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

0c348d6e-0799-4dd9-9899-a885eecab255.pdf (2.0 MB)

300 cr in sastasundar marketplace pan india expansion
700cr in sshb my guess is dividend or buyback. Listed entity might see reward of 500cr or so…

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Amazed to see that Sastasudar was able to unlock significant value from its subsidiary.

few observations.

On Dividend:
SML hardly has 40cr networth, considering 20% long term capital gains (inclusive of acculumated losses & indexation) tax outgo on 690cr worth stock should be close to 100cr for SSHBL. If the management decides to funnel that money back to SSVL, then there will be taxes on the dividend- this should put the new cash to listed entity after adjusting for mitshibushi stake & 25% tax is at (690-100)(75%)(75%) ~ 330Cr. i.e 20% of current market cap.

That said, i think money will be retained within SSHBL for the working capital purposes ( in anticipation of massive growth)

Subsidiary financials:

Company Narrative:
The most important aspect of the arrangement is- Sastasundar’s story has changed from being a B2C E-pharma player to a B2B Pharma supply chain & Distribution player with a very very strong strategic partner(FK).
– Problem with this narrative is

  • FK core strength is supply-chain. They are owning the B2C brand IP thereby have the ability to add more B2B suppliers. so, though FK is a strong player- the entire supply chain cannot be owned by SSHBL that said, SSHBL is expected to have a decent uptick in the topline.
  • Distributor Margins are wafer-thin, with hardly 8-10% gross margins, considering supply chain & inventory costs net margins can be super low at 2-3% - just like the other players.
    Image is taken from Medplus DRHP.

This brings us to the point on how to value such B2B pharma supply chain business- Views invited.

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There are more tax efficient ways to do the dividend. For example, they can merge SSHB with SSV They have also indicated about this corporate structure simplification in the slide deck.

Nonetheless, huge value unlock for shareholders. I think it’ll be super weird if they retain 700odd cr in a business which does almost no turnover. I am expecting a significant buyback or dividend after retailing capital for Genu?RS expansion.

Disc: INvested, biased

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Met the management last week. Sharing some takeways.
Disclosure - Invested.

Firstly on the eComm pharmacy space. India has a pharma market of 2.5-3 lac cr and it grows at 9-12% per annum. Medicines can be easier to buy online (especially chronic) as there are fixed brands and strengths which need to be ordered, compared to other eComm online purchases like Shoes, clothes etc which are difficult to choose. Also, chronic medicines in general are simply repeat purchases and hence easier executed by the click of a button. Presently the eComm market size is less than 10kcr which means is still under 4% of the industry. However, it is growing at a scorching pace and can reach 10-15% of pharma market share in the near term itself. That would imply a growth at 50-100%+.

SS is a leader in the ePharmacy space. Other important players being Pharmeasy, Reliance Netmeds and Tata 1mg.

SS: The total Operating revenue of the company reported in 2QFY23 was 254Cr which is an implied GMV of 300+Cr. On a monthly basis they are now almost caught up with the leader Pharmeasy in Pharmeasy’s B2C business. However, SS is almost close to breaking even on EBITDA (likely by FY23 exit quarter) versus Pharmeasy and others which are still massively loss making. Pharmeasy though is trying to turn things around.

SS is a debt free-cash rich company and the market cap is less than 1000cr now. SS Ventures (listed entity) owns 72% in its subsidiary SHBL which owns 25% in SastaSundar Market Place (SML). Flipkart owns the balance 75% in SML.
Hence when you own a share of SSVL (listed entitiy), you own 18% share in the front end Flipkart Health business. Refer to the PPT below by company slide 8 to understand the structure better.

SS has created a network of Health Buddy (franchisee owned stores), which manages last-mile delivery to customers. Currently, the Health Buddy network is focused on West Bengal, Jharkhand and Uttar Pradesh. The company is planning to roll this out on a pan-India level. The beauty of the Health Buddy network is that at a unit economics level, each Health Buddy is hugely positive in ROICs and they break-even in 2-3 months of operations. I have personally visited a few Health Buddies and verified the same.

SSVL is now doing complete supply chain for Flipkart Health and also building a network of warehouses. Presently they have already opened 7-8 warehouses across different states in India and plan to open in all 17 warehours in different states.

SSVL deal with Flipkart was a really smart move by SSVL and here is the reason why I believe so

  1. This business is a cash burn business in initial few years because of discounting. Flipkart has deep pockets and the backing of Walmart. They can run the long mile unlike some peers who are presently struggling to stay above the water.

  2. Customer acquisition cost is a high cost in this industry and peers spend as much as 15-20cr monthly for advertisement etc. Not many know that Flipkart is even bigger than Amazon in India (Flipkart owns - Myntra, PhonePe, Cleartrip, Flipkart health+, eKart, Shopsy and ofcousre Flipkart ecomm), has a customer base of 30cr plus customers. In the Pharmacy business this synergy of customer base will be extremely helpful.

  3. SSVL has ensured that the company would turn profitable by keeping profit making supply chain business and passing on the advertisement and cash burn needing B2C piece to SML.

SSVL also has entered the B2B business where they leverage their existing relationship with pharma companies to source medicines and directly supply to retailers in India. This business also already at a run-rate of more than 250-300cr and is expected to be very big. The margin benefits which comes out by removing intermediaries like C&Fs and Distributors are partly passed to retailers making the business attractive. Other important players in this segment are Arkamed (Pharmeasy), Entero health etc. Again the market is really really huge for this and this is likely the way business will be done going ahead in this industry.

The promoters and top management of SSVL are really smart people and have made a ship that is here to sail as it is self sustainable, cash rich and profitable (almost).
They were earlier owning another company called Microsec. Microsec was ultimately bought out and is in a way part of Motilal now post subsequent deals.

On Valuations: At an annual GMV of ~1200Cr run-rate, the market cap is just 900cr and the company has cash on the books ~300cr. Effectively EV is just 600cr. Expecting next year EBITDA to be Peer valuations are nowhere close and in 10s of multiple of GMV.

Disclosure: Invested.
This is not a recommendation to buy or sell. Please DO YOUR OWN RESEARCH.

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If you buy Sasta Sundar Venture you have only 72% X 24.9% stake in the part you are interested in, which is a piddly = 17.9% sake in sastasundar.com. Dont see the point in this unless you can explain.

Please correct me if I am mistaken

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You are absolutely right.

18% in the Front end entity which gets a multiple on the GMV. For eg: Pharmeasy’s B2C business is around 1800Cr run-rate now. And the company was asking for valuation of 36000cr when they were doing IPO rounds. That’s 20X.

Flipkart is already at 1200cr run-rate. You can assign whatever multiple you want and see if there is value. If you assign say 10X (half), then SS value for the same is 20% of 12000cr which is ~2400Cr. Not to forget that it is growing very fast and reported 45% QoQ growth in the quarter gone by. Next year GMV is anybody’s guess hence.

There is also Retail B2B business which is also valuable and profitable already. Growing very fast.

EV now is just 600cr. Not to forget that SS will be EBITDA profitable in FY24 (my guess), debt free and has 300cr Cash. Whereas Pharmeasy did 4000cr+ loss in FY22 as per this article and has a huge debt on the books.

Disclosure: Invested, so my views may be biased
This is not an investment recommendation. Please do your own reasearch.

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