Medplus Health Services Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Store maturity is the margin story: 49% of stores are under two years old and still ramping up, creating a large embedded earnings tailwind as they mature, while mature stores grew ~10%.
• Private label mix shift is subtle but powerful: Headline share dipped 20 bps QoQ to 13.7%, yet gross margin still improved ~50 bps because the basket spans 30% to 95% margins and mix within it matters more than the share itself.
• Diagnostics pilot is small, early, and high-utilization: Three full-service centers in Hyderabad are running MRI/CT machines up to midnight on 75% lower pricing versus peers; the first membership target is 100,000, and expansion beyond Hyderabad is not on the near-term agenda.
• Store rollout hit a licensing speed bump, not a strategy shift: Q3 adds slowed to ~246 from ~348 in Q2 because state inspection delays held up licenses; the plan remains 250 to 300 stores per quarter and at least 2,000 over FY24–FY25.
• What to watch next quarter: Whether the remaining ~10% of distributor-purchase companies convert to direct buying as promised, the pace of diagnostic member additions toward the 100,000 target, and any private label pharma guidance management said it may provide.

Store Economics & the Maturity Bridge

• Young-store drag: 49% of stores are less than two years old, up from 36% a year ago, and all are still in ramp-up phase, weighing on operating EBITDA.
• Breakeven cadence: 69% of stores opened between July 2021 and June 2022 broke even within six months, 79% by month seven, and over 10% broke even in just one month after the sixth. Management noted the percentage fluctuates between 65% and 75% and is not a concern.
• Tier-2 economics are better than they look: Top line in Tier-2 is slightly lower, but rents and other costs are much lower and private label mix is favorable, so EBITDA in small towns is actually better. Sales from Tier-2 cities and beyond contributed 30% of pharmacy revenues, up from 29% a year ago.
• Mature store growth stabilized: ~10%, in line with expectations, after being slightly lower earlier in the year due to high competitive intensity. Growth is expected at inflation rate plus share gains from local mom-and-pop retailers. Some temporary cannibalization occurs in larger cities when new stores open 500 to 700 meters from existing ones.
• Store closure rate: 17 closures in Q3 versus 14 in Q2, for net additions of 229.

Gangadi: "We think the value proposition which MedPlus has of providing genuine medicines and also of providing a great price driven by our scale of course, is even more that value proposition is even more relevant in a small town where there are a lot of small operators, they don't give as much discounts and there certainly I would say is more prevalence of non-standard or non-quality kind of drugs."

Private Label & Gross Margin

• Headline share vs. margin reality: Private label sales reached 13.8% of overall revenue, with pharma private label at 8.6% of pharmacy revenues. The share declined 20 bps sequentially, yet gross margin still improved ~50 bps because private label is a broad basket with margins from 30% to 90 to 95%, so mix within private label matters more than the headline share. A COVID-related inventory loss taken in Q2 also did not repeat.
• Pharmacy gross margin increased only 0.3 pp QoQ, in line with gradual private label increase.
• Scale unlocks new products: Scale now allows adding products that previously lacked minimum order quantity, expanding the range to over 900 curated products across pharma and non-pharma.
• Geography skew: Smaller towns have slightly higher private label penetration; most stores range between 8% and 8.5% minimum, with some stores higher.
• Substitution strategy: MedPlus now offers its own-brand products as substitutes when prescribed brands are unavailable, rather than substituting with another branded company's product.
• Trajectory: Management believes a 100 bps increase per year in private label share should be easy; on pharma private label specifically, guidance may be provided next quarter or so.

Store Expansion & Geographic Reach

• Q3 slowdown was administrative, not strategic: 246 stores opened versus 348 in Q2 because inspection process delays in some states caused licenses not to arrive in time. The plan remains steady at 250 to 300 stores per quarter, or 1,000 to 1,200 per year.
• New state entry: Plan to enter Kerala, Chhattisgarh, and Madhya Pradesh, with seeding stores in Indore, Raipur, and Cochin either this quarter or next quarter.
• Expanded into 43 new cities during Q3, with 58% of openings in Tier-2 cities and beyond. Highest additions were in Tamil Nadu (65) and Maharashtra (58).
• Maharashtra push: Extending rapidly into Amravati, Akola, and other districts in Vidarbha, plus adding stores around Nanded in Marathwada; approaching Mumbai cautiously with slightly smaller stores.
• M&A stance: Management sees no benefit in paying a big premium for chains when it can open roughly 100 stores a month organically and the next largest chain is only around 300 stores.

Gangadi: "We come across some chains, but we have never found anyone which is priced right honestly, given that we are able to open mostly at the rate of around 100 stores a month, and given that the next largest change is only around 300 stores, we really don't see too much benefit of paying a big premium for that."

Competitive Environment & Discounting

• Discounting intensity persists: Blended discounts remained between 16.5% and 17%, with the standard structure of 10% for bills under ₹1,000 and 20% above ₹1,000. Competitors still offer 25% and occasionally 30%, but management does not expect discount levels to worsen due to competitor entry.
• The real competitive set is unorganized: Management's focus remains on gaining share from the 85% of the market held by non-corporate dealers, not on matching funded competitors.
• Market structure view: Management fully expects more organized players to enter, noting every country in the world has at least two to four large pharmacy chains, and does not believe the market will be upset just because one or two players enter.

Gangadi: "As long as we are ahead of the other 85% of the market which is there in the hands of non-corporate dealers. I do not see any problem to continue to actually expand the way we wanted to."

Diagnostics Pilot

• Current footprint: Three full-service diagnostic centers in Hyderabad and over 100 collection centers operational. The plan is to open 12 centers total: four large (with MRI and CT) and eight smaller.
• Utilization driven by pricing: High-end radiology machines are running at high utilization because prices are 75% below comparable diagnostic centers, and the gap versus hospital rates is even starker. Extended hours mean patients come in after 9 p.m. and machines run up to midnight.
• Membership traction: 68,000 diagnostic plans sold with 119,000 underlying lives as of December 31. The first target is 100,000 members; the pace from 100,000 to 200,000 will determine whether to expand to other states.
• Capex contained: No material capex intended for FY24 beyond routine maintenance and replacement; the ₹85 to 90 crore outlay covers the Hyderabad pilot project.
• Timeline: Decision on expanding diagnostics beyond Hyderabad is not expected this quarter or next. Getting all 12 stores up and running took slightly longer than expected, delayed by about a month.

Dikshit: "75% discount, when we say that it is to be comparable diagnostic centers. But if you compare it to the rates for these machines within the hospital which is even more stark. So, the price is rising the utilization in all our three centers right up to midnight and we do have patients coming in even after 9 p.m."

Omnichannel & Procurement

• Online channel profitability: Store pickups as a share of online orders continue to maintain a higher share than home delivery. No spending on acquiring online customers in the last quarter; omnichannel remains a profitable channel.
• Direct buying near completion: No significant procurement benefit is expected from further direct buying as scale increases, because MedPlus already buys directly from most companies. The remaining ~10% of distributor-purchase companies will be converted in the next two quarters.
• Procurement fees: Management expects to benefit from fees and better margins as scale grows, particularly when companies want to launch products across 4,000 stores in seven states.
• Other expenses were flat QoQ because not all components are variable: moving expenses do not change much with small store additions in the same territory, and credit card charges are a small percentage overall.

Gangadi: "We have not spent heavily to acquire customers online. In fact, in the last quarter we have not spent at all, I would say, on increase of online customers. We will continue to maintain our Omnichannel as a profitable channel."

Guidance & Commitments

Key Metrics