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A fast KEY CHANGES -growing pharmacy retailer

Medplus Health Services Ltd (MHSL), incorporated on November 30, 2006 at Hyderabad, is the India’s second largest pharmacy retailer with network of over 2,000 stores distributed across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal, and Maharashtra. MHSL offers a wide range of products comprising pharmaceutical and wellness products (medicines, vitamins, medical devices, and test kits) and fast-moving consumer goods, such as home & personal care products, including toiletries, baby care products, soaps, detergents, and sanitizers. It operates via physical stores (~91% of sales) and online mode (contributes ~9% to FY21 sales). MHSL is backed by marquee investors including Lavender Rose, belonging to Warburg Pincus group and affiliates of Premji Invest.

* The market size of pharmacy & wellness retail segment is estimated at ~US$ 23bn in FY20 and is expected to grow at 25% CAGR to US $ 36bn over FY20-25 led by increase in life expectancy, better diagnostics methods, and rise in more lifestyle related diseases.

* The penetration of organized retail in pharmacy & wellness category is only 10% in FY20 and is expected to increase to 20% by FY25, thereby providing a large head room for organized players like Medplus to grow.

* MHSL enjoys strong store network with over~2,000 stores having grown from initial 48 stores. The store count grew at a CAGR of ~12% from 1,653 to 2,081 stores over FY19-FY21.

* Revenue grew healthy at a CAGR of ~16% over FY19-FY21 led by opening of new stores and strong SSSG (Same-Store Sales Growth) of 8.3%.

* EBITDA margins improved from 5.2% to 7.1% and EBITDA grew at a CAGR ~ 35% over FY19-FY21 led by cost efficient operations (technology-driven supply chain and distribution infrastructure developed in-house) and economies of scale.

* PAT grew at a CAGR of ~130% over FY19-21 led by better operating performance and topline growth.

* Strong cluster-based approach, omni-channel presence, value pricing and discounting strategy, 2-hour delivery capability & rising share of private label products differentiates MHSL from other players. 

* At the upper price band of Rs.796, MHSL is available at P/E of 71.5x (FY22E annualized) which appears to be aggressively priced. However, we assign a “Subscribe” rating for the issue on a long-term basis considering its strong growth in Revenue and PAT aided by strong store additions, improving margins, positive industry outlook and brand value.

Purpose of IPO

The offer comprises of fresh issue and offer for sale, totaling to Rs. 1,398cr. The proceeds of the offer for sale (Rs.798cr) shall be received by the selling shareholders. The net proceeds of the fresh issue (Rs. 600cr) will be utilized for funding working capital requirement of subsidiary, Optival and general corporate purposes.

Key Risks

* Increase in competition from other pharma retail players.

* The industry is subject to regulatory changes.

* Dependence on third party transportation providers for delivery of their products.

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