India's Second Largest Pharmacy Retailer MedPlus Files For An IPO: Here's What We Know So Far

Pharmacy chain, MedPlus Health Services, has filed a Draft Red Herring Prospectus (DRHP) for an IPO. The company plans to raise around Rs 600 crore through a fresh issue of share. The promoters and existing shareholders will sell around Rs 1,040 crore through an offer for sale.

MedPlus is the second-largest pharmacy retailer in India in terms of revenue from operations for the financial year 2021, and the number of retail stores as of 31 March 2021. The chain offers a wide range of products such as pharmaceutical and wellness products, medicines, vitamins, medical devices and test kits.

The company also sells fast-moving consumer goods (FMCG) products, such as personal care products, toiletries, baby care products, soaps etc. It also sells medicine through its phone app and website.

The company has over 2,000 retail stores, which puts it behind Apollo. The company has its highest number of stores in Karnataka (520), followed by Tamil Nadu (458) and Telangana (443). It has the highest revenue share in Chennai and Bangalore and the second-highest revenue share in Hyderabad and Kolkata.

The company focuses on growing in a cluster-based approach wherein it first achieves high store density in a highly-populated area in the city before expanding further into other areas. It also owns and operates the entire backend infrastructure of its operations. Such an approach allows it to create brand awareness in the particular city, increase the market share, copy the model in adjacent cities or markets, and generate cost efficiencies in each cluster.

Financials:

Unlike other store operations, MedPlus continued to grow during the pandemic as the government allowed essential businesses to continue operating. Revenues have grown at a compounded annual growth rate of 16 per cent over the last two years. However, a major part of the growth has occurred due to the new opening of stores, rather than a high same store sales growth rate.

In comparison to Apollo, the MedPlus’ margins are relatively subdued. It has generated operating earnings before interest depreciation taxes and amortisation (EBIDTA) margins of around 4 per cent, while Apollo has margins of around 6 per cent. Another competitor, Wellness Forever, has marginally better operating EBIDTA margins. Medplus’ largest cost centre is the cost of goods sold. To lower its cost of goods, MedPlus has been directly sourcing a major part of its inventory from manufacturers.

The company takes its stores on lease, which is evidenced from the fact that the company has around Rs 87 crore worth of plant property and equipment, while having Rs 400 crore worth of lease liabilities. The asset light model has helped the company expand quickly from 48 stores in 2010 to 2,000 stores in 2021.

The company has been stocking up on inventory, resulting in low cash flows. The company’s inventory has almost doubled from Rs 394 crore in 2019 to Rs 643 crore in 2020. Inventories have increased to Rs 750 crore in 2021. Inventory pile-up can often be a negative sign implying the inability to sell off goods. However, the company bought inventory to mitigate supply chain risks due to Covid and for adequate supply to new stores.

Key Risks:

Competitive Risks:

The company faces strong competition from local and chain pharmacies. It also faces strong competition from online sales channels. The company operate in a sector with low operating margins. Any downwards pressure on revenues could affect the company’s earnings.

Regulatory Changes:

The healthcare sector is quite heavily regulated. Any inspections or reports with adverse observation could impact MedPlus negatively. In addition, any changes in regulations can adversely impact MedPlus.

Changes in Prescription Drug Pricing & Product Mix:

The company relies on prescription drugs to generate more than 75 per cent of its sales. Any drug price control measure initiated by regulatory bodies could adversely affect the company. Similarly, any adverse changes in the company’s product mix can also impact MedPlus negatively.