MEDPLUS HEALTH SERVICES

IN NEED OF A TONE UP

While the initial public offering of the company was a big hit and sustained investor interest for some time, the recent reports about an increase in promoter pledges and high valuation has caused concern among investors

MedPlus Health Services Limited is the second-largest pharmacy retailer in India, operating over 4,407 stores across 600 cities in 10 states. Founded in 2006 by Dr. Gangadi Madhukar Reddy, the company aims to be the first choice for customers’ health and wellness needs by consistently understanding and exceeding their expectations. The company offers a wide range of products, including pharmaceutical products, wellness products, fast-moving consumer goods and private label products. It has a strong presence in the retail and wholesale sale of medicines, manufacturing and contract manufacturing of private-label pharmaceutical and wellness products, import, distribution and full-fledged diagnostic centres.

IPO Performance
On December 23, 2021, Medplus Health Services Limited launched its initial public offering (IPO), marking a significant milestone in its growth story. The IPO was successful, achieving a listing day gain of 40.81 per cent, with the share price rising from the issue price of ₹796 to a closing price of ₹1,120.85. As we fast forward to June 2024, two years and six months after the IPO, we see that the stock has taken a significant hit, now trading at ₹696.90. The once-promising debut has given way to a disappointing performance. The stock has lost 12.45 per cent of its value since the IPO, a stark contrast to the initial enthusiasm.

So, what seems to have gone wrong? Has the company failed to meet expectations? Has the market overreacted to the IPO hype? The answers remain unclear, but one thing is certain – Medplus Health Services’ stock performance has been a rollercoaster ride with a disappointing outcome. However, despite the challenges, the company remains committed to its mission of providing quality healthcare services to its customers. As it continues to navigate the ever-changing market landscape, it maintains its focus on delivering value to the stakeholders.

Financials
The company recorded revenue of ₹5,625 crore for FY24. The EBITDA stood at ₹354 crore maintaining a 6.3 per cent EBITDA margin and generating net profit of ₹66 crore. For FY24, the revenue grew around 23 per cent and the management expects similar lines of growth moving ahead in FY25. It expects the EBITDA to remain at 6 per cent plus for FY25. For the latest quarter, Q4FY24, the revenue came at ₹1,490 crore whereas the net profit worked out to ₹34 crore, the highest ever quarterly net profit after 11 quarters.

Revenue Mix
The revenue breakdown for Medplus Health Services is predominantly driven by its pharmacy – retail segment, which accounts for approximately 98.4 per cent of the total revenue. The remaining 1.6 per cent comes from diagnostic services. The company’s product offerings are heavily skewed towards generics, with around 85 per cent of the product sales being generic medicines. Additionally, about 15 per cent of the medicines sold in pharmacies are under the company’s private label brand. The management is actively working to increase the share of private label products in the future.

Store Expansion
The company is constantly increasing its number of stores. Currently, these stand at 4,407 as of FY24 year ending.MedPlus Health Services has demonstrated impressive growth, adding 585 new stores in the last 12 months, including 174 in the most recent quarter. It has a diverse store network, with 52 per cent of its locations in metro cities, 13 per cent in Tier I cities, 23 per cent in Tier II cities and the remaining 12 per cent in Tier III cities. Around 41 per cent of these stores have been established in the last two years, indicating rapid recent expansion.

Interestingly, the stores that have been operational for more than two years tend to show higher EBITDA margins, suggesting that profitability increases with the maturity of the stores. Looking forward, MedPlus Health Services is set to continue its growth trajectory with plans to open approximately 600 new stores in the fiscal year 2025. This expansion strategy underscores the company’s commitment to increasing its market presence and reaching more customers across various city tiers.

Diagnostic Business
MedPlus Health Services has been expanding its diagnostic business. It initially entered the diagnostic market in March 2022 with four full-service centres, two smaller centres and 120 collection points in Hyderabad. The company aimed to leverage its existing customer base, as most customers buying medicines at its stores would also require diagnostic testing. Initially, the company planned to expand its diagnostic business beyond Hyderabad, but it has since deferred these plans until the profitability of the pilot project is established.

The company wants to reach 200,000 subscribers in the diagnostic business before deciding on further expansion. It has around 120,000 subscribers in the diagnostic business, with a goal to reach 200,000 before expanding further. MedPlus Health Services had approved a proposal to raise ₹1,200 crore through a qualified institutional placement (QIP) in November 2023, but this plan has been put on hold. Investors would do well to watch out for the company’s expansion plans and how this will boost its revenue.

Shareholding Pattern
After listing, investors have reduced interest in Medplus Health Services, which is quite evident through a decrease in public holding in the company. Since the IPO, the public’s shareholding has decreased from 28.08 per cent to 22.10 per cent. On the contrary, FIis have increased their stake significantly in the company from 3.42 per cent to 14.94 per cent over the same period. As of March 2024, the promoter holds 40.39 per cent stake in the company and DIis hold 22.47 per cent while the public hold 22.1 per cent and the rest 14.94 per cent is held by FIis

Potential Risk
High Debt and Low Interest Coverage Ratio: MedPlus Health Services has a high debt level and a low-interest coverage ratio, indicating that it may be highly leveraged and could face difficulties in servicing its debt obligations. High Promoter Pledge: As of March 2024, the company’s promoters have pledged a significant portion of their shareholding (54.2 per cent). This high level of promoter pledge raises concerns about the company’s financial stability and governance.

Valuation
Medplus Health Services has a high PE ratio of 127.17 times, suggesting high valuations. Its ROE is 4.27 per cent, which is relatively low. The stock trades at 5.29 times its book value, raising concerns for investors.

Conclusion
MedPlus Health Services has demonstrated impressive growth in its store network and revenue. The company also has significant potential to grow its private label business. However, it faces challenges related to high debt, low-interest coverage and high promoter pledges. Additionally, the stock’s high valuation as reflected in its high PE ratio and low ROE is a matter of concern. Given these factors, it is advisable for investors to wait until the company’s balance-sheet shows signs of deleveraging. Therefore, our recommendation is to AVOID.