Medplus Health Services Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Private label is the margin engine: Private label pharma GMV share hit 16.3%, driving ~200 bps of gross margin expansion to 23.7%, with a clear roadmap to add ~0.5% net sales share per quarter.
• Diagnostics turned the corner: The segment swung to a positive operating EBITDA of ₹2.1 crore (7.4% margin) after a one-time restructuring charge, with underlying profitability at 11.1% once legacy closures are absorbed.
• Store addition guidance cut sharply: Net store additions for FY25 are now guided to 400–450, down from the original 600, after a slow Q1 from elections and other disruptions; the lost openings will not be recovered.
• Cash flow quality is tied to expansion pace: H1 free cash flow of ₹142.5 crore benefited from the slower store rollout; management warns this will be "a bit lower" as the planned 400–450 net additions execute.
• What to watch next quarter: Whether private label share continues its ~0.5% quarterly climb, the pace of the store rollout catch-up, and any decision on quick commerce participation as competitive intensity rises.

Private Label: The Margin Story

• Rapid penetration gains: Private label pharma GMV share rose from 7.9% in Q1 FY24 (pre-launch) to 16.3% in Q2 FY25, while private label total sales reached 18.4% of revenue. Management expects net sales share to increase ~0.5% every quarter and sees no reason it should not reach 24–25% in eight quarters.
• Unit economics are transformative: On a ₹100 MRP product, private label costs ~₹12 versus ~₹68 for branded, yielding a 50% margin against branded pharma. Each 0.7% increase in private label share adds ~0.3–0.35% to overall gross margin.
• Chronic patients lead, acute patients surprise: Chronic patients, who spend more per month and save more by switching, account for slightly over 50% of private label sales. Acute patients are also buying in "reasonably large numbers," which management calls a pleasant surprise.
• Private label adds to branded sales, not replaces them: The working capital benefit from the mix shift will take time because private label currently layers on top of existing branded purchases rather than substituting them.
• General goods priced for loyalty, not margin: Private label FMCG products are priced lower than any other private label in the market to drive repeat purchases; margins are 20–21%, not highly accretive but intended to build the customer base.
• Regional penetration varies widely: Some regions already have 20% private label on an MRP basis, while newer states sit at 8–10%. Efforts are underway to increase brand awareness in those newer states.

Reddy: "We don't want it to be a one-time purchase. And we want them to come back because the product is great and it is available at a price at which no one else sells."

Store Network & Expansion

• Network scale and composition: The store network grew to 4,552 from 4,089 a year ago, with total square footage crossing 0.24 crore sq ft and average store size at 529 sq ft. All stores are leased; a very small portion are franchised, primarily in locations difficult to service.
• FY25 addition guidance cut: Management now expects net store additions of 400–450 this year, down from the original 600. The Q1 shortfall from elections and other disruptions is lost and will not be made up.
• Q2 cadence: The company opened ~145 stores and shut down ~30–35, for a net addition of ~108 stores in the quarter.
• Tier 2+ cities growing share: Sales from tier 2 cities and beyond increased to 36% of pharmacy revenues from 34% a year ago, a mix shift that influences revenue composition.
• Delhi NCR entry: Three test stores opened in Delhi, Noida, and Gurgaon, all performing well. Delhi was the last of the top seven cities where MedPlus was not present. Expansion will be measured: "maybe do 4–5–6 stores in each region to gain foothold," with no immediate large-scale push.
• Franchisee model remains experimental: The company is trying franchising in some larger cities but the outcome is uncertain; no specific split or target was provided.

Store-Level Economics & Maturity

• Maturity drives returns: Stores older than 12 months generated 94% of pharmacy revenue with a 10.2% store-level EBITDA margin and 58.1% operating ROC. Stores older than 24 months reached 10.6% margin, while the 13–24 month cohort sat at 7.7%, illustrating the ramp path.
• Inventory vs fill rate trade-off: Inventory days of ~83 are partly structural: each new store requires ~36 days of stock. Management prioritizes fill rate over cutting inventory too fine, because the cost of lost sales exceeds the cost of inventory. Optimization will continue but fill rate remains the binding constraint.
• Renewal rate inching up: On-time renewal rate improved to 25% in Q2 from 24% in Q1, a small but directionally positive signal on customer retention.

Reddy: "The cost of lost sales is far higher than the cost of inventory. So, we are always mindful of that. We try to optimize it. We don't, we try to make sure that the fill rate is right."

Diagnostics: Turnaround & Restructuring

• From loss to profit: Diagnostic revenue grew to ₹28.31 crore from ₹18.15 crore YoY. Operating EBITDA turned positive at ₹2.1 crore (7.4% margin) versus a loss of ₹2.9 crore last year.
• One-time restructuring charge: Legacy operations in Nagpur, Bengaluru, and Vijayawada were closed, incurring a one-time expense of ₹1.97 crore (₹1.13 crore non-cash). These closures yield net operational savings of ~₹0.75 crore per quarter. Excluding the one-time charge, diagnostic EBITDA would have been 11.1%.
• B2B channel exploration: Management is exploring all options including brokers, insurance companies, TPAs, and direct-to-company relationships. Small to medium-sized companies in Hyderabad have already taken it up, though no material revenue contribution was quantified.
• Margin already optimized: Diagnostic gross margin is already at an optimized level; future profit growth will come from topline expansion rather than further margin improvement.

Competitive Landscape & Channels

• Quick commerce: wait and watch: Management is not doing anything on quick commerce as of now and will wait to see how it plays out. The reasoning: pharmacy is tough for e-pharmacy and "even more tougher for quick commerce" given prescription requirements and fill-rate complexity. No concrete decision criteria were specified.
• Online business steady at 7%: Online contributes 7% of business with no additional discounts or benefits given to online buyers, preserving channel margin parity.
• Subscription pricing experiments: The subscription program started at ₹49 in Telangana and was increased to ₹99 in Tamil Nadu a couple of months ago. Management will "slowly experiment" with further increases.
• Marketing spend stays lean: The company spent ~₹1 crore on marketing last quarter, focused on influencer content, podcasts, and targeted information to regular customers. No ATL spending is planned, and quarterly marketing spend will not exceed "a couple of crores."
• MedPlus brand not for independent pharmacies: Management ruled out expanding the MedPlus private label to mom-and-pop stores, reasoning that the 50–80% discount positioning advertised openly in MedPlus stores would not work well for an independent operator.

Reddy: "If pharmacy is tough for e-pharmacy or for the internet side. I think it'll be even more tougher for quick commerce, but we will see. We'll wait and see how that plays out. Honestly, we don't want to really jump onto anything right now."

Financial Outlook & Capital Allocation

• Gross margin trajectory: Gross margin expanded ~200 bps to 23.7% on the back of private label growth. Management sees no reason for it to come down and is "actually optimistic above the H1 number" when asked about the full-year outlook.
• Free cash flow tied to expansion pace: H1 free cash flow of ₹142.5 crore benefited from fewer new store openings. With planned additions of 400–450 stores, free cash flow will be "a bit lower," though no specific guidance was provided.
• Sales outlook stable: Management expects sales to be "flat or slightly up" with no reason for performance to be worse than Q2.
• Private label range expansion possible: The current ~700 SKU private label portfolio could add another 150 products, though no timeline was committed.

Dikshit: "If you want to be conservative, you could take the average for Q1 and Q2 as H1. But if you want a management sense, we are actually optimistic above the H1 number."

Guidance & Commitments

Key Metrics