MedPlus Health Services Limited (MEDPLUS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the MedPlus Health Services Limited earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. [ Srinivas ] from MedPlus Health Services. Thank you, and over to you, sir.

Thank you. Good evening, everyone. On behalf of MedPlus, it's my utmost pleasure to welcome you all to the MedPlus Q2 FY '27 Earnings Conference Call to discuss the financial results of MedPlus for the second quarter of FY '27, which were announced earlier. We have with us today the senior management represented by Mr. Madhukar Reddy Gangadi, CEO and MD; and Mr. Sujit Mahato, CFO. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Please note the disclaimer mentioning these risks and uncertainties on Slide 1 of the investor presentation shared with all of you earlier. Documents relating to our financial performance were circulated earlier, and these have also been posted on our corporate website. I would now hand over the call to Sujit. Thank you, and over to you, Sujit.

Thank you, Srinivas, and good evening, everyone, on this call. An update on our network in terms of openings and closures. We have opened 219 stores and there were 53 store closures, including 14 relocation cases and 23 franchisee outlet closures. We achieved a net addition of 166 stores, including net addition of 82 franchisee outlets during the quarter compared to the 146 stores added during the last quarter. We continue with the outlook for adding 800 net new stores, including the franchisee outlets in FY '27. An update on the store network. In terms of our store network age, around 29% of our stores have been operational for less than 2 years. And the remaining 71% of our stores have been operational for 2 years or more. In terms of the store size, at quarter end, our network consists of 5,642 stores, including 849 franchisee outlets, spanning over 3 million square feet. This compares with 5,476 stores, including 664 franchisee outlets as of June 2026. The average store size stood at 539 square feet. During the quarter, we added 82 franchisee stores and converted 103 COCO stores to franchisee model. An update on the revenue mix. Presently, MedPlus offers a large range of SKUs spanning across pharma and non-pharmaceutical categories. Private label sales for quarter 2 FY '27 constitute 21.4%, pharma being 10.7% and non-pharma 10.7% of our total revenues. Private label non-pharma sales grew by 18% quarter-on-quarter with the sales mix improving from 9.8% to 10.7%, primarily due to improvement in supplies post quarter 4 FY '26. We plan to further expand the product range to drive growth and increase the private label non-pharma sales mix. Private label pharma sales grew by 5.9% quarter-on-quarter, while the sales mix declined marginally from 11% to 10.7%. Gross margins increased from 24.5% in quarter 1 FY '27 to 25.1% in quarter 2 FY '27, driven by a higher private label sales mix and lower discounts. During the quarter, we updated the presentation of revenue mix by product category on Slide 13 of the investor presentation by reclassifying revenues from franchisees previously included under others into the respective product category. To ensure comparability and consistency, the same reclassification has been applied retrospectively to the preceding quarters, covering all the periods presented. Our consolidated revenue for the quarter stood at INR 20,371 million. Our consolidated operating EBITDA for the quarter stood at INR 981 million, representing 4.8%. This quarter included a onetime benefit of INR 79.6 million. This relates to the reversal of retention bonus provision for store employees. Excluding this reversal, consolidated operating EBITDA for the quarter would have been INR 901 million, representing 4.4%. Revenue from pharmacy operations grew by 21.3% on a year-on-year reported basis. The pharmacy operating EBITDA stood at INR 885 million, representing 4.4%. An update on our store performance, stores older than 12 months. Revenue from these stores in quarter 2 was INR 17,325 million, representing 93% of pharmacy revenue. These stores had a store level EBITDA margin of 11.7%. A word here on the store level EBITDA margin by age, while stores greater than 12 months had a margin of 11.7%, this was 11.9% for stores greater than 24 months, and 8.4% for stores in the 13 months to 24 months age bracket. On allocating all non-store-related costs, the operating EBITDA of stores greater than 12 months would be INR 945 million, which translates to a margin of 5.4%. An update on our working capital. Our net working capital for Q2 was 54 days. The inventory in our warehouse was 34 days. In quarter 2, the inventory level of our first-year stores was 86 days. In comparison, for our stores older than 12 months, the inventory was 34 days. An update on our diagnostic numbers. Diagnostics revenue for the current quarter grew to INR 410.5 million compared to INR 332.5 million in quarter 2 FY '26. Diagnostics segment recorded an operating EBITDA of INR 97.9 million, representing 23.8% compared to INR 50.9 million in quarter 2 FY '26. In July, we sold 648 plans per day. In August and September, this was 640 and 657, respectively. As on 30th September, we had around 2.16 lakh active plans. That concludes our update for the quarter. I request the host to open the line for questions.

[Operator Instructions] The first question comes from the line of Paresh Chaudhari with Latent Advisors PMS.

So in the previous calls, we had given a commentary that we expected the franchisees to have a higher sale -- a higher share of private label products as compared to the COCO. So how has it played out on ground? If you could give some like-to-like comparison of, let us say, some geography.

So we'll have to come back to you with details on that. Maybe starting next quarter, we'll actually start splitting out the franchisee numbers for all of you. But for now, I think it is more or less in line with what the company has. The private label sales are a function of 2 things: Typically, the region in which the store is and the vintage of the store. So for a rural franchisee, the private label is bound to be higher versus a city store. And obviously, while we expect that the franchisee will do more private label as we go forward, initially, it is still going to be less. So given that most of our guys are still new, it may still not be at the same level as the overall company.

[Operator Instructions] The next question comes from the line of Sudarshan Agarwal with Axis Capital.

Just checking on the private label mix. So this quarter, we have seen steadying on the private label pharma side, I guess. So where do you see this going ahead in quarters ahead on the private label pharma? And secondly, on non-pharma also, we are seeing consistent growth, right, on a Y-on-Y basis as well. So where do you see this kind of moving in the next, let's say, 3 to 4 quarters?

Sure. So on the pharma side, as we mentioned in the past, the sales growth got muted. In fact, it actually went down a little bit in absolute -- in percentage terms because we wanted to make sure that our employees are not misselling -- not misselling, I would say they're not being too aggressive in pushing the private label. That was causing a little bit of a problem with our regular customers. Hence, we got it muted down. Hence, over the last 3 or 4 quarters, you would have seen that we had gone down by around 0.5% or 0.6% quarter-on-quarter. This quarter, though, I think that largely got arrested. The degrowth was much smaller. And in absolute terms, the number was actually higher than what we had sold in Q2. The big difference was -- yes, the big difference, though, was that the brand sale went up. So while even the private label sales went down slightly on the pharma side, overall, it actually grew in absolute terms. That's one. On the non-pharma side, that was a problem more of supply chain and the pricing being not quite right and all that. So both of those have been corrected now. I think it went up from 9.8% to 10.7% quarter-on-quarter. This is now going to be just a function of us adding as many new categories as possible. Obviously, we cannot -- we have to do only the adjacent categories. You can't just do sell anything out there. It is also going to be a function of how many stores come up in a newer format, which has got a self-service kind of thing, which is slightly more amenable to the private label non-pharma kind of sales. But I don't see any cap on that. I don't see any reason why it should not continue to grow.

Yes. But I think a few quarters back, you used to kind of allude to the fact that maybe we can increase the private label mix by 50 to 100 basis points on either net or the other basis on a quarter-on-quarter basis. So does that trajectory now start back given that...

So if you take both the components of private label, which is pharma and non-pharma, I don't see any reason why we should not grow in the range of around 0.5% every quarter, maybe slightly less. But yes, on the whole, I think that's the number we'll be at, if you combine both. Though pharma side may actually grow slightly lesser, maybe at 0.2%, 0.3%, but the other one, maybe 0.1% or 0.2% or something like that. The balance will be made up by the non-pharma side, where it is not a question of substitution. It is just a question of adding new products and taking a larger share of the wallet.

Got it. And lastly, I think I saw that your discounting has come down a bit, 1-odd percent on broadly membership or otherwise. This is in relation to the wage hikes to, kind of, offset the wage hikes, et cetera, that has happened. And, I mean, will this kind of remain at these levels, the discounting? And is there a similar trend being observed in the industry as a whole that discount rates are coming off a little bit?

No, not really. So we, kind of, had this in our thing even earlier. Unfortunately, the increased wage hike did not let us get the full benefit of this. Otherwise, we should have had a slightly higher EBITDA, obviously. But no, given that we are the biggest discounters out there, I don't think anyone else is really following us out there. I don't think there's anything -- it's not a general trend in the industry. Let me put it that way. This is part of a plan for us to decrease the discounts over a period of time.

[Operator Instructions] The next question comes from the line of [ Rikant Singh ] an individual investor.

Sir [Foreign Language] profitable margin [Foreign Language] near about INR 2,000 crore [Foreign Language] sale [Foreign Language] net profit INR 56 crore [Foreign Language] last quarter [Foreign Language] supply chain [Foreign Language] disturbance [Foreign Language] net profit margin [Foreign Language] at least should be near about 10% as an investor [Foreign Language]?

Thank you for your question, Rikantji. It's a journey. If you look at the retail business, I think what you alluded is 10% PAT. That's a wishful thinking. But yes, the process to it is between what we have been there for last 2 years, you would see a continuous steady improvement on the PAT levels. And that journey will continue, as Madhukar explained, as and how we expand the EBITDA margin, that flows down to the PAT and that continues to increase. But definitely, we would not allude anywhere between 10% of PAT. Currently, we are at 2.5% and 3%, 3.5%, and that's the trajectory we would take and slowly increase.

[Operator Instructions] The next question comes from the line of Akhil Parekh with 360 ONE Capital.

My first question is on the margins front. Last quarter, you had said you will be in better position to guide how the EBITDA margins will look like for the remainder of the year and going forward in FY '28. If you would like to guide on the EBITDA margin trend, that would be helpful.

So I think this quarter, we are at around 4.8% EBITDA. I expect that we'll only get better in the next coming quarters. I cannot tell you exactly how much, but it will definitely improve as we do 2 things: One, streamline the costs and more importantly, actually improve the product mix. So both of those are happening. I expect it will increase. I think for the year, though, the overall EBITDA may be in the range of, I would say, conservatively around INR 380 crores to INR 400 crores is what I think the number will be depending on how the next 2 quarters are. But yes, that is something which we can easily commit to. I don't think that's a challenge. The AOP, though, I think, which got by mistake circulated out there, had a slightly higher number. And unfortunately, after that AOP, we saw a huge increase in the salaries across Karnataka and Telangana and all. And that has actually been a pretty big impact, I would say. If it were not for that, we should definitely be in a much higher number. But yes, as a percentage basis, though, the EBITDA will continue to grow. I would say that the last quarter was an aberration. This quarter, we'll probably be back in the 4.8%, 4.5% kind of thing as we go forward.

So INR 380 crores to INR 400 crores annual [indiscernible]?

Yes.

Second, on the cash flow, right, first half, they are softer as compared to last year because of the increase in working capital needs. While if I look at last couple of years, our cash flows have been very strong, like FY '25 and '26, they have been roughly in between INR 500 crores to INR 540-odd crores. Is it fair to assume our cash flow generation for full year '27 and '28 will get back to what we have delivered in terms of, say, EBITDA to OCF conversion will be similar to what we did in '25 and '26?

So a fair portion, yes, because if you also look at it, it's a function of the number of new stores what we are adding because as and when we add new stores, there is a gestation period of when the stores starts delivering positive cash. So to that extent, subject to that, absolutely, we'll be back on track.

The last 2 questions from my side. One is on the aging structure, right, of our stores that has kind of deteriorated from 79% to 71%, if I look at it for the last 2 quarters, obviously, because we are adding stores at an aggressive pace. Do you think the streamlining of costs and private label going up, that can get offset because of the inferior aging structure of our stores going forward? So will that play a role on the margins?

So I think for a growing company like us, that trade-off will always be there. That's historically -- that's the only reason we explain the details about the network age because as you rightly pointed out, there will be a play between the mature stores versus the stores which we believe are still in the nascent stage. And to that extent, that drag as the network size increases versus our growth, for sure, will offset and still should be able to deliver a positive growth net.

And lastly, the promoter pledging of the shares. Given that our business fundamentals are so strong, as an analyst, I feel we are not getting the right multiple and probably the share pledge is one of the overhangs. Any thoughts on that, that would be helpful. And if any corrective measures will be taken by the promoters, I think that can lift the price pressure of the stock?

So the pledging is only a function of the pricing of the stock, unfortunately. We're not really selling or taking any cash or doing any extra loans or whatever stuff. I believe it is the wrong time for me to sell any stock and get the debt down, although that is on the cards, but it is not going to be immediate or it's not going to be in the next quarter or so. We'll probably do other things to make sure that the price goes up. But eventually, it is the overall, I would say, performance of the company, which will take the share price up is my belief. One of the things which we think is that the whole thing around the private label and our ability to sell a high-value product like the medicine and make it in our own brand and be able to sell is not getting communicated properly, I guess. I'm sure eventually the message will go. Just look at the fact that today, out of the INR 650 crores to INR 670 crores, which we sell every month, 21% comes from private label and INR 70 crores is general goods. So if you take it, that's almost INR 800 crores of our own brand selling is there in general goods and an equal amount selling in the medicine side, which is, again, a pretty substantial amount. We're seeing a small but steady growth in both these things. I think this is what will help us get the EBITDA up, get the overall percentage up and get the share price up.

The next question comes from the line of Akash Shah with Investec Capital Services.

Sir, in first quarter, you had guided for same-stores growth to remain at 9% to 10% for FY '27. Do you maintain that? And second is, you had alluded to quarter-on-quarter improvement of 30 to 50 bps in the share of overall private label going ahead. So just wanted your confirmation on these 2 things.

Yes. So private label pharma, non-pharma combined, I think that should be pretty easy to get. We have already seen that in this quarter. Private label pharma, which had actually dipped for a while, has now basically started to plateau out. And although it is growing in terms of absolute numbers, as a percentage, it's actually dipped a little bit. But I think this will be the end. We'll probably start seeing a growth out there in that also as a percentage.

So 0.5 percentage points improvement every quarter should be achievable, in your opinion?

Yes. That ballpark number should be achievable.

And on SSSG growth, sir?

So on the mature stores, we continue to believe it will be between 9% and 10%, 10.5%.

And sir, last question. Any thoughts on the CapEx plans that we had withheld?

No. I don't think we are going to be visiting that anytime soon. CapEx now is out of the question. Our focus will be only on opening new stores and doing that private label.

And sir, just lastly, in fourth quarter, you had mentioned -- in fourth quarter of FY '26, you had mentioned that you would be maintaining the gross and EBITDA margins, which was back then. So should we assume that the percentages that were reported in fourth quarter could be normalized from FY '28 and onwards?

Should be, I mean, this year also we would have been able to do it fairly easily if not for the 2 events which happened. One, of course, was the huge increase in salaries across a couple of states. And in fact, across the board also, we had seen several different revisions to all sorts of things on the wage bill. So if not for that, we should have been able to do it easily, yes, going forward.

I think for FY '27, it is impacting because -- it has impacted because of that private label issue and the salaries. That's what you wanted to allude, right?

That's right.

The next question comes from the line of Ashutosh Parashar with MIT.

Question from the gross margin front. Given that the mix improvement on the private label side will largely come from non-pharma versus pharma. So how should we expect that to play out in the gross margin front? Firstly on that. And on the EBITDA margin front, given that we have a huge headwind of wage hike, so apart from the discounting that we have reduced, what else are we doing? And I have a couple of more questions that I'll ask in the follow-up.

Sure. So the impact of the general side is not going to be very high, I must say. It will just help us grow the sales because that will be a larger share of the wallet, private label general goods because the margin is roughly in the range of what we actually get normally. But that doesn't mean that we are not going to grow the private label pharma side. The overall growth will be around 0.5%, but we expect that the private label non-pharma will also -- pharma will also end up growing. And there, the impact is going to be much better for us. So that's one. On the -- I think you had one more question.

Yes. Just on the -- apart from discounting, what else are we trying to take [indiscernible]?

I don't think there's going to be any more shocks on the wage side. I don't think we really want to do anything more out there. I think now it's just going to be improvement in the same-store sales growth, adding new stores and product mix, and streamlining our cost at the back end. These are going to basically do it. I don't think we're going to do anything on the discounting side as of now.

On the store addition side, given that we are close to around 300, 310 in the first half, so are we on track towards that 800 store addition this year and next year also broadly? And in terms of the size, so are we doing something different there in terms of new store we are opening, let's say, higher -- bigger size stores to accumulate more of the non-pharma private label stuff, et cetera? So any tweaks are we doing there? And then lastly, on the diagnostic front, we have seen very good margin pickup over the last 2 quarters. So what are the plans there? That would be it.