Medplus Health Services Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Store brand is the story: MedPlus launched 400+ own-label drugs at 50–80% below MRP, driving a 15% revenue jump in Hyderabad vs 3x the growth of other cities, and has now rolled out nationally.
• Margins are stuck, not rising: Operating EBITDA margin sits at 2.9%, well below the ~5% peak, despite a 5-quarter high in mature store mix. Management’s explanation of store maturity drag does not fully close the gap.
• The bet is on consolidation: Management argues that pricing own brands at deep discounts will make small independent pharmacies unviable, forcing market share to shift toward scaled players like MedPlus.
• Diagnostics is a contained experiment: The business is near central breakeven on a ~₹110 crore investment, but management declined to give any timeline for breakeven or geographic expansion beyond Hyderabad.
• What to watch next quarter: Whether the national private-label rollout lifts same-store sales outside Telangana/Andhra, whether margins finally inflect with the vintage mix, and any update on the store-opening pace after a soft H1.

The Store Brand Pivot

• Launch mechanics: 400+ drugs launched in Hyderabad end-June 2023 at 50–80% below MRP; expanded to all states by October, with Karnataka and Maharashtra following shortly after a hurdle was cleared.
• Early proof point: Hyderabad/Telangana saw a 15% revenue increase from September vs June, roughly 3x the growth rate of Bangalore and Chennai; 9% of that increase came directly from MedPlus store brands.
• Volume response: In Hyderabad, Telangana and Andhra, private-label pharma reached close to 15% of GMV; 8 out of 10 substitution attempts succeeded, and one-third of the 433 SKUs offered were taken up by customers.
• Customer pitch: MedPlus told customers its 4,000-store network and ₹4,500 crore scale let it source drugs manufactured to the same quality as large brands, with the discount passed through because there is no marketing cost.
• Inventory economics: Stocking MedPlus brands costs one-fifth of stocking branded generics, which management expects to reduce inventory investment per store and improve ROCEs over time.
• The cannibalization trade-off: New discounted private label replaced older, higher-margin private label (7–7.5% of sales), costing roughly 2% margin on that portion; the additional 7% of sales gained from branded generics secured another 1%, and the overall sales lift more than compensated. In Hyderabad, the margin-loss effect from merging old and new labels is now behind them.

Madhukar Reddy: "MedPlus making MedPlus Store brand available at 50% to 80% below MRP also makes it difficult for small stores to sell at full price trade generics."

Margin Puzzle

• The headline number: Operating EBITDA margin was 2.9% in Q2, well below the recent peak of ~5%, even though stores older than 2 years reached a 5-quarter high of 53% of the base.
• Management’s explanation: Stores under 12 months (21% of base) and in their second year (26%) are a drag; a store hits its ~10% gross margin target only at 24–30 months, once it reaches ~₹15 lakh/month in sales.
• The unanswered tension: An analyst pressed that the mature-store mix is at a multi-quarter high yet margins are not, and management did not directly reconcile the contradiction.
• Operating leverage path: Fixed cost is only ~2%, but warehousing (3%) and corporate cost (2%) will grow in tandem with revenue from ₹4,500 crore, leaving some room for leverage; warehouse automation has taken longer than expected.
• Private-label margin trajectory: Management says it currently makes 75–100% more on private label than on branded generics after discounts and incentives, and that this can only go up from here.

Madhukar Reddy: "24 to 30 is when we actually hit the 10% gross margin. And below that then we have the, a portion of cost of the... that we definitely need these to come to the level of that Rs. 15 lakh odd sales per month, per store kind of number for it to actually get to that number."

Store Network & Expansion

• Footprint: 4,089 stores across 599 cities in 9 states; 18 new cities added in Q2. New state entries planned for Kerala, Madhya Pradesh and Chhattisgarh.
• Opening pace: Q2 added ~260 stores vs an implied ~400 run-rate; management attributed the shortfall to timing, normal regulatory issues and new-state preparation, and expects a Q4 ramp-up. Full-year guidance now looks like ~800 stores, down from the initial 800–1,000.
• Closures: Management said the closure rate is not as high as 5% annually but did not provide the actual figure; the average age of closed stores is 5.6 years, indicating moves driven by lease expiry or relocation rather than failed new openings. 80–90% of store cost is recoverable on closure.
• Store refit program: Roughly 1,000 stores are being refurbished to move private-label non-pharma products from behind the counter to in front of the counter, part of the ~₹5–6 lakh per-store CAPEX beyond fit-out and deposits.
• Payback period: Management expects the payback period to fall as private label reduces inventory cost and overall store investment, improving ROCEs.

Competitive Strategy & Industry Structure

• Fragmentation math: India has ~900,000 pharmacies serving 140 crore people, roughly 20x the number of US pharmacies for 4x the population; average per-store throughput is extremely low because small operators survive on high-margin trade generics.
• The small-store model: A store selling ₹20 lakh/year can survive on trade generics with >70% margins; an average bill of ₹1,500 with 20% substitution yields ₹150 margin, giving ~10% overall.
• The MedPlus attack: By pricing own brands at 50–80% below MRP, MedPlus aims to make it impossible for small stores to match on price while covering their costs, forcing consolidation toward scaled players.
• Government tailwind: Jan Aushadhi stores and the NMC notification (later withdrawn) signal a policy direction toward generics; 80% of drugs are variations of a limited set of formulations.
• Trade generics expansion: MedPlus plans to make trade generics from manufacturers like Cipla, Alchem and Zydus available at the same price as its own store brands.

Madhukar Reddy: "if trade generics are available at that number, at 50% to 80% discount that automatically means lot of the smaller stores will find it very difficult to sell it at that full price. And if they tried to sell, at a price which matches with us, the low throughput will not allow them to actually survive. We will see a consolidation, we will see the benefit of that coming to us, that is for sure."

Diagnostics: Contained Experiment

• Scale: 4 full-service centers, 7 Level-II centers, and 120+ collection centers, all in Hyderabad; total investment is only ~₹110 crore. Management has no plans to expand geographically for the current experiment.
• Financial trajectory: The business is now more or less breaking even at the central level; sales continue to grow and losses continue to decline. A July 2023 price increase of ₹150 (15%) did not affect plan offtake: daily plan sales grew from 348 in July to 408 in September.
• No guidance: Management declined to give firm guidance on breakeven timing or active-plan targets, though it noted a long-term target of 250,000 lives and expects to close FY24 below 150,000 active plans.

People & Operations

• Attrition is structural, not competitive: Employees work at minimum wage, often from small towns, treat retail as a first step, gain experience, and move to better jobs after 2–3 years. Management does not see this as driven by competition.
• Seasonality: Q1 is typically soft during peak summer; festival periods (Dusshera, Diwali) and vacations see small dips as elective procedures and doctor visits decline. H2 margins were much stronger last year.
• QIP resolution: An enabling resolution was obtained for a QIP; cash on books is ~₹220 crore. Management described it as purely enabling, with no committed amount or timeline.
• Acquisitions: Management is always willing to look but sees no great targets currently; would consider a complementary, profitable model at a decent price, but valuation is an issue.

Guidance & Commitments

Key Metrics