Buy MedPlus Health Services Limited Target Rs.866 by ARETE Securities Ltd
MedPlus Health Services delivered a strong sequential recovery in 2QFY27, with revenue growing 21.3% YoY (+8.4% QoQ) to Rs 20,371 mn and EBITDA rising 14.3% YoY to Rs 1,701 mn, ahead of our estimates by 8.0% and 12.7% respectively. EBITDA margin expanded 126 bps QoQ to 8.3% (-52 bps YoY), helped by a 59 bps QoQ improvement in gross margin to 25.1%, a stabilisation in private-label pharma, a rebound in private-label non-pharma (mix up to 10.7% from 9.8%) and a one-time Rs 79.6 mn reversal of a store-employee retention bonus provision (company operating EBITDA of Rs 981 mn / 4.8%; Rs 901 mn / 4.4% excluding the reversal). PAT of Rs 561 mn was up 1.0% YoY and 69% QoQ, 21.3% above our estimate, as depreciation (+22% YoY) and finance costs (+27% YoY) on a larger lease book absorbed most of the operating gain. Management guided to FY27 operating profit of Rs 3,800-4,000 mn (+4-9% YoY; earlier plan Rs 4,200-4,400 mn) after absorbing ~Rs 70 mn per month of minimum-wage inflation in Karnataka and Telangana, reiterated its target of 800 net store additions in FY27 and confirmed that non-core capex plans stay withdrawn.
Management call highlights
* Network: guidance of 800 net store additions in FY27 reiterated (FY28 to be higher). H1 net adds were 312 (166 in 2QFY27); the network is 5,642 stores (849 franchise), with 71% over two years old. 103 CoCo stores were converted to franchise; franchise revenue rose to Rs 1,160 mn from Rs 830 mn, with economics broadly similar to CoCo stores.
* Guidance: FY27 operating profit guided at ~Rs 3,800-4,000 mn (+4-9% YoY), below the earlier plan of Rs 4,200-4,400 mn after minimum-wage hikes in Karnataka and Telangana (~Rs 70 mn per month). No further wage or discount changes expected; warehouse consolidation and automation target a 0.5-0.75% cost reduction over four quarters.
* Store economics: 12M+ stores (93% of pharmacy revenue) grew 13.2% YoY with a 11.7% store-level EBITDA margin and 72% operating ROCE. Mature-store SSSG is expected at 9-10.5%.
Valuation and outlook
We remain positive on MedPlus given its leadership in India’s organised pharmacy retail market, disciplined store expansion and scalable franchise-led model. 2QFY27 marks an inflection after a weak 1QFY27: private-label pharma has plateaued, private-label non-pharma has recovered, gross margin has rebounded 59 bps QoQ and mature-store (12M+) EBITDA margin held at 11.7% with an operating ROCE of 72%. Management expects combined private-label mix to improve by ~0.5 pp per quarter, targets a 0.5-0.75% reduction in costs over four quarters through warehouse consolidation and AI-led automation, and does not expect further wage shocks or discount changes. That said, FY27 profitability is capped by the minimum-wage reset (Rs 800-850 mn annualised) and by a higher depreciation and finance cost run-rate on the expanding lease book (29% of stores are under two years old). Even so, the 2QFY27 beat lifts our FY27E EBITDA/PAT by 2.2%/3.9% to Rs 6,754 mn/Rs 2,466 mn, consistent with management’s FY27 operating profit guidance of Rs 3,800-4,000 mn, while FY28E EBITDA/PAT are broadly unchanged (-0.5%/-0.2%). We expect revenue, EBITDA and PAT to each compound at ~14% over FY26-28E, driven by store additions and operating leverage. We now value the company at 13x EV/EBITDA (from 15x) on four-quarter forward EBITDA to September 2028E (Oct-27 to Sep-28E) of Rs 8,702 mn, which gives a target price of Rs 866 (from Rs 825), implying an upside of approximately 44% from the current market price of Rs 600. We maintain our BUY rating.
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