Medplus Health Services Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Rapid store expansion defines the quarter: 1,074 net new stores in FY23, including 284 in Q4, with 58% of Q4 openings in Tier 2+ markets. This youth-heavy base means nearly half the network is under two years old, pressuring near-term margins.
• Private label is the margin lever in motion: Non-pharma private label reached 5.7% of revenue, up from ~3.5% last year, with a stated target of 7-8% this year. Pharma private label held at 8.4%, and the mix shift toward higher-margin own brands is a deliberate, controllable gross-margin driver.
• Mature stores prove the unit economics: Stores older than 12 months delivered 10.3% store-level EBITDA and 60.5% ROCE, while the overall pharmacy operating margin is weighed down by 50% of stores still maturing and corporate costs yet to scale.
• Diagnostics is a small, loss-making bet with a long data-gathering phase: The Hyderabad pilot is running a ~₹5 crore quarterly loss, expected through Q2 FY24, while management intentionally avoids differential renewal pricing to study natural retention. Only 33% of the March '22 cohort renewed.
• What to watch next quarter: Whether the 800-1,000 planned new stores for FY24 keep the network youth problem intact, the pace of private label non-pharma's climb toward 7-8%, and any sign that diagnostics losses begin narrowing from Q3 as guided.

Store Network: Youth, Geography & Economics

• Expansion tilted young and toward Tier 2+: 1,074 stores added in FY23, with 284 in Q4 alone. Karnataka and Tamil Nadu led additions. 58% of Q4 openings were in Tier 2+ markets, where store economics are more favorable, and 33% of Q4 revenue now comes from those markets, up 30% YoY.
• Youth drag is structural, not temporary: 49% of stores are under two years old, with 30% under one year. New stores carry 114 days of inventory versus 39 days for mature stores, and their lower turnover dilutes consolidated working capital and margin metrics.
• Maturation path is visible: For stores opened in April-September '22, 65% broke even within six months and 71% within 12 months. Mature stores (>12 months) generated ₹1,073.7 crore, 88% of pharmacy revenue, with EBITDA margins improving by vintage: 7.8% at 13-24 months, 10.6% at >12 months, 11% at >24 months.
• New states are contiguous, not a leap: Entry into Chhattisgarh, Kerala, and Madhya Pradesh will start with 20-25 stores each, supplied from existing warehouses in adjoining states until local operations stabilize. This avoids upfront infrastructure bets in unproven markets.
• North India question deflected: When an analyst pressed that the model would not work in North India where MedPlus is unknown, management acknowledged the points and moved on without committing to any entry timeline or strategy.

Gangadi: "Two years is where the actual potential of the store is seen. We expect a 10% kind of EBITDA at the two-year level. And today, 50% of our stores are under two years at this point."

Private Label: The Controllable Margin Story

• Non-pharma private label is the fastest-moving lever: Revenue share rose from ~3-3.5% last year to 5.1-5.7% this quarter, driven by expanded range, better in-store visibility, and a shift to self-serve front-of-store formats in new locations. Management targets 7-8% this year.
• Pharma private label stable at 8.4%: No breakout growth here, but it remains a meaningful, steady contributor to the gross margin mix.
• Gross margin improved 40 bps QoQ: The uplift came from inventory management efficiencies and lower provisions, not yet from the private label mix shift, which is still building. Management declined to break out the private label contribution.

Gangadi: "We were at around 3%, 3.5% last year. And the effort is to actually get it up to 7% or 8% over the period of this year."

Online & Competitive Dynamics

• Online growth is muted by design: Omnichannel QoQ growth was flattish, and the pure online segment remains subdued because competitors are buying customers with higher discounts. MedPlus is not spending to acquire online customers and treats omnichannel as a profitable, slow-growth channel. Store pickups hold a higher share than home delivery.
• Discount intensity has not eased: Industry discounts stand at 17.1% and have not declined, even as some competitors pulled back on advertising. At least two competitors still offer 25% off for the first three purchases. Management sees no near-term relief.

Gangadi: "There are a certain set of customers who want to go online and there are... a lot of competitors out there who are moving them with higher discounts than you find. So those who are inclined towards that are probably going out there."

Diagnostics: Pilot Phase, Losses, and Data Collection

• Hyderabad pilot is small and loss-making: The network stood at 7 centers (3 full-service, 4 Level 2) at March-end, growing to 10-11 in Q1 FY24, with over 100 collection centers inside existing pharmacies. The average quarterly loss of ~₹5 crore is expected to persist at least through Q2 FY24, with improvement from Q3 onward.
• Renewal strategy is deliberately neutral: Management set no price differential between new and renewing customers to gather data on natural renewal behavior. The only disclosed cohort, March '22, showed a 33% renewal rate. A differential pricing strategy will be introduced in coming months, but no guidance on renewal rates is offered yet.
• No new city until Hyderabad proves out: Expansion beyond Hyderabad waits on significant growth from the current ~100,000 member base. Two more centers will be added to complete Hyderabad coverage first.

Dikshit: "Currently, there is absolutely no differential between a customer who is renewing and who is buying a new plan. And this was actually done intentionally because we wanted to gather data on what is the natural pace of renewals."

Margins, Costs & Capital Allocation

• Pharmacy margin is anchored by store youth: With 50% of stores under two years old and 800-1,000 more planned in FY24, management expects overall pharmacy EBITDA margin to remain flattish. Any improvement would come from backend automation or scale benefits reducing corporate costs, not from store-level maturation alone.
• Corporate costs are a watchpoint: When asked about a sequential rise in corporate costs, management could not confirm if it was significant and took the query offline. The stated expectation is that these costs decline as scale increases.
• Capex is self-funded for now: Existing cash of ~₹280 crore can fund 700-800 new stores. Pharmacy capex for FY24 is guided at ₹240-300 crore (~₹30 lakh per store). A working capital credit line may be tapped later, but no equity or debt raise is planned beyond that. Diagnostics capex will be immaterial in FY24.
• Warehouse automation shifts to Chennai: The first automated warehouse, originally planned for Hyderabad, has moved to Chennai due to building possession delays in Hyderabad. It should be operational in four to five months. Hyderabad will follow as the second site.

Guidance & Commitments

Key Metrics