SastaSundar Ventures Ltd (a new venture in the nascent epharmacy space)

[sahil_vi]

In this post I am presenting my investment thesis for SastaSundar Ventures.

Industry structure and Tailwinds

The frost and Sullivan report from 2018 does a good job of explaining the e-pharmacy industry. To summarize the 50 page report in a few points:

1. Macro factors: india has a large and aging population. Healthcare Spending as % of GDP will increase. GDP will increase. Indian Pharma market will increase.
2. e-Pharmacy Growth: the e-Pharmacy market in India is estimated to be around US $512
   million (~INR 3,500 Crores) in 2018 and is estimated to grow at a CAGR of 63% to reach US $3,657 million (~INR 25,000 Crores) by 2022. If you check the YoY growth figures of large e-pharmacies, this won’t seem like a stretch to you.
   
3. The e-Pharmacy model could account for 15%-20% of the total pharma sales in India over next 10 years, largely by enhancing adherence and access to medicines for a majority of the under-served population. If the Pharma market becomes 2.5x from 41B$ in 2021 to 100B$ in 2030 (9.5% CAGR), then e-pharmacy would be a 20B$ opportunity in 2030. That would be a CAGR of 24% for 8 years between the 2 estimates of e-pharmacy market size F&S provide to us. 63% growth for 3-4 years, and 24% growth for 8 more years.
4. Key drivers for high industry growth: internet penetration, GoI digital india initiative, e-healthcare initiatives by GoI, increase in health insurance penetration, ayushman bharat, changing disease pattern from communication to lifestyle diseases (require frequent medication), growth in indian economy.
5. There are 2 business models prevalent in the sector: inventory based and market-place model. In inventory based, company maintains inventory of the medicines and in marketplace based, user is matched to a seller of medicine. In fact this is the case for all ecommerce websites/apps. Most of them like Amazon and Flipkart are hybrid. They keep inventory and serve as a marketplace with inventory maintained by the seller.
6. Key risks to existing e-pharmacy players: B&M chains like Apollo pharmacy can establish online presence, established e-commerce players can enter (already happened with amazon and reliance), risk of consolidation (already happening)
7. Healthcare ministry recently (2018) announced some good e-pharmacy rules/guidelines. Key/primary takeaway for me was that e-pharmacies cannot advertise in any way or form on any medium. Need to share data with government for public good. Cannot sell certain classes of drugs like habit forming drugs.
8. Why there is a need for e-pharmacies: single retail pharmacies due to their low volume purchase drugs at high prices from distributors. e-pharmacies due to large-scale purchase (from distributors or sometimes pharma companies directly) are able to drive better bargains and thus make the system as a whole more efficient. Quality also goes up since single retail pharmacies cannot control for quality easily. Very hard for single retail pharmacies to stock all drugs forcing customers to visit multiple pharmacies. No such problem for e-pharmacies since inventory and orders are centrally managed. e-Pharmacies have the resource to invest in the latest information technology software. Digitalization of pharmacies enables them to record and track transactions and increase productivity. e-pharmacies due to their centralized approach are also able to deliver to many rural locations in the country, which is a first. Many of these places do not have any proper B&M pharmacies even.

SastaSundar Business Model

The name of the company is essentially a callback to indian values of Savings and Quality. While some urban indians might find it funny or cringe worthy, I think most indians would appreciate the values it represents. SastaSundar has 3 business verticals. e-Pharmacy, FMCG (Own brands + other brands), diagnostics. Their mission statement is “Providing comprehensive solution for all the healthcare needs- from preventive care to diagnostics to medicine procurement to doctor consultation”.

The core business is the e-pharmacy business. They only make 2cr from the diagnostics biz which is why most of the analysis is for the e-pharmacy biz. Sastasundar has an interesting hybrid sort of online-offline business model. They allow users to either place an order online (on the app/website) or to walk into their stores which are asset/inventory light and place orders. Orders are always delivered to your home, even if you place an order inside their store. This is because SS understands the importance of inventory management. Customer experience suffers if pharmacist tells them “I dont have medicine X”. Hence, thanks to their inventory based model they are able to ensure that they always maintain enough stock of all medicine and fulfill all orders. So why do they have the storefronts? I personally find this angle fascinating. It helps in 3 ways:

1. A lot of people who require medicine are old and digitally uneducated. Many of them also refrain from trying to learn how to use an app. all such folks can simply walk into the store.
2. This enables SS to utilize a key part of their differentiated offering. As highlighted in earlier posts, they have a concept of a health buddy. Think of this as your personal assistant. They’ll help you place an order, create a personalized relationship with you. Ensure you return back. No wonder that SS’s 90% orders come from repeat customers. This kind of customer loyalty is extremely hard to build. SS also ‘sweats’ their healthbuddy assets well by ensuring same person does multiple tasks for the company. This hybrid model ensures that SS has good brand loyalty.
3. This hybrid model also ensures that they are able to capture mindspace of the customer. This is extremely important specially for e-pharmacies since they cannot advertise. The assetlight (inventory light) storefronts (which are franchises not owned by SS) also serve as a tool to stay in the mindspace of the customer. Have seen same mental model in other investments: Saregama (carvaan), and Google (Google home, pixel) and Amazon (Echo) etc.

SS also cross-sells FMCG and their own brands. Own brands are of course at a much higher margin and FMCG also, they dont provide much discount. This cross-selling enables convenience for the customer and helps them capture larger pocket share of the customer. If reliance can enter e-pharmacy, then SS can also sell biscuits.
They seem to have an interesting process in terms of how they select which OTC medicine to sell.

Screenshot 2021-05-22 at 8.03.38 AM|485x101

Their own brands have been created in a thoughtful way after analyzing the needs and wants of the customers and gaps/holes in the marketplace.

Perhaps the boldest slide one can find about SS is the vision 2024 slide in their FY18 investor presentation which has been removed from subsequent investor presentations. Suffice to say, management must have received feedback not to share 6 year aggressive visions, but the fact that this slide appeared in public domain leads credence to the hypothesis that this is what the management’s vision and targets are. Of course timelines can and will change and are dynamic. Whether this happens in 2024 ot 2026, it would be a great thing if and when management can meet these bold targets:

In FY18, the distribution of GMV (gross merchandise value) looked like this:

This sets a clear target of 7000cr of revenue with 15% EBITDA margins. We will analyze both the growth and profitability in subsequent sections.
Management strategy for achieving the said growth:

Also to achieve this growth, SS is planning to target top 12 states in India, have 1 warehouse in each of the states, and open 250 micro pharmacies (SS assetlight stores) near each warehouse. They plan to capture 10% of the pharma market in each such region. (I think what they mean is 10% the e-pharmacy market).

SS also has a B2B initiative called ‘Retailershakti’ which would mean, SS would act as distributor for independent retail pharmacies, thus driving more efficiencies and revenues. Retailer Shakti provides competitive advantage to retailers’ customers in terms of wide range of products, price &
experience. It provides the widest assortment of 35000+ products across 120 categories from regional, national & international brands at one place to online retailers & wholesalers at good margins.

Most e-pharmacies allow one to get diagnostics done but they focus on tie-ups with existing brands. SS has taken a different approach by starting their own diagnostics called Genu labs. I like this approach for 2 reasons: industry has very good unit economics and secular growth runway. No need to provide discounts. Scale up here would boost overall business metrics. Genu labs is still very small. Did 2cr revenue in FY20 which was a 100% growth over FY19.

SastaSundar Growth

As far as I can tell, SastaSundar’s strategy is to remain near-profitable and grow in line with or slightly above average industry growth. We can see this in the past data.

This being a high growth industry, growing in line with industry is perfectly normal in my opinion. We can see similar growth playout in the Q3FY21 and 9MFY21.

Do note how the number of HBs scales much slower than the number of users and revenue, thereby providing operating leverage.

SastaSundar Profitability

The company is still growing and yet to hit the inflection point wherein it can become profitable. We do know from the 2024 vision that they want to have 15% EBITDA margins. But how will they do it? Let us discuss.

1. As we can see from one of the first posts in the thread and also from the F&S report, centralized inventory planning enables the e-pharmacy to place bulk orders at the scale wherein they are able to buy considerably below MRP. How low? See the next point.
2. In the latest Investor presentation, SS has claimed that they make 29% margins on medicines: . This shows the power of buyer consolidation.
3. Then why does SS make losses at EBITDA level? Major driver is the 15% discounts they need to give right now to stay competitive with competition. Right now the industry norm is to provide at least 15% discounts on medicine. The industry is in its hyper-competitive stage. Consolidation is happening. Netmeds got sold out to reliance. Medlife and pharmeasy merged. The offline retailers (which forms the bulk of the market) do not like the 15% discount either. The 15% discount wont remain forever. Same thing played out in Telecom too. Post consolidation, the 15% discount is likely to go away. Then, the EBITDA profitability would emerge.
4. Despite giving 15% discounts, SS is very close to breaking even at an EBITDA level:
   
   . If one looks closely this is happening both because with scale they are able to buy the medicines cheaply and also because employee costs are going down as they scale up and operating leverage plays out.
5. Despite the need for inventory, this is an asset light business. Since the health-buddy centers are operated as franchises, the fixed assets have not growth since 2-3 years. They’re around 112 cr. Co has actually been stocking up on lot of inventory post covid to ensure smooth customer experiences and ensure there is no shortage. Despite that, their total WC is only 63 cr. This gives a total capital deployed of 175 cr. This gives us a capital deployed turnover ratio of 3. Even if co can make a 5% EBITDA margin, ROCE would be 15%. If they can make a moderate 10% EBITDA margin, ROCE would be 20% and if they can make their target EBITDA margins of 15%, ROCE would be 45%. This shows us that this industry (specifically this business model) does have favorable unit economics, once profits are made.
6. I checked for international examples and US B&M retailers are able to make 5% EBITDA margins despite strong distributor consolidation. It is not a stretch of imagination to imagine that indian e-pharmacies can make 10% EBITDA margins especially with the asset light nature.
7. They have no debt and negligible depreciation and so EBITDA margins would also end up being net margins, approximately.
8. As per a recent moneycontrol article (shared in this thread), their profitability is actually the best among all the players compared:
   

Equity Dilution & Fund raising

SS also desires to scale to pan india, which requires up front investments and capital. Public markets are ruthless and give SS a valuation of 1x sales due to its lack of profitability. Thus, company (technically listed company’s subsidiary) raises money from PE firms like its plan to raise 100M$ in the next 2-3 years from existing investors (who are strategic investors): SastaSundar Funding: SastaSundar in talks to raise $100 million - The Economic Times. For the hyper growth and pan-india presence this fundraising is required. It would lead to equity dilution for existing shareholders which is a key negative, but that is what life is like when one invests in a hyper-growth company which needs to raise funds. The good part is that last such fundraise they did was at 3x or 4x valuations of public market cap and so equity dilution is not as much as we fear it would be, plus if company can raise money more efficiently from PE players who are willing to value it higher, it is good for the investor for the long term. This fund raise would also be utilized to scale up Genu Labs which is a very welcome move due to favorable growth and unit economics of the business.

Valuations

As shared in previous section on profitability, SS trades at significant discount to peers who are all unlisted.

Risks

Key risks remain:

1. Entire e-pharmacy industry could end up never making money (I place low probability on this event).
2. SS could be acquired by a larger player. (Even in this case, i place low probability on loss of capital for public market investor).
3. Equity dilution would result in dilution of ownership. (Cannot do anything, need to live with it).
4. e-pharmacies could be profitable but SS could go bust/not make profits (Given that they are industry leading in terms of margins, I place low probability on this event).
5. SS is a microcap stock and thus liquidity is low. All risks wrt ownership of microcaps apply here.
6. Reliance and Amazon could offer deeper discounts (say 30%), and bleed out SS. (Due to their industry leading margins and almost close to breakeven, i place low to medium probability on this. Even SS can and does raise money, can slow their growth and compete on discounts. Would delay profitability for everyone. Still this remains the largest key risk in my books. One key observation is that we have not seen such behavior from amazon when they entered food delivery. Discounts were in line with zomato and swiggy).

Disc: This is not buy or sell advice. I am Invested with ~3% of PF. Most risky investment to date but risk-reward seems favorable to me. Would not advice anyone to invest large parts of PF into this one risky investment.

Sources:

Frost-Sullivan-Outlook-on-e-pharmacy-market-in-India (1).pdf (2.3 MB) Investors_Presentation_February_2018 (1).pdf (2.7 MB)
5697fa8f-66fe-4ec0-8055-f12855d2236c.pdf (4.1 MB)

SastaSundar in talks to raise $100 million

SastaSundar Ventures: Is This Listed E-commerce Company Really Undervalued?

SastaSundar Ventures -- Turnaround in the making

This VP thread

[ankit95]

Excellent work @sahil_vi

To make some projections - I expect the equity would be diluted by around half if the company raises $100million at market valuation. If the company keeps growing sales at current rate of 40% CAGR (conservative given industry growth estimate of 63%) for next 5 years the sales become 5-6x, assuming multiple remains the same there is 2-3x return from there (halved by dilution).

I think there is an extremely low probability that the company will not get rerated post-fundraise. Competition by VC funded players was a big reason for undervaluation IMO which should not be a concern after fundraise. For comparison 1mg was bought by Tatas at 4x Sales.

Disc: Holding 3% of PF. No recommendation.

[sahil_vi]

@ankit95

To make some projections - I expect the equity would be diluted by around half if the company raises $100million at market valuation.

https://www.equitybulls.com/admin/news2006/news_det.asp?id=255886
2019 mitsubishi had invested 100cr and bought 30 lakh shares. This puts price of 1 share at roughly 300 rupees. Market value was 100 rupees. I think equity dilution might happen at significantly higher price.

[arvind_kishore]

Nice work Sahil. The equity dilution seems to be at the subsidiary level which owns the eCommerce business. Any idea how much stake sasta sunder venture currently owns in that subsidiary?
The other thing which looks risky is the expansion in their own product portfolio. This may be high margin but takes management’s focus away from the testing and eCommerce business. Thanks

[sahil_vi]

@arvind_kishore

Any idea how much stake sasta sunder venture currently owns in that subsidiary?

72% its there in Annual Report.

@arvind_kishore

This may be high margin but takes management’s focus away from the testing and eCommerce business

IMHO this is a wrong way to look at it. The FMCG own brands are complementary, in the healthcare space. They enable company to diversify the revenue stream which is always welcome. They enable cross-sell, capturing higher % of wallet of customer. All desirable characteristics.

[anupnarayan]

Hi Sahil. Nice work. I was reading about this Company few days back and thought of sharing my observations below for a discussion -

Initial thoughts - Good reputation in West Bengal market with a vision to expand geographically. Platform business. E-pharmacy sector is in vogue and has attracted fair bit of capital (Tata bought 1mg, Reliance bought Netmeds, Pharmeasy + Ascent got capital from TPG, Everstone etc.), market is pretty under penetrated

1. Huge market (2-5 lakh crore market growing estimates growing at 40% yoy) - So definitely a big check on industry growth

2. Large part of distribution is fragmented due to regulation and trust factor that people have in their local kirana stores. Organised players make up only single digit market share of this - this again is a big positive for organised chains to grab share

3. Large consolidation in play. Currentlt 7-8 large national / regional players operating - however like e-commerce, eventually 2-3 players may corner significant market share - this remains to be seen

4. Pharmeasy + medlife appear to be best bet in this space - unlisted. Have an integrated b2b platform serving hospitals, pharmacies (retailio + ascent), largest EMR platform, largest B2C platform, dynamic founders, well capitalised by blue chip PEs - seem best placed to take on the might of Amazon & Reliance.

5. SS - founders, while very little videos are there in the public domain, not sure if they have fire in the belly part to compete with big boys and win. The 2018 investor presentation is definitely a great data point in this direction that gives a sneak peak of how the promoters are thinking. Had missed reading this. 1B sales in 4-5 years is a big target indeed

6. SS - month on month revenue growth appears amongst the slowest compared to peers - one can check how Pharmeasy & competition have scaled up. Maybe this is a function of capital or East market where they are operating or growing at a measured pace from Promoters - dont know. However if Promoters are thinking of growing to 1bn, growth should have come about much faster All this while gross margins are still negative

7. Also being a small company, annual reports dont give disclosures on cost breakup - warehousing / logistics / discounts / overheads etc. to see trends - I know ET Prime comments they are breaking even, but Company doesnt give breakup of expenses so how does one understand economics

8. SS - Seems to have scaled well in Eastern region - network of retailers / buddies and platform connecting retailers to order for supplies are key advantages. Also selling wellness and other products via ecommerce site. Has recently tied up with Asics for sports merchandise - Super going!

9. However if one looks at organized players - everyone does teleconsultation, dianogstics. Hence only scale will differentiate players which will lead to lower discounts, better bargaining ability with pharma companies

10. For SS to break ground in newer areas, customer acquisition is going to involve burning more capital. So growth will come at a cost

11. Peers have a great head-start in the scaling up game. Pharmeasy. Netmeds etc have 20,000 pincodes access + growing 10% mom. SS is sub-scaled, growing slower and needs massive capital

12. Not sure how Jap investors will add value here - seems more like dead capital. Maybe Asics was facilitated by them. But wont move core economics for SS

13. At best seems like an acquisition candidate for the others, worst may burn out in the next 2-3 years

14. Regulations dont seem to be fully clear and allowing e-pharm to flourish however directionally things have gone in their favour last year

Lets have a discussion around how to get comfort on the scaling up bit as thats my main worry here.

Sharing some materials that I came across

How a part-time Hindi typist earning Rs 1,800 per month built a Rs 111 crore...

https://assets.ey.com/content/dam/ey-sites/ey-com/en_in/topics/health/2020/09/healthcare-goes-mobile-evolution-of-teleconsultation-and-e-pharmacy-in-new-normal.pdf

Will Pharmeasy Win E-Pharmacy’s Intense Battle? - A Junior VC

[sahil_vi]

@anupnarayan

Hi Sahil. Nice work.

Thanks for the appreciation

@anupnarayan

2-5 lakh crore market growing estimates growing at 40% yoy) - So definitely a big check on industry growth

Wanted to clarify a bit. e-pharmacy is considerably smaller. IPM is large, growing slow. e-pharmacy is ‘eating’ IPM by growing much faster than IPM at high rates. F&S 2018 report estimates growth at 63%, i dont have the latest numbers.

@anupnarayan

Large part of distribution is fragmented due to regulation and trust factor that people have in their local kirana stores. Organised players make up only single digit market share of this - this again is a big positive for organised chains to grab share

Correct. F&S industry report talks about this too.

@anupnarayan

Large consolidation in play. Currently 7-8 large national / regional players operating - however like e-commerce, eventually 2-3 players may corner significant market share - this remains to be seen

Consolidation is definitely happening but how do we estimate how many players would remain? I find it impossible to predict how many would remain. This would fundamentally be a function of the market penetration strategies, market retention strategies and the kind of relationships e-pharmacies build with the customers. Indian politics is consolidating too, but there is enough room for strong regional players. Something similar could playout in e-pharmacies. In the worst case scenario, SS might have to remain consolidated to its home turf of WB. But once they turn profitable and with the customer retention customer repeat rates they have, i dont think it would be very easy to force them to go bust. For all these factors, I would not agree that market would end up with 2-3 players. Market would have smaller than 7-8 players, would depend on how much differentiation different players can build. Here is an anecdote i wanted to share from a close friend:

@Sahil's friend

I have ordered from pharmeasy, netmeds, everytime i order it is being serviced by a single seller in my area in mumbai. Someone named Jadhav chemist.

What i want to highlight is that these platforms need to either build scale or differentiation in order to survive. Scale is not necessary, but is sufficient.

@anupnarayan

Pharmeasy + medlife appear to be best bet in this space - unlisted.

By what metric? I think if we analyze historic patterns, largest players do not necessarily end up being the eventual winners in a space. I would say my opinion here is it is difficult to predict who is the best bet.

@anupnarayan

SS - founders, while very little videos are there in the public domain, not sure if they have fire in the belly part to compete with big boys and win.

Think you answered your own question by quoting the 2018 presentation

@anupnarayan

SS - month on month revenue growth appears amongst the slowest compared to peers - one can check how Pharmeasy & competition have scaled up.

Have you seen the FY21 data? My own checks (which could very well be wrong) indicate that SS and pharmeasy are growing roughly at the same pace. Unfortunately there is no public data yet to verify the same. Also SS has been much more conservative relying more on word of mouth and customer relations. We can prove this with data:

1. SS has 90-92% repeat orders which are industry leading. In fact what from some PE investors i hear is that most in industry do not focus on this.
2. Look at the FY20 sales and current app downloads.
   

	Pharmeasy+Medlife	SS
Current Downloads (M)	20	1
FY20 revenues	1050	450
Revenue per download	525	4500

The quality and thus value of each SS app download is incredibly higher than a pharmeasy customer. It is 9x more. Pharmeasy due to its marketplace model is well suited for hypergrowth, but has lesser customer retention or customer stickiness and lesser customer loyalty imho. My thesis is SS customers will stick to SS due to differentiating factors (please see the softer aspects in the scuttlettbutt posted in the thread by @sujay85 ) like healthbuddy, tightly integrated diagnostics (pharmeasy outsources it). It is way more likely that due to a better overall experience, pharmeasy users would happily migrate to SS when SS scales in their city. The thesis that the one who scales the 1st will win is false IMHO. One can indeed check how pharmeasy has scaled up - through aggressive marketing advertising and cash burn. However, one must question whether these customers are loyal to pharmeasy or would happily switch. When pharmeasy is only a marketplace, why would they not? Anyway same chemist would provide on netmeds.

@anupnarayan

Also being a small company, annual reports dont give disclosures on cost breakup - warehousing / logistics / discounts / overheads etc. to see trends - I know ET Prime comments they are breaking even, but Company doesnt give breakup of expenses so how does one understand economics

Already covered this in the post. Understand that more details would help. However at a top level it is clear how this works, at least to me.

@anupnarayan

SS - Seems to have scaled well in Eastern region - network of retailers / buddies and platform connecting retailers to order for supplies are key advantages. Also selling wellness and other products via ecommerce site. Has recently tied up with Asics for sports merchandise - Super going!

agreed.

@anupnarayan

However if one looks at organized players - everyone does teleconsultation, dianogstics. Hence only scale will differentiate players which will lead to lower discounts, better bargaining ability with pharma companies

Disagree. There is a diminishing returns angle here that one needs to appreciate. Beyond a critical scale, everyone would get the same or near similar discounts from pharma companies/distributors. SS with their scale already get a 30% margin for pharma products. I do not know the industry well enough to say where it saturates but surely it would imho between 30-50%. @bheeshma could you please comment on this if you know about it? Whatever that is, thesis is that SS would scale to that level based on their plans to raise 100M$ already covered in previous post.

@anupnarayan

For SS to break ground in newer areas, customer acquisition is going to involve burning more capital. So growth will come at a cost

They are raising capital.

@anupnarayan

Peers have a great head-start in the scaling up game. Pharmeasy. Netmeds etc have 20,000 pincodes access + growing 10% mom.

From the SS latest IP slide deck:

@anupnarayan

Not sure how Jap investors will add value here - seems more like dead capital. Maybe Asics was facilitated by them. But wont move core economics for SS

Frankly they do not need to. it is already a good business model. All they need, is to scale up, for which they are raising 100M$. They had raised roughly 130cr in previous rounds in 2019. I’d say that is a decent upgrade.

@anupnarayan

Regulations dont seem to be fully clear and allowing e-pharm to flourish however directionally things have gone in their favour last year

Regulations actually would favor SS over competitors by disallowing all forms of advertising. We will then get to see how much organically pharmeasy can grow.

@anupnarayan

Lets have a discussion around how to get comfort on the scaling up bit as thats my main worry here.

Frankly this seems to be a central part of your thesis, not mine. I am perfectly alright with them growing in-line with industry. Key risk for me remains deep(er) discounting by amazon/flipkart/tatas/reliance. This would be a simple value destruction move and would be a clear exit trigger for me.

[anupnarayan]

Thanks for your note.

1. Here’s the way I am thinking about this - In a market where there are established players like Pharmeasy and the largest corporates - how can the Company win? They can differentiate themselves or scale up to such a point that they start getting economies of scale that can help them stay in the game longer or fight aggressive pricing strategies from larger peers

On differentiation - I appreciate and note the goodwill they have created in their home turf. As I said, this is what got me to study more about the company. However i really don’t think there is any differentiation with respect to customer experience here - I would happily order from pharmeasy / netmeds / SS etc. if they give better discount / have my medicines / give a timely service - that’s all. Don’t think there will be any loyalty beyond this. There is no data to show that SS scores over others on these points. There are anecdotal evidences from satisfied customers for each and every large player. I would rather not take their success in their home turf for granted and be worried about them losing customers to competition as and when they set their sight

Why I say Pharmeasy + Ascent is the best bet

1. Largest scale till now in terms of footprint
2. Backward integration for medicines - Ascent is the largest B2B player who is also authorised distributor that fills up inventory for large hospitals (such as Manipal Group etc.) and pharmacies, also fills up inventory for Pharmeasy. So they have been working to ensure retail pharmacies are well stocked for right SKUs. Think of SS retailer group buying but at a much larger scale.
3. Pace of growth comparison. Pharmeasy went from 111 cr in FY18 to 358 cr in FY19 to 637 cr in FY20 vs/ SS went from 162 cr in FY18 to 222 cr in FY19 to 388 cr in FY20. If you have more data to support they are growing just as fast as P, pls share. They dont have to grow the fastest, however dont think they have had competition looking at their markets yet. As other players look to their markets, my sense would be their growth rates and business model could be tested
4. Now with Medlife acquisition, they get scale in the South as well. So they are strong in West, South and North
5. Very well capitallised

SS Business model - It is important to understand the finer aspects of their business model, economics etc. to really see how they have been able to bleed the least (as quoted by ET). So if you have comfort on this aspect, please do share. Ideally some sort of unit economics comparison will make it clear

If Reliance and peer set act irrationally and adopt aggressive strategies (and they have deep pockets, and there is no reason to believe they will not be aggressive), what is the fallback SS is going to have? They will need more equity to burn, to keep them going. They may get it today, tomorrow but its a game of what it takes to create a large geographic enterprise in an area where all the large players are already trying their bit to succeed.

What i do like about SS

1. I definitely see scope in a large market being out there to move into but question is whether customer will continue to stay with them when there are other options to choose from. I appreciate the softer aspects, just dont think they will be sufficient to ensure stickiness - purely because in their markets, they have not been tested
2. Their 100mn equity raise talks is definitely good fire power for them to quickly scale organically / acquire smaller set-ups for geographic diversification. I will keep tracking for mom volumes to pick up and details around the same

Other data points (not material to thesis however will still like to point out):

1. The market size mentioned is for entire pharmacy market - which is addressable for e-pharmacy players. The growth rate to be clear is for e-pharm players as rightly pointed out by you too
2. SS is growing slower than pharmeasy - as stated above
3. Larger players backed by capital and having growth hungry promoters have more often than not gone ahead and captured significant market share (Indiamart - B2B, Practo, Flipkart etc. many more examples) - anyways who will win is difficult to predict however there are advantages of growing scale and having done it first
4. Dont know where you are quoting that customer retention or experience is poorer for P and peers. If P is growing via marketing, it need not be a lower quality of business/growth necessarily. Look at Angel Broking (which is also growing by marketing aggressively as opposed to Zerodha which has grown mostly through word of mouth). As long as they are able to deliver customer experience, there wont be need to change
5. Also, scale of backend of P is different from SS. Infact SS would need to significantly expand its retail group buying program to place large orders with pharma companies
6. Not sure where you are getting download / FY20 figures from. Are financials from RoC?
7. Also do check SS’s 25k zip codes. They say where they give courier services. Does it mean slower delivery? Not sure. Others don’t give this
8. Sales is also generated via phone, online ordering in addition to phone usage. So dont do a Sales / download metric

[brokeinvestor]

Agree with Anup’s assessment. This is a high cash burn model with obvious economies of scale (around distribution/logistics, CAC and two-sided network effects). The obvious analogy here is food delivery platforms and not political parties. There are few local nuances and barriers to entry in this business and it is easy for a deeply pocketed player to enter a new market and disrupt a smaller incumbent through aggressive marketing and discounts. Swiggy and Zomato also scaled through cash burn and aggressive marketing, guzzling foodpanda, uber eats etc along the way. Frankly, hyperlocal delivery models like food delivery, e-grocery, online pharmacies etc are low hanging fruits for VC/PE players now. The playbook is always the same.

It is fanciful to think other players are not concerned about repeat orders and stickiness and IMO, comparing revenue per download is pointless. It’s not a revenue driver. I understand that the AOVs (average order values) might not be available publicly but this can not be used as a proxy. The number of active customers and the number of orders per active customers are being completely ignored. The article from AJVC that Anup quoted anyway mentions that Pharmeasys AOV is Rs. 1200.

[anupnarayan]

And curious why did they have to remove their 2024 strategy of 1bn in subsequent presentations.

Again this is only my gut feel, P has a dynamic team of young turks in their 30s who understand technology, there are several videos of Siddharth online. You can compare with SS Promoter’s video online. Dont feel the same energy

[sahil_vi]

@anupnarayan

Dont feel the same energy

Everyone should invest based on their own conviction. I agree to disagree on the necessity of hyperscaling aspect. Already explained my reasoning in previous post. If one does not feel the energy, then better to stay away from the investment (not an investment advice, just requesting all investors to follow their own conviction and research). I personally dont have an energy column in my investment thesis checklist, so I am able to invest without feeling the enegy. it is not necessary that everyone has the same investment criterion.

Btw there is one very big possibility which a lot of investors are discounting right now. Right now ss is very close to break even. If they are able to break even and get better valuations in public markets they would have access to dilute equity in a much larger market (equity market) which pe backed players don’t have. Of course this optionality depends on rerating which itself is unpredictable and unknowable.

Interesting anecdote

I take this from the Founder and Chairman’s Linkedin Post:

@BL Mittal on LinkedIn

Review received from Mr. Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Co. Ltd and a resident of Mumbai:

"I was searching for a medicine for one of my family member. I couldn’t get it in pharmacy near my home.
I went on line to search for medicine. Unfortunately many known websites weren’t able to provide that.

Down the line I got to sastasundar.com. I was bit skeptical to place an order there. However since no other website/ app was able to deliver that medicine I had no choice but to order from sastasundar.com. I chose cash on delivery rather than pay on line due to my skepticism.

To my pleasant surprise the order got delivered faster than promised. The whole experience was awesome.

I needed to that medicine again this week. The same story repeated. Neither pharmacy near my home nor bigger online medical apps were able to provide the same.

This time I ordered without hesitation on sastasundar.com. To my pleasant surprise I got the delivery despite cyclone ahead of promised delivery date.

My experience of ordering on sastasundar.com is awesome. They have delivered when others have failed.

Keep up the good work."

Interesting post about why they chose the name SastaSundar:

B L Mittal on LinkedIn: Making of SastaSundar :Why We selected name...

Disc: Invested and positively biased.

[sujay85]

Pharmeasy looks to raise Rs 3,000-Rs 3,700 crore via IPO: Report

PharmEasy hires two i-bankers for India IPO

So, the IPO, if it goes through, will value Pharmeasy at $3 billion, means nearly 20,000 Cr. Sastasundar currently has a market cap of 610 Cr, which is nearly 30 times less than the valuation Pharmeasy is seeking!! Market must be betting SS to go bust or something!!

[Malkd]

I’ve tried to understand the franchisee model but I really can’t figure out how it benefits the person who takes the franchise. I’ve even spoken to a friend of mine who owns a couple of pharmacies and he can’t understand it too.
So basically sastasundar wants someone who has relevant pharma qualifications to buy or rent a 120 sq ft shop. They then want that person to hire 2 pharmacists and a driver. This store would also need a freezer for last day storage.
However, since there’s no inventory how does this act like anything but a marketing ploy for sastasundar and wealth destruction for the franchisee? A client needs to visit this shop and then use it only to place an order which will be delivered to his or her house a few days later. Why would the client choose to do this and not visit an actual inventory based pharmacy? Also for the subsequent visit the client could just visit the website and bypass the store?
It works for sastasundar but do the actual franchisees make money? If sastasundar plans on only using a franchisee based model for these health buddies is it really sustainable if thats the case? Tbh it looks like they are getting their marketing and shop and staff for free… While it’s good for SS I really don’t see how the health buddies are profitable for the franchisee and if growth via this angle is sustainable long term considering this. Are there any reviews from actual franchisee owners online that we could look at? Also is there a split between how many stores are owned outright by SS and how many are franchisees(sorry if mentioned in public domain. I couldn’t find it in my cursory study)
Regards the Ipo of pharmeasy… Its the usual case of retailers being sold outrageous valuations. SS unfortunately is already listed. If they were to do an Ipo now and use words like break even, physical stores, PE backing etc im sure the market would have given it higher valuations too. That being said this entire epharma sector doesn’t sit well with me. It looks like a case wherein those with access to huge amounts of cash will win and even with fund raising sasta sundar looks in serious risk of enjoying a few profitable years but a dagger of margin destruction hanging over them permanently. Even small pharmacies are creating a Web presence in my area to service customers in their locality.
I am not sure if SS will survive but at least the valuations price in that risk so any good news will be an upside(maybe even an exit via a buyout since its so cheap) .
However, What i am sure of is pharmeasy is getting away with daylight robbery commanding such high valuations in this very, very dangerous segment.
Side note: I still don’t understand how SS have spelt health supplements as health suppliments front and center on their main page Considering its out there for all to see and isn’t hidden somewhere deep inside.

Disc: not invested but studying this space and I’ve realised the feeling of uneasiness is directly proportional to the more I study.

[sahil_vi]

Good video to understand the nuts and bolts of how one can become a healthbuddy franchise and how the economics works out:

SastaSundar Franchise l Refundable Deposit l Sasta Sundar Medical Franchise | Retail Pharmacy Shop

@sujay85 i know it is hard but if possible could you please verify this with your nearest franchise whenever you are comfortable (i know this might happen after many months given that we are in middle of covid). I would try to do it too for my nearest healthbuddy franchise whenever possible.
2 interesting observations:

1. Why it makes sense to become SS healthbuddy (PS: please dont ask me to translate, please find a hindi reading friend who can translate it or : try google translate (the app actually works for images too :D)
   
   
2. The margins for SS HB store work out to 7.5% assuming 1000 houses order 1 medicine order and 1 OTC order per month worth 1000 rupees.

Would be good to see if real life scuttlebutt can either confirm or deny what this video is suggesting. Of course it would be anecdotal evidence but better than nothing.

Disc: Invested, biased.

[Nitya_Shah]

BL Mittal has a very poor reputation as a promoter. Few years back he had started a financial services company and now many think this is his next new failed plan. Beware, of the promoter, been hearing too many people calling him and his company a fraud

[aga.ayush11]

Building on the amazing work done by VP members on this thread, specially @sahil_vi & @sujay85.

I went through the past annual reports to understand their shift from a financial services company to e-pharmacy. It wasn’t a smooth transition and a lot happened before SS became what it is today. I will try to capture this through snippets taken from their past Annual reports till FY16.

2011:

The company, know as Microsec back then, came out with an IPO at Rs. 118 back in 2010. It was subscribed around 12 times. FY11 was the first time they came out with an Annual Report. In the first year itself they acknowledged that they were having a tough time in their legacy business of financial services.

They made the first comments about pivoting away from financial services in the very first Annual Report. Their thought process started with a food processing company and nothing related to healthcare. They even wanted to enter the education industry. Clearly they were desperate to move away from financial services.

Major part of books and revenues were from the lending business, they were into Loans Against Securities (LAS). No pure play NBFC like lending. They were a completely integrated financial services company with LAS, Brokerage, Investment Banking, Wealth Management, and Research. LAS was the biggest contributor. Read this about the thought process of their LAS business. They seem to be risk averse people.

2012
The “challenging” scenario in FY11 continued in FY12 and can be seen in their comments from AR12.

As was mentioned in the last AR that they wanted to move away from LAS and diversify into other segments of financial services, they filed an application for a Mutual Fund license with SEBI.

No mention of Food Processing business or anything else apart from Financial Services in AR12.

2013:

For the first time there wasn’t a lot of focus on being a financial services company and they wanted to go Digital in AR13.

They were re-imagining their financial services business and wanted to go digital. They started something called Club Kautilya (more on this later). They even ventured into digital marketing and brand promotion business.

AR13 was the first time they mentioned about entering into healthcare through SastaSundar (SS). It wasn’t launched by then.

Their food processing venture was now renamed to Microsec Healthbuddy (what we saw on EPF website).

More insights on how they were thinking about SS. They wanted to sell food, spices, and medicines. Still exploring what they really wanted to do.

Clearly defining the three verticals they would be working on going ahead-

Even by the end of FY13 they were thinking about Mutual Fund and having a place in the financial services industry.

They were also thinking about digital financial planning through Club Kautilya-

2014:

And then comes FY14, there is no mention about the financial services arm in Chairman’s message.

That is how they mentioned about their financial services business in AR14

More confidence about their conservatism-

Their update on SS in AR14.

2015:

FY15 looks like an important inflection point for the company where they diverted all of their focus on this “digital transformation”. They were always focused on 'Own Brands" as we see today, too, and ventured into multiple things from Herbal and organic, Hair Oil, Smoking related products, to Sanitary napkins and baby care products. They were all over the place and still did not know what they exactly wanted to do with this SS platform that they were building, just like any other start-up. Although, they had a well-defined vision of making quality healthcare products accessible to masses at a fair price.

Here is an important extract which clearly shows their focus on moving away from financial services. It also gives me some relief that they gave up their NBFC license and withdrew their Mutual Fund application.

Here is their update on SS. From an avg of 400 orders per day they grew 5x to 2000 orders per day with high retention right from the start-

An update on their digital media platform-

2016:

Years of learning and grind defined in one paragraph-

Idea of HealthBuddy was born-

An indirect mention of moving away from Digital Media as a revenue vertical and using its competencies for their newly born Healthcare business.

Company’s thought process on HealthBuddy in CEO’s words-

Some key metrics on how the numbers of SS have evolved-

Their constant focus on becoming profitable was there right from the start-

Something on their financial services division that I am still unclear about. Did they sell this outside their group or do the current promoters continue to have an interest in Microsec? They also mentioned about undertaking lending activities for their SS partners, is this a part of their HealthBuddy model?

I wanted to understand their transition and how they have evolved. I did not make an effort to look for corporate governance issues, and would appreciate it if someone did that and shared their findings. I do intend to track their subsidiary numbers and try to understand the kind of cash they had burnt by the end of FY16, after which ALL of their efforts went towards building SastaSundar.

As a side note, I found an article which mentions the involvement of Ketan Parekh in Microsec IPO.

Disclosure: Have initiated a tracking position.

[MihirDam]

Tata Digital buys majority stake in 1MG.

Tata Digital Buys Majority Stake In Pharma App 1MG

Looks like it is going to be a 3 way race between Netmeds (RIL), 1MG (Tata) and Pharmeasy for the market leader with sastasundar looking more like an acquisition target rather than a very key player in e-pharmacy space.

Disclosure-
Invested due to reasonable valuations. Still think it can return strongly from current levels.

[aga.ayush11]

Had a chance to visit a HealthBuddy store near my house. Sharing the insights that I could gather-

1. This was his 5th year of running the HB store. He does around 8-10L monthly sales.

2. His store was not easy to locate. He did not have a store on the road and it was not visible if you are just walking by.

3. The store was owned by the HB owner. Therefore, no rent cost.

4. He does not have any employee and works on a very low opex model. He does not even keep the shop open throughout the day. He comes every morning, receives the orders that has to be delivered and then heads out for delivery.
   4.All the orders in a particular area are fulfilled by an exclusive HB. So, even if I place an order online, the HB near me will deliver the package. He mentioned that an HB has a 3-5km radius exclusivity but I find it hard to believe as I have two more SS HB stores both in a range of 2km.

5. A HB makes 7% of the total bill amount to the customer, whether it is through the app or walk-in. All the packages are delivered by an HB in Kolkata, and he will make 7% on the bill amount.

6. He mentioned that there are almost negligible walk-ins.

7. Since he does not have to pay rent and has not hired a delivery boy, he gets to save 4-5% out of the 7% SS gives him.

8. Have a very high customer retention.

   • His loyal customers now place an order through WhatsApp. Shows that the high-touch model is working.

   • He visits 3-4 elderly every week who are not comfortable placing an order by themselves.

9. He mentioned that his growth is now similar to any pharmacy out there.

10. He indicated that SS does not give a HB franchisee so easily now since it is deeply penetrated in Kolkata and West Bengal overall.

11. SS had reduced the discount that it used to give to the consumers from 20% to 15% during covid. However, they went back to 18% after sales started to drop. Indicates that this is price sensitive, discount driven market.

12. He is also on the Retailer Shakti (RS) program. He makes 1% of the bill amount. SS is currently giving 26-27% discount on MRP to the pharmacies according to him. Need to figure out how much discount on MRP does a pharmacist get from their stockist.

    • He mentioned that he wasn’t interested in RS because order value is sometimes as low as Rs. 500 and he only makes 5 bucks on it while he has to travel 1-2km to deliver it.
    • He wasn’t keen on continuing with RS.

Conclusion: From what I understand, HBs look more like mini-fulfilment centers for SS that help them with last mile delivery. The people running HBs have a high-touch relationship with the customers which help them get repeat orders. HBs also act like customer-service agents for SS’s customers. However, SS does have a professional customer-service setup. Cost of high-touch + last mile delivery + customer service is 7%. We need a lot of information to establish if this strategy is prudent. The transportation cost from warehouse to an HB is on SS’s books.

Further work-

We need to understand what discount is SS getting from pharma companies. They give 18% on MRP to the customers and HB gets 7% of the bill amount, therefore, SS is essentially giving up 25% of the value of the medicine in this transaction. We need to understand at what discount on MRP is SS buying from pharma cos?

In the case of Retailer Shakti, SS is giving discounts of 26-27% on an average on the MRP to the pharmacies (need to double-check) and RS agent gets 1%. Therefore, SS is giving up 27-28% of the MRP. Here, SS is replacing the stockist, so we need to understand the kind of money a regular stockist is making to justify this 27-28%.

We need to understand at what point and sales number does an HB store reach a saturation. What is the steady state growth rate?

Any thoughts or questions that we can ask the HBs would be appreciated. I plan to visit more of them.

Disclosure: Have initiated a tracking position.

[sujay85]

Very well done Ayush.

@aga.ayush11

He does not have any employee and works on a very low opex model. He does not even keep the shop open throughout the day. He comes every morning, receives the orders that has to be delivered and then heads out for delivery.

Given that HB makes 7% of the total order value only, the number of employees seem to depend on the order pressure, cost cutting measures of the owner. In my locality at Kolkata (Bijoygarh) the store remains open throughout the day and I have seen 3-4 persons working at times.

@aga.ayush11

Since he does not have to pay rent

Actually he may have to pay rent if he doesn’t own the place, but SS has no responsibility of paying the rent.

@aga.ayush11

Have a very high customer retention.

• His loyal customers now place an order through WhatsApp. Shows that the high-touch model is working.
• He visits 3-4 elderly every week who are not comfortable placing an order by themselves.

They give a polite call every month/fortnight in which no order was placed. I used to get annoyed when such calls come in between my works, but few days back when the call came last time I talked to them and inquired how an elderly person who doesn’t have the ability to place orders through app or visit stores can place the orders. I was told that anyone can place orders by giving a call to the SS customer care number or to any of the numbers they use to call us. They will deliver the order and collect the payment by cash. In case prescription medicines are needed, the customer needs to send a photo of the prescription by some means (mail or whatsapp).

Good to know that the HB you contacted actually visits his elderly customers to know about their requirement. So, it seems to depend on the HB only as to how they want to serve their customers. But one thing is certain: they serve customers in a very down to earth manner. Such things matter a lot in the digital age we live and may be the reason behind the customer retention / repeat order.

@aga.ayush11

they went back to 18% after sales started to drop. Indicates that this is price sensitive, discount driven market.

Price sensitiveness is obvious as people are very much value conscious. More so because even local pharmacies have started to deliver orders for free with good discounts. They sometimes deliver the medicines the same day. Still, SS is able to fulfill much more orders as they hold more SKUs in their warehouse.

Some pharmacy owners even resort to malicious campaigning saying that medicines served by the online players are fake. Such campaigning was rampant 3-4 years back, but I have seen multiple elders still hesitating to place orders with online players due to this reason.

Thanks again for your great work.

Disc: Invested.

[aga.ayush11]

Hi Sujay, thanks for the appreciation! Your past work definitely helped me with my scuttlebutt.

@sujay85

In my locality at Kolkata (Bijoygarh) the store remains open throughout the day and I have seen 3-4 persons working at times.

If you could ask the HB in your locality the kind of average monthly turnover they would be doing pre and post covid then it will give us a lot of perspective on how a busy mature store and a non-busy mature store look like. Maturity here is based on time frame. The HB I visited was operating for more than 4 years.

@sujay85

Actually he may have to pay rent if he doesn’t own the place, but SS has no responsibility of paying the rent.

Agreed!

@sujay85

I was told that anyone can place orders by giving a call to the SS customer care number or to any of the numbers they use to call us. They will deliver the order and collect the payment by cash.

I got the same feedback.

@sujay85

they serve customers in a very down to earth manner.

Yes, the person I met was also focused on how he wants to service his customers right and that is why does not depend on delivery boys right now when he can handle it on his own.

I would highly encourage others to visit an HB store if they have one near their homes and feel comfortable about stepping out during these times.