Medplus Health Services IPO sees huge demand, subscribed 52.60 times

Medplus Health Services Limited (Medplus) opened for subscription on 13th December. As at the end of the last day of the issue, the IPO has been subscribed by 52.60 times, backed by strong demand across categories. The company had looked to raise up to Rs 1,398.30 crore through the public issue. Here are the details:

About the Medplus Health Services Limited IPO

• Medplus Health Services IPO Date: 13 December - 15 December 2021
• Medplus Health Services IPO Price band: Rs 780 - Rs 796
• Issue Size: Rs 1398.30 crore (Fresh issue aggregating up to Rs 600 crore and offer for sale aggregating up to Rs 798.30 crore)
• Reservation: QIB 50%, Retail - 35%, NII 15%
• Post Issue Market Cap: Rs 9,318 crore – Rs 9,497 crore
• Employee Reservation: Rs 78
• Minimum Investment: Rs 14,328
• Bid lot: 18 shares, and in multiples of 18 shares

Objectives of the issue

The net proceeds from the IPO will be utilized for the following purposes :

• Funding working capital requirement of the subsidiary, Optival
• General corporate purposes

About Medplus Health

• Medplus was incorporated in 2006, and it is the second-largest pharmacy retailer in India in terms of revenue from operation and number of stores (FY21).
• It offers a wide range of products that include pharmaceutical and wellness products - medicines, vitamins, medical devices, and test kits. It also offers fast-moving consumer goods, such as home and personal care products, including toiletries, baby care products, soaps and detergents, and sanitizers.
• It is the first pharmacy retailer in India that offers an omnichannel platform to customers. Customers can purchase products through stores, place orders over the telephone, online orders, and a Click and Pick facility.
• They also deliver their customers’ online purchases within 2 hours of purchase in select cities of Hyderabad, Bangalore, Kolkata, Pune, and Nagpur. Medplus's warehouses are located in Bengaluru, Chennai, Hyderabad, Vijayawada, Kolkata, Pune, Bhubaneshwar, Mumbai, and Nagpur.

Industry Outlook

The domestic pharmaceutical market is highly fragmented with the top 10 companies contributing less than 50% of the market, and the top 150 companies accounting for close to 96% of the market. The market is primarily dominated by Indian companies, which account for close to 80% of the market share.

As of FY20, the pharmacy retail industry was estimated to be worth approximately Rs 1,72,500 crore and expected to grow at a CAGR of approximately 10% in the next five years. Here are some evolving trends in the pharmacy retail industry:

• Modern pharmacy retail is estimated to grow at a rate of 25%, growing faster than other categories.
• E-commerce and omnichannel retail are expected to grow at a CAGR of 44%, with pharmacy e-commerce expected to be one of the fastest-growing segments after food and grocery.
• FMCG products account for approximately 15-20% of the overall revenue of organized pharmaceutical stores and hence going forward, one can see cross-selling with FMCG products with good margins.

Listed Peers

There are no listed companies in India that are comparable in all aspects of business and services that Medplus provides. Hence, it is not possible to provide an industry comparison in relation to its business.

However, there are unlisted players from which the company will continue to face competition. The prominent names are Apollo Pharmacy, Wellness Forever, API Holding, Tata 1mg, and Netmeds.

Financials

• Medplus has reported revenue for FY19, FY20, and FY21 as Rs 2,272.74 crore, Rs 2,870.60 crore, Rs 3,069.27 crore, respectively. It has reported good revenue growth since FY19.
• The EBITDA for FY19, FY20, and FY21 is Rs 131.35 crore, Rs 150.96 crore, and Rs 238.21 crore, respectively. The EBITDA margin for the same period is 5.78%, 5.26%, and 7.76%.
• The net profit for the same period is Rs 11.92 crore, Rs 1.79 crore, and Rs 63.11 crore, respectively.
• The average EPS (Basic) and RoNW for the last three financial years is 2.51 and 4.41%, respectively.
• Their average revenue per store was approximately Rs 1.59 crore, as compared to the average revenue per store in the domestic pharmacy retail industry of approximately Rs 0.23 crore for FY21.
• The operating ROCE for the financial years 2020 and 2021 was 19.87%, 26.08%, respectively.

USPs

India’s second-largest pharmacy retailer - They operate 2,326 stores distributed across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal, and Maharashtra as of September 30, 2021. They are focused on growing and achieving market leadership in the key cities where they operate.

Established Brand - MedPlus brand has a history and tracks record of over 15 years. It has become a well-established brand that the company has positioned to stand for genuine and good quality pharmaceutical products offered at affordable prices.

Successful track record of expansion - They have grown from operating initial 48 stores in Hyderabad at the start of 2006 to operating India’s second-largest pharmacy retail network of over 2,000 stores. They are focused on extending and maintaining an efficient supply chain and distribution network to support the growth of established and new clusters. It has a streamlined and methodical store opening process that is focused on the sustainability and profitability of every new store rolled out.

Lean cost structure and technology-driven operations - Company’s scale of operations, wholly-managed and operated supply chain and distribution infrastructure, strong and integrated technology backbone, and focus on maintaining cost-efficient operations give them an advantage over their competitors.

Growth Potential

Strengthen market position by increasing store penetration - Medplus intends to capitalise on the shift from unorganized to organized retail of pharmaceutical products in India and strengthen their market position by increasing store penetration and customer reach in existing clusters and developing new clusters in other states and cities. They intend to enter into one to two new states every year.

Grow Omni-channel platform - It plans to further develop an omnichannel platform with the aim to increase online sales revenue contribution to total revenue from operations. It will leverage the growing store network and focus on deliveries through its growing number of larger format stores. It expects to expand its ability to deliver online purchases within two hours of purchase in Mumbai by December 31, 2021.

Enhance revenue and increase customer wallet share - Investing in and enhancing their customer-facing mobile application and customer-facing features on their website will allow them to better analyze and manage customer interactions and related data and insights throughout the customer lifecycle. It will help them understand their requirements, create a long-term relationship with customers, build customer retention, and drive sales.

Risks

Pledged shares - One of its promoters, Lone Furrow Investments Private Limited, has pledged a portion of its shareholding with certain lenders under various loan and security agreements. Any exercise or enforcement of such a pledge could dilute the shareholding of Lone Furrow Investments which in turn affect Medplus business and future prospects.

Negative cash flow - The company has in the past, and may in the future, experience negative cash flows from operating, investing, and financing activities. Negative cash flows over extended periods, or significant negative cash flows in the short term, could materially impact a company's ability to operate the business and implement its growth plans.

Changes in prescription drug pricing and commercial terms - Sales of prescription drugs, medical devices, and drug prices may be affected by changes to the healthcare industry, including legislative or other changes that impact patient eligibility, drug product eligibility, the allowable cost of a prescription drug product, the mark-up or channel margin permitted on a given prescription drug product, etc. It may incur significant costs in the course of complying with any other changes in the regulatory regime affecting prescription drugs.

Medplus Health Services:

Medplus Health has reported a steady 16% CAGR rise in its total revenues to Rs 3,069 crore in between FY19 and FY21. The company’s profits have also risen sharply from Rs 11.9 crore in FY19 to Rs 61 crore in FY21. For the first six months of FY22 ended on September 30, 2021, Medplus has reported a net profit of Rs. 66.37 cr, higher than what it reported in the 12 months in FY21. The company’s margins and return ratios have also shown good improvement over the last three years.

If we annualize Apr-Sep 21 earnings, Medplus Health IPO is valued at a PE ratio of 72 times (on a fully diluted basis). As is the case in this IPO season, good businesses are getting priced at expensive valuations, and Medplus is no exception. The company does not have any listed peers.

Given the company’s strong product profile and footprint, healthy rise in topline, robust increase in profits, healthy margins, and good return ratios, we remain “Positive” on the long-term prospects of the issue.

Subscription status (End of Day 3) (15th December 2021)