Medplus Health Services Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Store expansion accelerates, but drag persists: Net additions rose to 144 stores (vs 114 QoQ), yet stores under two years old continue to weigh on operating EBITDA as they ramp up.
• Private label is the margin story: MedPlus-branded pharma GMV jumped from 6.6% to 15.0% in Telangana and from 8% to 11.2% in other states, with a target of 20% over the next year.
• Cannibalization is a deliberate trade-off: The newer MedPlus brand is eating into the older, higher-margin Wynclark brand, compressing overall private label margins in the near term while management pursues volume.
• Diagnostics stays a contained pilot: The segment remains unprofitable at the HO level, and no expansion beyond Hyderabad is planned until the subscriber base reaches at least 200,000.
• What to watch next quarter: Whether the 20% private label target timeline firms up, the pace of Wynclark erosion in chronic therapies, and the promised disclosure of diagnostics center-level EBITDA.

Store Network & Footprint

• Net additions stepped up: 144 net new stores in Q3, up from 114 in Q2, taking the total store count higher while management balances growth with profitability.
• Tier 2+ cities now nearly half the base: 59% of Q3 openings were in Tier 2+ cities, and these markets now account for 45% of total stores, reflecting where management sees the next leg of growth.
• New states entered: The company began operating in Madhya Pradesh, Chhattisgarh and Kerala, bringing its presence to 10 states. Madhya Pradesh and Chhattisgarh are performing well and expected to grow faster; Kerala is growing more slowly due to regulator stickiness but the underlying market is good.
• FY24 store target: Gross additions for the full year are expected to be close to 600, with net additions slightly lower.
• FY25 pace similar: Management expects to add around 600 to 700 stores next year, with final figures to be updated later.
• Mature stores growing above inflation: Stores opened up to the end of FY21 are growing at inflation-plus rates, and overall mature-store growth is expected to stay slightly above inflation going forward.
• Rent expense flat despite additions: Rent held at INR53 crores QoQ because last year's 1,100 outlets were opened at various points during the year, while only 400-plus have been added in the current nine-month period, creating a timing lag. Annual contract escalations of 5% to 7% are built in.

Private Label Strategy & Margin Mechanics

• MedPlus brand launch scaled nationally: After the Telangana pilot, the MedPlus private label was launched across all seven other states, in all stores, starting October 2023.
• The cannibalization math: In Telangana, the older Wynclark brand has been eliminated and everything is sold at the MedPlus brand rate. In other states, both brands co-exist, but MedPlus is taking share from Wynclark, compressing overall private label margins. Chronic therapy Wynclark sales are likely to decline to near zero over time, while acute therapy Wynclark will continue at full price for less price-sensitive customers.
• Two-tier pricing logic: Price-sensitive customers and MedPlus discount plan members get the MedPlus brand at a 50% to 80% discount. Those who are not price-sensitive and seek early convenience pay full price for Wynclark on acute therapies.
• Substitute coverage expanding: The company has substitutes for 60% to 62% of its inventory (covering roughly 70% of medicines) and expects to reach up to 70% going forward.
• Customer education is the bottleneck: The most common pushback from customers is whether the MedPlus brand is a generic product. Management is addressing this through in-store explanation, media, influencers and testimonials, clarifying that all products are generics differentiated only by quality of make.
• Market share ambition: Management sees an opportunity to win 10% to 20% of the 80% of customers who currently do not shop at MedPlus, using price as the draw.

Gangadi: "The common question we encountered is this. Whenever our guys have gone and said 50% to 80% discount on our brands, they have said customers have come back and said is this a generic product?"

Private Label Financials & Targets

• GMV share trajectory: Private label pharma GMV rose from 6.61% to 15.03% in Telangana and from 8% to 11.2% in other states following the MedPlus brand launch.
• 20% target within reach: Management believes hitting 20% private label share on the pharma side (on a GMV basis) over the next year is achievable.
• Gross margin uplift from mix shift: Branded products carry roughly a 13% margin, while the MedPlus brand earns 22% to 23%, so every point of private label share gained is margin-accretive, net of Wynclark cannibalization.
• Discounting stable outside one market: No increase in discounts on branded products except in West Bengal, where the discount moved from 10% to 15% two to three quarters ago.
• DPCO a persistent headwind: Drug price control orders periodically reduce prices on regulated products, acting as a drag on reported growth.
• Margin trajectory tied to top line and mix: With fewer new stores opening, the drag from immature stores is smaller, so margins should improve slightly. However, the bigger drivers remain revenue growth and the private label component, and additional non-store operating costs like marketing may be incurred to support the private label push.

Gangadi: "I think for us to get to 20% will not be very tough on the pharma side over the next one year."

Diagnostics: Contained Pilot, No Near-Term Expansion

• Seasonally weak quarter, still grew: Q3 is typically soft for diagnostics due to the festival and holiday season, yet the segment still delivered 8% QoQ growth.
• Subscriber base building slowly: The pilot operates in Hyderabad with around 120,000 subscribers serving roughly 220,000 people. Management wants to reach at least 200,000 subscribers before deciding whether to expand to other cities.
• No material capex planned: No big machines or new centers are planned for FY24 or FY25 beyond maintenance capex. Minor additions like ultrasound equipment or an ambulance are possible, but no new center rollout is on the table.
• Segment still unprofitable: Center-level performance is improving, but HO-level costs are not yet diversified across enough cities, keeping the overall diagnostics segment in the red.
• On-time renewal rate improved: The rate moved from 15% in Q2 to 19% in Q3, a positive leading indicator for subscriber stickiness.

Balance Sheet & Capital Allocation

• QIP enabling provision secured: Shareholder approval was obtained for a qualified institutional placement as an enabling provision, valid for 12 months. Management described it as optionality and said no action is expected in the near term; the company will consider equity or debt as circumstances require.

Guidance & Commitments

Key Metrics