Medplus Health Services coming with an IPO to raise upto Rs 1428 crore

Medplus Health Services

• Medplus Health Services is coming out with a 100% book building; initial public offering (IPO) of 1,79,33,981 shares of Rs 1 each in a price band Rs 780-796 per equity share.
  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
  
• The issue will open for subscription on December 13, 2021 and will close on December 15, 2021.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 1 and is priced 780 times of its face value on the lower side and 796 times on the higher side.
  
• Book running lead manager to the issue are Axis Capital, Credit Suisse Securities (India), Edelweiss Financial Services and Nomura Financial Advisory and Securities (India).
  
• Compliance Officer for the issue is Parag Jain.
  

Profile of the company

The company offers a wide range of products, including (i) pharmaceutical and wellness products, including medicines, vitamins, medical devices and test kits, and (ii) fast-moving consumer goods, such as home and personal care products, including toiletries, baby care products, soaps and detergents, and sanitizers. The company was founded in 2006 by Gangadi Madhukar Reddy, its Managing Director and Chief Executive Officer, with the vision to set up a trusted pharmacy retail brand that offers genuine medicines and delivers better value to the customer by reducing inefficiencies in the supply chain using technology.

The company employs a data analytics driven cluster-based approach to its store network expansion, whereby it first achieve high store density in a densely-populated residential area within a target city before expanding its store network in the surrounding areas within that city, followed by expansion into other adjacent cities. Its cluster-based approach to store network expansion is also driven by its understanding of the catchment demographics, market dynamics, and its ability to support store expansion with back-end infrastructure, such as warehouses and distribution centres. This approach and understanding allow it to (i) create brand visibility within the cities where it operate, through focused implementation of marketing and advertising initiatives, (ii) increase its market share in the cities where it operate, (iii) replicate its growth model in adjacent underserved cities and towns, as it develop its presence in those clusters, and (iv) generate cost efficiencies due to operating leverage achieved in its supply chain and inventory management. It has a streamlined and methodical store opening process, and dedicated operations and business development teams at the area, city and state levels that would vet and approve the opening of new stores.

Proceed is being used for:

• Investment into company’s material subsidiary, optival for funding working capital requirements of Optival.
  
• General corporate purposes.
  

Industry overview

The healthcare sector in India primarily includes hospitals, pharmaceutical companies and pharmacy retail, diagnostic services, medical equipment and supplies, medical insurance, telemedicine companies and medical tourism. Whilst the per capita health expenditure in India is one of the lowest in the world, with total health expenditure comprising 3.5% of India’s GDP (and as compared to the global average of 6.5%), there is a high potential for growth given an increasing awareness, affordability and acceptability of health services leading to an increased spending on healthcare. India’s domestic pharmaceutical market was valued at Rs 1,500 billion in financial year 2020, having grown at a CAGR of approximately 10% in the last five years, and is expected to grow at a similar rate going forward. The key market characteristics of the domestic pharmaceutical market include a low per capita health expenditure, high share of private out of pocket expenses (which includes purchases from pharmacies), and lower penetration across rural areas which has led to a high opportunity of growth given the limited penetration of health services in rural and urban areas.

The domestic pharmaceutical market in India can be segmented based on the type of drugs sold, which includes prescription drugs and OTC drugs. Prescription drugs further comprise of generic drugs (including branded generics and ordinary generics) and branded patented drugs. Branded generics attach proprietary names to generic drug molecules whereas ordinary generic drugs are known by their chemical names. During financial year 2020, generic drugs accounted for 75% of the total domestic market, with over-the-counter (OTC) drugs and branded patented drugs accounting 18% and 7%, respectively. Pharmaceutical market is also segmented by therapy including acute therapy and chronic therapy. Acute conditions are generally severe and sudden in onset and therefore patients require medications urgently. This could describe ailments ranging from a broken bone to an asthma attack. The major acute therapies are anti-infectives, gastrointestinal, dermatology and vitamin/Nutrient. India is an integral part of the global pharmaceutical supply chain, and accounts for exports and imports with more than 200 countries in the world. The pharmaceutical supply chain consists of manufacturing plants, intermediary product suppliers, logistics partners and technology partners. The Indian domestic market consists of a large network of more than 500 medium and large companies (that manufacture/contract manufacture), around 60,000 distributors, and around 800,000 pharmacy retail outlets, with more than 100,000 pharmaceutical brands available in the market given it’s a branded generics market.

Pros and strengths

India’s second largest pharmacy retailer: The company is the second largest pharmacy retailer in India, in terms of (i) revenue from operations for the financial year 2021, and (ii) number of stores as of March 31, 2021. The company operates 2,326 stores distributed across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal and Maharashtra as of September 30, 2021. In addition to being the second largest pharmacy retailer, the company focus on growing and achieving market leadership in the key cities where it operate. For the financial year 2021, its share of the organized pharmacy retail market based on revenue from operations in Chennai, Bangalore, Hyderabad and Kolkata stood at 30%, 29%, 30% and 22% respectively. In terms of number of stores as of March 31, 2021, the company ranked 1st in Chennai and Bangalore, and 2nd in Hyderabad and Kolkata. The company has also extended its leadership position from offline sales of pharmaceutical products to online sales of pharmaceutical products. Commencing in 2015, it was the first pharmacy retailer in India to offer an omni-channel platform.

Successful track record of expansion using distinct cluster-based and replicable store unit expansion approach: The company has grown from operating its initial 48 stores in Hyderabad at the conception of its business in 2006 to operating India’s second largest pharmacy retail network of over 2,000 stores, distributed across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal and Maharashtra, as of March 31, 2021. The company employs a data-analytics driven cluster-based approach to its store network expansion, whereby the company first achieve high store density in a densely-populated residential area within a target city before expanding its store network in the surrounding areas within that city, followed by expansion into other adjacent cities. This approach (i) allows it to create high brand visibility for customers within the key cities, through focused implementation of marketing and advertising initiatives, (ii) leads to its under-served cities and areas, as it develop presence in existing clusters and develop new clusters, and (iv) increase cost efficiency due to economies of scale achieved in its supply chain and inventory management. The company focuses on extending and maintaining an efficient supply chain and distribution network to support the growth of established and new clusters.

High density store network enhancing omni-channel proposition: The company is the first pharmacy retailer in India to offer an omni-channel platform. Commencing in 2015, its customers could either visit its stores or access its offerings online, through its website and mobile application. Its customers has multiple options, including (i) purchasing products at one of its stores, or (ii) placing an order through a telephone call to receive delivery of their purchased products, or (iii) placing an order online to receive delivery of their purchased products, or (iv) ‘Click and Pick’, by placing an order online and picking up their purchased products from one of its stores. Its ‘Click and Pick’ proposition allows its customers the ease of showing their prescription at a store, in cases where uploading the prescription online becomes a challenge. With its wholly-managed and operated last-mile delivery infrastructure from its stores, the company is now able to deliver its customer online purchases within two hours of purchase in select cities of Hyderabad, Bangalore, Kolkata, Pune and Nagpur. These services were started in the financial year 2021, and recent pilots conducted in July 2021, have showed promising results where 93% of online delivery purchases were delivered within two hours in select micro-markets of Hyderabad. The company is going to expand its ability to deliver online purchases within two hours of purchase in cities such as Chennai and Mumbai by December 31, 2021.

Well qualified, experienced and entrepreneurial board and senior management team: The company’s business and operations are led by a well-qualified, experienced and capable management team, who come from diverse backgrounds and various fields of expertise, such as medicine, finance, business and technology. Three members of its senior management team are doctors, and intimately understand its business, its industry and the competitive landscape. The founder, Managing Director and Chief Executive Officer of the Company, Gangadi Madhukar Reddy, holds a bachelor’s degree in medicine and surgery from Sri Venkateswara University, and a master’s degree in business administration from the Wharton School of Business, University of Pennsylvania. As both a doctor and an entrepreneur, he has played an instrumental role in the strategic direction and to the growth of the business, developing and maintaining key relationships with its shareholders, business suppliers and other stakeholders. Its Board of Directors brings understanding of the pharmaceutical industry, retail businesses and consumer brands in India.

Risks and concerns

Insurance coverage may not be adequate to protect against all potential losses: The company’s insurance includes coverage of certain risks such as fire and other natural and accidental risks at its stores, laboratories and warehouses, and includes stock, money, vehicle and D&O insurance, which is in line with its industry. As of March 31, 2019, March 31, 2020, March 31, 2021 and September 30, 2021, the amount of its insured assets was Rs 447.43 crore, Rs 708.05 crore, Rs 833.57 crore and Rs 912.08 crore, representing 86.21%, 88.93%, 86.45% and 84.12% of its total assets excluding intangible assets, land, right of use, deferred tax and bank balances. The company may be exposed to liability risks, such as product liability, product recall or personal injury risks. In addition, if any or all of its warehouses or stores are damaged in whole or in part, its operations may be interrupted for a sustained period. The company cannot assure that its insurance policies will be adequate to cover the losses that it may incur as a result of such events. If the company suffer a large uninsured loss or any insured loss suffered by its significantly exceeds its insurance coverage, its business, financial condition and result of operations may be materially and adversely affected.

Operations subject to high working capital requirements: The company may require significant amount of working capital, and a major portion of its working capital is utilized towards inventories. As on September 30, 2021, the company has a sanctioned working capital limit of Rs 185 crore. The company’s growing scale and expansion, if any, may result in increase in the quantum of current assets. Its inability to maintain sufficient cash flow, credit facility and other sourcing of funding, in a timely manner, or at all, to meet the requirement of working capital or pay out debts, could adversely affect its financial condition and result of its operations. Its activities expose it to a variety of financial risks, including credit risk, liquidity risk and in particular, market risk. If any of the credit facilities availed by the company are recalled on a short notice, the company may be required to arrange for funds to fulfil the necessary requirements. The occurrence of these events may have an adverse effect on its cash flow and financial conditions.

Failure to meet customer expectations may harm brand and reputation: The company seek to provide convenience to its customers through its omni-channel platform, with both online and offline channels. The company maintains a wide product mix, which includes products that depend on recent inventions and developments in the pharmaceutical manufacturing industry. The company markets and sells these products based on recent prescription trends in the market. However, it is difficult to consistently and successfully predict which products doctors may prescribe and the products and services its customers may require from the company. The company has recently introduced a wide range of private label products so as to distinguish the company from its competitors and offer its customers a variety of products based on their purchasing power and spending capacity. Any failure or inability to timely identify or effectively respond to changing preferences in the medical industry, spending patterns of its customers, evolving demographic mixes in markets or obtain and offer particular categories of products could adversely affect its relationships with customers and clients, as well as the demand for its products and services. This could also result in holding an excess inventory of unsold products, which could adversely affect its operating results. Specific instances of such risk that adversely affected the company in the past three financial years and the six months ended September 30, 2021 are not ascertainable or measurable, and the impact of such risk on the financials of the company cannot be quantified.

Rely on third-party manufacturers for supply of products: Almost all its inventories sourced by the company are manufactured by third-party manufacturers, including its private label products which are manufactured for the company by third-party manufacturers on a contract-manufacturing basis. As a result, the company is dependent on third-party manufacturers for the timely supply of all its inventories, including general pharmaceutical and FMCG products. From time to time, and especially during periods of intense demand or supply chain disruptions, its suppliers may find it necessary to allocate a supply of particular products amongst retailers. Such allocations of supply have not in the past proven to be a significant impediment in the conduct of its business. However, any decline in the quality of products manufactured or a delay in delivery of products, or a rise in job work charges may adversely affect its operations. Any withdrawal of services from such manufacturers may adversely affect its result of operations and future prospects. Although the company have put in place strict quality control measures for all private label products manufactured for the company on a contract basis, the company cannot assure that its private label products will always be able to satisfy its customers’ quality standards.

Outlook

Medplus Health Services is India's second-largest pharmacy retailer in terms of the number of stores and revenue. The company offers pharmaceutical and wellness products i.e. medicines, vitamins, medical devices, test kits, and fast-moving consumer goods i.e. home and personal care products, baby care products, sanitizers, soaps, and detergents, etc. It is also the first pharmacy retailer in India to offer an omnichannel platform wherein customers can purchase products through stores, place orders over the telephone, online orders, and a Click and Pick facility. It follows a cluster-based approach for store network expansion wherein it first opens high store density in a populated residential area within a target market. The company has a streamlined and methodical store opening process that is focused on the sustainability and profitability of every new store that it roll-out. Its omni-channel proposition to its customers leverages its existing store networks and supply chain and distribution network to offer a differentiated offering to its customers. On the concern side, pharmacy retail businesses could be adversely impacted by the supply of defective or expired products, including the infiltration of counterfeit products into the supply chain, product tampering, product recalls or product mishandling issues. Besides, the company’s products are sourced from a wide variety of domestic and international vendors, and any future disruption in supply chain or inability to find qualified vendors and access products that meet requisite quality and safety standards in a timely and efficient manner could adversely impact the needs of its customers.

The issue has been offered in a price band of Rs 780-796 per equity share. The aggregate size of the offer is around Rs 1398.85 crore to Rs 1427.54 crore based on lower and upper price band respectively. On the performance front, total income increased by 7.03% to Rs 3090.81 crore for the financial year 2021 from Rs 2887.89 crore for the financial year 2020, primarily due to an increase in revenue from operations. The company’s profit for the year increased significantly to Rs 63.11 crore for the financial year 2021 from Rs 1.79 crore for the financial year 2020. The company intends to capitalize on the shift from unorganized to organized retail of pharmaceutical products in India, taking advantage of the low base of organized pharmacy retail penetration and increasing penetration of mobile and internet usage in India, and strengthen its market position by (i) increasing its store penetration and customer reach in existing clusters and (ii) developing new clusters in other states and cities. It plans to further develop its omni-channel platform with the aim to increase online sales revenue contribution to its total revenue from operations.