two hours.

  3. Apollo 24/7 has over 30 million registered users.
    Their omnichannel network generates over 200 million prescriptions annually. With Amazon’s partnership they intend to grow this by 50% over the next 2 years.

There is so much competition from pharmacy, tata mig also and medplus don’t advertising their brand . I don’t know how they will face the competition from cash burning companies and apollo hospital.

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27

How do they plan to make money? It is like MedPlus splitting up its 4% PAT margins with a giant like Amazon. This is one of the key reason that investors need to understand here.

Can the partnership of Apollo-Amazon where Amazon brings volumes but takes away part profits sustainable? That’s the key question.

EDIT - Also, I believe partnership with players like Amazon wouldnt be too useful in this eco-system. What you need is what PharmEasy has - integration from doctor network to diagnostics and then to pharmacy.

Through this integration - you can literally compete with pharma cos on what brand to push etc. Creates a lot of opportunities and bargaining power. But PharmEasy splits its distribution margins with retailers (it charges commission).

So we need to ask these questions from MedPlus - plans for backward integration to doctor consultation and then to diagnostics.

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28

Medplus by now will have a customer base in key location it would be difficult for any player to disrupt this because there is no value add from other players. except the advertising. Even if multiple players fight in same location there is greater chance of survival of fittest which in this case is apollo or MedPlus.

Agree with @luckbychance bringing in Amazon will eat in profits where already margins are low.

One good question for MedPlus management would be how they will capture new location where the competition is already present.

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29

we have to remove the investor hat from our head and Just wear a customer hat and think.

Is this a really difficult to penetrate in b&m space? not at all.

We usually buy two kind of medicines, one if i have headache(Acute case), i buy a tablet from nearby store. Will i look for a medplus or apollo or thulasi? Big no. All i look for a shop with name ending medicals, i wont even remember the medical name which i have purchased. Another if i have a diabetes(Chronic case), will i have any reservation to buy only in medplus or apollo? Again no, since it is a big purchase all i need is the shop who give me big discount. People will travel distance to bulk medicine, if it makes sense (My father travel 27 kms to buy medicine from thulasi pharmacy which gives good discount)

The moment apollo opened the store opposite to medplus, medplus will lose some sales and the moment medplus opened a store opposite to apollo, apollo will lose some sales. It is not safe to say that it is difficult for other players to disrupt. If other cannot value add here, then medplus also cannot do value add.

In one case we might not go to some medical shop, even though they provide the bigger discount, is whenever you go with a prescription and they says some medicines are there and some are not. These thing medplus has some upper hand due to their density of their store, they will incur less operational costs in replenishing stores.

Online space is currently is cash burn stage, if medplus wish to make the cash burn up against tata and ambani, they wont even have a chance to stand. Let big boys have fun

Disc: Interest in this space, no position yet

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30

My family unfortunately has to buy 25k worth of medicines per month. And we buy ONLY from medplus. Their 20% discount is nice. In fact in Hyderabad, Medplus is decidedly better than everyone else including Apollo.

They have stock of most medicines and if it’s not available, they can place an omnichannel order and get the meds in few hours. I suppose it remains to be seen if they can expand well outside south.

Invested and a long term customer for many years.

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31

@vij Will you still stick to MedPlus if same service offered by Apollo Pharmacy with 25% discount?

32

@Sidharth_Chandraseka
I find that Apollo Pharmacy offers consistently subpar service. I have tried multiple locations and Medplus is better in the following

  1. Availability of medicines and interest/drive to procure them if unavailable.
  2. Interest and attention of the agents

Actually the Apollo Pharmacy outlet is closer to me, but I stopped going there. Honest to God, they are not even comparable for me. I am from Hyderabad.

I am a Medplus customer for a reason, and if another player emerges who offers similar service and better price, I’ll jump ship.

PS: People who are blessed enough to be low-value customers for pharmacy stores, will likely be okay with almost anyone. Stay blessed. Health is indeed more than wealth.

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33

That’s the trick here, no matter where you place and what you do, finally cost is king in this market.

Easy to penetrate into new place and easy to lose the same place to competitor. Very less moat in offline space.

34

My old man takes chronic medications for Diabetes, blood pressure, heart etc. Yearlier I used buy it from a nearby medical store who used give discounts from 10-20%. Monthly bill used to be Rs. 4 - 5000. Now he himself goes to a PM Jan Aushadi Kendra and buys. The same medicines cost from Rs. 2 - 2500 - almost 50% less!

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35

@Caution_Investor
I haven’t used Jan Aushadi Kendra yet. I did have a look before, but the manufacturers seem 2nd tier small and micro units, and I am not very confident of their quality control. I only buy meds manufactured by the big manufacturers who also export with FDA approval. I can tell you many people have similar thoughts (and many don’t).

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@vij Even I am apprehensive of the quality and refused buy it from there. But my father doesn’t give me the Doctor prescription and he himself goes to that Jan Aushadi shop and buys. He has been using since a year and finds no difference in quality of medicines or his health. Also he believes in our PM Modi :slightly_smiling_face:

37

There no customer stickyness in this space. People will go where conveanience is there and best rate is provided.

Medplus strategy to go deeper in the current location will provide that convince factor and they are providing 20% discount which is best in the industry. For online players to provide more discount than this would result in huge cash burnout.

On apollo I have faced the same issue with Bangalore shop their inventory and agents behaviour are not ok. This was 2 years before.

Disclaimer : invested in small tracking position .

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38

I see that many have thoughts that price is the main deciding factor and moat, if any, in this sector…
I am just thinking in which other field/sector/business it is not? I think it is just that it is currently very evident in this business.
If we compare to telecom, Jio disrupted with price but ultimately had to play catch up on quality of service and it had its focus on quality as well and hence it sustains today…

If price is only road to success here, then RIL has a clear right to win and they know exactly how to play on price.

I think the real key is - Execution & Delicate balance of Price (via cash burn or strategic means), backward/forward integration, developing an ecosystem and capability in the top team to have a unique/clear vision and ability to execute with perfection…

Here also, RIL has top notch execution capabilities.

Dmart has also flourished alongside the same RIL by virtue of its unique business model & execution. Many know that the moat of Dmart is very simple but still so difficult to emulate for even RIL & Tatas…So, the real moat for this business, according to me, would be - Understanding of this business & its future along with clear vision by its Promoters & Top management . Along the road would come many occasions where tough decisions need to be made - Like how this Pandemic made Dmart foray into Dmart Ready, although very reluctantly initially but now also it is one of the most unique online model they are following…the true character of the top Leaders would be seen in such occasions…

Maybe if we are aware of crucial business decisions taken under stressful environment, it would make us understand how good the Leaders understand their own business. This is still one of the most disruptive sectors…a gem of an entrepreneur suddenly sold his diagnostic baby to a unicorn…therefore, it would be important to be 100% sure that the top leaders here understand their business better than the top leaders of RIL or Tatas…and if they do, then rest will follow…

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39

To me, Med+ is for medicines similar to DMart is for groceries. However, the following are the potential concerns:

  • Currently, there is lack of awareness or distrust or unfamiliarity with generic medicines. People don’t realize that many of the branded ones we buy are generic formulations only. As per our investigations, both generic and so-called branded medicines go through same quality checks on their way to medical shops. Every batch of medicine that goes to medical shops are tested by the govt and/or third party before they hit the stores. So efficacy shall be in permissible limits irrespective of generic or branded formulations. Also, the reputed brands simply outsource their manufacturing. So don’t think that the brands manufacture in their pristine factories. Unbranded generics and branded ones may come from same factory. Once the awareness and trust develops, generic shops would give serious competition to Med+, as the key differentiator then would be the price, and generic shops trump Med+ hands down.
  • Many of us assume that Med+ only sells branded medicines. But we should not forget, many branded medicines are generics only. The quirk in generics, and branded generics, is that the MRP is set very high, sometimes comparable with original formulations. Selling price would be 50 to 90% less. You may find exact same Cipla branded generic medicine both in Med+ and generic medical shop. But Med+ would give 20% discount on MRP only, while it can be bought at 50% discount from generic shop (yes, exactly same medicine). So the margin Med+ has for such generics is high. You can verify this in your area. In short, Med+ does not always give you the lowest prices. Customers may discover this anomaly.
  • Med+ online delivery is much slower compared to Apollo, for example. Apollo does express delivery, where we get some medicines within 1 or 2 hours. In case of, Med+ it is usually next day delivery (or pick up). But in my experience, Apollo is not reliable, and at times they screw up. Never faced any issue with Med+. However, this may change and Apollo could up their game.
  • As the drones become mainstream for deliveries, the costs of eCommerce players like PharmEasy may go down drastically. Speed of deliveries could also increase significantly. We already have quick commerce players in retail, even without drones. This, in my opinion, is a serious threat to the dominance of Med+, Apollo, and even unorganized retailers. We can’t simply ignore ecommerce players since they’re currently loss making. Entry of drones could drastically disrupt the equations.

Med+ may evolve to meet these concerns, but one may not assume smooth sailing.

Disclosure: Not Invested, but interested, so tracking

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40

Can you pls elaborate on who are these generic shops? As far as I am aware, all these organized as well as unorganized pharmacies sell branded generics. Are there any specialised shops selling only unbranded generics? If the generic is unbranded then who owns them? Are they private labels?

Also, what exactly is a private label of Medplus…is it an unbranded generic? Thanks