Buy Medplus Healthcare Services Ltd For Target Rs 825 by ARETE Securities ltd
MedPlus Health Services reported a mixed performance in 1QFY27, with revenue growing 21.8% YoY to Rs 18,796 mn, driven by continued store expansion and healthy demand across its pharmacy network. However, profitability remained under pressure, with gross margin contracting 160 bps YoY to 24.5% and EBITDA margin declining 139 bps YoY to 7.1%. The margin compression was primarily driven by a lower contribution from higher-margin private-label products (20.0% vs. 21.5% in 1QFY26), a higher mix of branded medicines (63.8% vs. 63.0%), normalization of inventory provisions, elevated competitive intensity and a sharp increase in employee costs following statutory wage hikes. Despite the near-term margin headwinds, management reiterated its FY27 guidance of 800 net store additions and expects profitability to improve gradually as private-label penetration recovers and recent pricing initiatives begin to support margins.
Management call highlights
• Management reiterated its guidance of 800 net store additions in FY27, supported by both company-owned and franchise stores. During the quarter, the company added 146 net stores, taking the network to 5,476 stores spread across 2.9 mn sq. ft., with 73% of stores now over two years old. Around 24 COCO stores are being converted to the franchise model, while 95% of these franchise opportunities will be offered to senior employees (>3 years of service).
• Private-label products contributed 20% of revenue (10.7% pharma and 9.3% non-pharma). Management deliberately reduced aggressive in-store promotion of private-label products to improve customer experience, resulting in a temporary decline in mix. Going forward, private-label penetration is expected to recover gradually through marketing initiatives, influencer engagement and improved staff training, rather than sales incentives.
• Gross margin declined due to a combination of lower privatelabel mix, ~50 bps dilution from the growing franchise business, normalization of inventory provisions, and the absence of yearend supplier discounts. Management expects margins to improve over the remainder of FY27 following the recent changes to the customer discount structure.
• To support margin recovery, effective 7 July, MedPlus reduced customer discounts on purchases above Rs 1,000 from 20% to 19%, with initial customer response remaining encouraging.
• Store-level salaries increased 29.8% YoY, driven by statutory minimum wage hikes, particularly in Karnataka (~60%) and Telangana (>25%), while procurement, supply & distribution costs increased 36.2% YoY owing to network expansion.
• Inventory remained well controlled with 54 net working capital days, comprising 33 warehouse inventory days and 36 store inventory days for mature stores.
• The diagnostics business continued to scale, with revenue increasing to Rs.370.8 mn and operating EBITDA improving to Rs.65.9 mn. Active diagnostic subscriptions reached approximately 200,000, with daily plan sales improving steadily during the quarter.
• Management has put proposed non-core capex projects, including the food park and wellness initiatives, on hold following shareholder feedback. Capital allocation will remain focused on the core pharmacy business, including store expansion, warehousing and private-label development.
• The company continues to focus expansion on underserved markets, with 77% of net store additions during the quarter coming from Tier-2 and Tier-3 cities, where competitive intensity remains relatively lower.
Valuation and outlook
We remain positive on MedPlus given its leadership in India's organized pharmacy retail market, disciplined store expansion strategy and scalable franchise-led expansion model. While near-term profitability has been impacted by wage inflation, lower private-label contribution and inventory provisioning, we believe these pressures are largely transitory. Management has reiterated its guidance of 800 net store additions in FY27, while the increasing share of mature stores (73% of the network is over two years old). However, following management's decision to moderate the pace of private-label penetration in order to enhance customer experience, we have lowered our margin assumptions. We now expect private-label mix to improve more gradually, resulting in a slower recovery in gross margins than previously anticipated. Accordingly, we revise our FY27E/FY28E EBITDA estimates downward by 10.2%/8.0% and PAT estimates by 10.4%/15.1%. Despite these revisions, we expect MedPlus to deliver Revenue/EBITDA/PAT CAGR of 13%/ 15%/14% over FY26-28E, supported by sustained store additions, improving store productivity and gradual operating leverage. We roll forward our valuation to June FY28E and value the company at 15x FY28E EV/EBITDA. Based on our revised June 2027 EBITDA estimate of Rs 7,217 mn, we arrive at a target price of Rs 825, implying an upside of approximately 15% from the current market price. We maintain our BUY rating.
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