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MedPlus Health Services Ltd (Medplus), is the second-largest pharmacy retailer in terms of revenue and number of stores in India with 4,552 pharmacies across 12 states as of 30th September 2024. Medplus has 14% market share as of 2023 in the organized Pharma market and holds strong market share in Chennai, Bangalore, Hyderabad and Kolkata of approximately 30%, 29%, 30% and 22%, respectively as of FY21 in organized pharmacy retail market. MedPlus intends to position itself as a one-stop destination for pharmaceuticals, diagnostics, and wellness products, capitalizing on India's growing healthcare needs and the shift toward organized retail through Ecommerce, expansion of private label products and Diagnostics.

Investment positives:

* Organized Retail in Pharmaceuticals: The Indian pharmacy market is valued at $50 billion (2023), with organized players like MedPlus holding less than 10% market share, indicating significant room for growth. Consumers increasingly prefer branded pharmacy chains for better service, product quality, and price transparency. The organized pharmacy segment in India has grown from 9% market share in 2018 to 18%+ in 2023, reflecting a shift in consumer preference toward branded pharmacy chains. Similarly, organized players have reported 15-20% CAGR revenue growth, outpacing the overall market growth rate of 8-10% CAGR.

* Omni-channel growth: Online channel revenue which is currently 6% of the total revenue as of 2QFY25, has increased with store addition. This strategy offers advantages like low customer acquisition costs as these centers double up as branding and advertising sites. With presence in 2709 pincodes, Medplus is able to reduce the delivery time to 2 hours. Competitors find it difficult due to lack of store physical store count. This proposition also lowers the delivery costs. Due to the hyper local presence, MedPlus can serve both acute and chronic segments which is only 37% of the market, covering the entire spectrum of pharmaceutical needs

* Growth strategies:

Private Label Expansion: MedPlus has 1,161 SKUs in its private-label portfolio consisting of 787 pharma products and 374 Non pharma products. Private label has ~65% gross margins compared to branded drugs which has ~13% margins. Medplus intends to increase the penetration of private label pharmaceutical products by introducing more therapeutic areas, in particular for sub-chronic and chronic ailments and introduce new private label products in the consumer categories of nutrition and wellness.

* Cluster based expansion strategy: It employs data analytics driven cluster-based approach to store network expansion, whereby the company first achieves high store density in a densely-populated residential area within a target city before expanding store network in the surrounding areas within that city, followed by expansion into other adjacent cities. This has led to higher store concentration in cities like Bangalore, Chennai, Hyderabad and Kolkata

Outlook and Valuation

We remain optimistic about Medplus, given its strong positioning within India's consumption growth narrative and the favorable dynamics in the healthcare sector. The essential nature of the industry, combined with a steady transition from unorganized to organized retail, provides a solid foundation for growth. With rising awareness of generic drugs, we expect Medplus to be a major beneficiary of this trend.

Key growth drivers for the company include its aggressive store expansion strategy, which is expected to drive revenue growth, and a growing contribution from its private-label business, which will enhance EBITDA margins. Medplus plans to add 415, 780, and 930 stores across FY25, FY26, and FY27, respectively, targeting both existing markets and new regions like Kerala, Chhattisgarh, and Madhya Pradesh. This expansion is projected to support a revenue CAGR of 20% over FY24-27.

The private-label segment, currently contributing 10.5% of sales, is anticipated to grow by 1- 1.5% per quarter, reaching approximately 30% of total sales-consistent with the caps observed in U.S. pharmacy chains such as CVS Health and Walgreens. This shift is expected to result in a quarterly gross margin improvement of 0.5-0.75%, driving a cumulative EBITDA margin expansion of ~200 bps by FY27.

We project a revenue, EBITDA, and PAT CAGR of 20%, 32%, and 61%, respectively, over FY24- 27, with PAT expected to more than double from FY25 onwards, supported by these growth drivers and management's guidance.

Given the heavy reliance on achieving store addition targets and meeting the six-month breakeven timeline, we apply a conservative 30% discount to the current EV/EBITDA multiple of 21x. As a result, we assign a 15x multiple to the estimated EBITDA of 7,541 crore for December 2026, leading to a target price of 874

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