MedPlus Health Services Limited (MEDPLUS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the MedPlus Health Services Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Srinivas. Thank you, and over to you, sir.

Thank you, Manav. Good evening, everyone. On behalf of MedPlus, it's my utmost pleasure to welcome you all to the MedPlus Q1 FY '27 Earnings Conference Call to discuss the financial results of MedPlus for the first quarter of FY '27, which was 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 store network, openings and closures. We have opened 222 stores at a gross level, and there were 52 store closures, including 9 relocation cases and 27 franchisee outlet closures. Additionally, 24 stores are in the process of conversion from company-owned/company-operated stores to the franchise model. We achieved a net addition of 146 stores during the current quarter, compared to the 218 stores added during the last quarter. We continue with the outlook for adding 800 net new stores, including the franchisee stores in FY '27. In terms of our network age, around 27% of our stores have been operational for less than 2 years, and the remaining 73% of our stores have been operational for 2 years or more. In terms of our network and store size, at the end of the quarter, our network grew to 5,476 stores with 2.9 million plus square feet, compared to 4,813 stores and 2.5 million plus square feet at the end of June '25. The average store size is in the range of 539 square feet. Update on the revenue mix. Presently, MedPlus offers a large range of SKUs spanning across pharmaceutical and non-pharmaceutical categories. Private label sales for Q1 FY '27 constitutes 20%, pharma being 10.7% and the non-pharma being 9.3% of our total revenue. Update on the financial numbers. Our consolidated revenue for the quarter is INR 1,796 million. Our consolidated operating EBITDA for the quarter stood at INR 651 million, representing 3.5%. Revenue from pharmacy operations grew by 21.8% Y-o-Y on a reported basis. The pharmacy operating EBITDA stood at INR 588 million, representing 3.2%. An update on our store performance. Stores older than 12 months. Revenue from these stores in quarter 1 was INR 1,436 million, representing 94% of pharmacy revenue. These stores had a store-level EBITDA margin of 10.4%. A word here on the store-level EBITDA margin by age. While stores greater than 12 months had a margin of 10.4%, this was 10.6% for stores greater than 24% (sic) [ 24 months ] and 6.9% for stores in the 13 to 24 months age bracket. On allocating all non-store-related costs, the operating EBITDA of stores greater than 12 months would be INR 707 million, which translates to a margin of 4.3%. An update on the working capital. Our net working capital for Q1 was 54 days. Inventory in our warehouse represented 33 days. In quarter 1, the inventory level of our first year stores was 100 days. In comparison, for our stores older than 12 months, the inventory was at 36 days. An update on our diagnostic numbers. Diagnostics revenue for the current quarter grew to INR 370.8 million, compared to INR 302.9 million in quarter 1 FY '26. Diagnostics segment recorded an operating EBITDA of INR 65.9 million, compared to INR 41.3 million in quarter 1 FY '26. In April, we sold 552 plans per day. In May and June, this was 557 and 644 plans, respectively. As at end of June, we had around 2 lakh active plans. Additionally, we would like to inform that the CapEx proposals as approved by the Board has been put on hold by the company. We would evaluate and later inform, update the market on the utilization of the fund on the balance sheet. That concludes our update for the quarter. I request the host to open the line for questions.

[Operator Instructions] We have our first question from the line of Sudarshan Agarwal from Axis Capital.

I think you will have a lot of questions on this. But as you said, you have put the CapEx plans on hold. But just want to understand the rationale behind kind of putting that strategy forth and getting it approved. So you have INR 40 crores of CapEx for a food park and oil extraction unit and another one for the wellness services facility. So just want to understand what are we thinking in terms of strategically going ahead with these plans that we have approved? Yes, we have put it on hold, but we have more insights into how the company is thinking on investing in these aspects going ahead. That would be my first question.

Sudarshan, I'm happy to take you through the whole strategy, if Sujit has already not announced that we are now putting it on hold, I don't think there's any point in discussing it, honestly. There was a thought, and I thought that backward integration would really help, especially in areas where the products are new, supplies are not easy to find, and sometimes it is just easier to own the supply chain and all. But we have, on further deliberation, decided that we'll probably put it on hold. Definitely put it on hold for now and come out with a plan on how we'll actually utilize the funds. So yes.

This would be related to the food park. I guess you will be putting on hold the other one as well? Or is that investment continuing?

All CapEx spend for now, if we were to basically come back and -- yes, all CapEx, meaning the main -- the 2 main things, the food park and this one. Those are the concierge plan.

So on the food park, I understood your thought process. On the wellness, I mean, this is something that we would -- we were thinking of trying as a new kind of foray, right, like we did with diagnostics, what I would kind of...

Okay. I'll tell you what my thoughts were on that, but again, I have to reemphasize the fact that we are now putting it on hold. So it probably does not -- is not relevant. But anyway, the thought was that all companies today are looking at diverse revenue streams in adjacent areas. You can't just basically do just a pharmacy and -- I know there's a lot of opportunity. But even as a vertical grows, you also sometimes have to bring in some horizontal areas also. We thought that that was a good area to go in. Prevention was a great area to go in, concierge medicine, wellness, prevention, longevity and all kind of go hand in hand, and we thought that is the logical next place for us to go given that we're already doing diagnostics. But diagnostics has one piece left, which is when people come to a diagnostic center and they get themselves tested, since we are not offering a complete, let's say, we're not closing the loop on it. We're not telling them what he has to do. And a lot of times he ends up going to a doctor. And doctors, for reasons best known to them, will disregard any kind of lab, which brings a result which is not in their -- maybe just not marketed to them. Let me put it that way. Right. So we wanted to own that entire thing and basically do a complete out-of-hospital health care kind of stuff. Out of hospital. But anyway, that we have now put on hold. We're not going to do it. We will think about it. It's unlikely now. We'll basically think about it in MedPlus, I would say.

Okay. Got it. Coming to your performance in the quarter, yes, strong top line growth. But in terms of margins, we have seen yet again the private label share contracting in Q1. We had this issue last year. So can you just give some sense on what led to this drop? And how should we think of this private label share moving in quarters ahead?

So for us, private label, when we started off, we pushed very hard, and we made sure that everyone was aware of it and the employees are also heavily incentivized to sell it and all. So I think the early adopters very quickly shifted. And after that, maybe our employees would have gone a little overboard in trying to push it to every single customer out there. And in the process, we may have basically, I won't say annoyed, but at least put off some customers out there. So we try to pull it back. And so now the stores are basically focused on [indiscernible] while as a percentage it has grown -- degrown slightly. Year-on-year the growth is still there. Every single molecule which we have been selling, we're selling more of it. We continue to grow. As a percentage, it has degrown slightly because our overall sales has grown. And we are now focused on making sure that the customer is completely served, whether it is for brand or whether he is looking for, let's say, a slightly more affordable kind of medicine. So we offer it. If he takes it, great. If not, that's okay. But then what that has allowed us to do is allowed us to actually grow the customer base in the branded side. And that's why you're seeing a small, let's say, dip in the overall percentage.

Got it. And how should the share move?

Yes. Going forward though, it's going to be a function of 2 things. One, a little bit of our own advertisement outside the store, which is through influencers to other -- various other sources, to bring people in who are otherwise not coming into the store, for seeking out the MedPlus equivalents of all the branded drugs. So that is how we plan to actually grow that whole share. And we'll also obviously try and get our employees to be slightly better salespeople, get the whole message out. So a combination of both making our employee slightly more skilled at selling private label. And two, bringing in people who are otherwise not shopping with MedPlus at all to come into the store for their drugs. So that's the plan for us. We think we will, with this quarter, be arresting the slight, I would say, degrowth which we have had, and from there on, start building up again at the rate of around 0.5% or 0.3%, 0.4% kind of stuff.

Okay. Got it. And a part of your gross margin was also affected by franchisees, right, 50 basis points. So can you just broadly give me a sense, private label, of course, will gradually come up, but this franchisee dilution will be part of our numbers going ahead on the gross margin side, right, at least for the near term, as long as they don't scale up?

Yes. So let me explain a little bit. Franchisee is still in an experimental kind of stage. We believe that India is a market where you can have 20,000, 30,000, 40,000 stores. And we believe that long term, that's the only way for us to get to that number. So for us, we are working on that right now. One of the main things -- so for us, the way we see franchisees, that's a logical way for us to grow. Whatever margin we are getting is additional margin. Yes, it will definitely be slightly lower than our regular store, but the thing is the return on investment on that is going to be higher. And once we track the model, we'll be able to grow way faster. That's how we see it.

We have our next question from the line of Saion Mukherjee from Nomura Securities.

Sir, on this CapEx plan, you would have had some reasons to sort of plan for this, would have thought about it over many months on this. You got a Board approval. What has happened in the last, let's say, less than a few hours that you've decided to put it on hold?

Difficult to say, Saion. Maybe it is the wisdom of the masses, I guess. But see, for us, we definitely are, let us say, going to be, let's say, sensitive to the stock market for sure. We're not going to -- while I believe it's a good thing to do, create adjacency, is the way the whole world is growing out there, and that is what the Board also felt. But the fact that the market reacted so strongly and the fact that a bunch of our investors have also said the same thing and all, we feel that maybe we are not 100% right. So happy to put it -- I wouldn't say happy to put it on hold, but yes, we have taken the feedback and we want to put it on hold.

Right. So sir, does that mean that we should not expect any sort of big CapEx plan in years ahead? I mean how do you plan to then sort of do this? Because public shareholders could react the way they would. So how would you have that process in place to ensure that any CapEx decision, et cetera, in the future sort of doesn't have this kind of a fit?

So I guess, public markets have not really said no to any kind of CapEx on our warehousing, on our stores or anything like that. So I guess as far -- as long as we are focused on core business, I really don't see anyone cutting out with anything. And even if they did, then we wouldn't really give a fuss. So core business will continue irrespective of what the market thinks or says, whether it's private label or regular stores and all that. So that will happen. Can we basically take a pause at this time on CapEx spending? Absolutely. But is that something which we will do continually? No, as long as it is -- and definitely not if it is about the core business.

Okay. Sir, coming to the core business, you have shared your annual operating plan. So based on your quarter 1 performance, how does this plan change? You had a INR 400-odd crores of operating EBITDA on a consol basis. So what is your estimate now? Does that remain same or it undergoes a change based on quarter 1 number?

Saion, this is Sujit here. So 2 things. One, maybe you're referring to the Board deck, which was by mistake uploaded, but the data remains as it is what you have rightly pointed out. And for the time being, numbers do not change, because as Madhukar explained, we are working on getting back the private label back on track. We are working on certain costs which we had not anticipated, which have got hit during the current quarter. For example, effective 7 July, the company has already, I would say, tweaked the discount structure for all sales greater than 1,000, where the company gives 20% discount. We have already reduced to 19% for a large number of customers. We see that traction. And therefore, if there is any such other adjustments required so that we keep the annual operating plan as a basis and a guide, I would not say we are bound by that, we can either exceed that as well. So on top line, you would have seen we have achieved 99.9%. On the operating EBITDA, there is a gap to be covered. That's been the nature of Q1 as well. But we are pretty confident that coming quarters, we will be able to make that upside.

Okay. And sir, one last question on your private label traction. So the growth has been weak on a year-on-year basis, though there is some growth. So in terms of the number of people who are subscribed to this private label subscription, what is that number as an absolute number of people, like how has that changed on a quarter-on-quarter, on a year-on-year basis?

Actively, there are close to 44 lakh, 45 lakh people who are on this plan. And every month, there is an annual pattern. Last quarter, if I remember the number right, we added 10 lakh plans, including renewals. The good part is, earlier, we were realizing INR 99. We have now increased that to INR 149. So on membership alone, we should see a INR 10 crores to INR 11 crores impact on the top line for the whole year, which will flow through to the bottom line.

Okay. So today, how many -- you have 44 lakh, 45 lakh people on the plan as of June?

Yes.

And how much was this number in the, say, the June of 2025, compared to what it was...

I don't remember it exactly, but it was in the range of 39 lakhs to 40 lakhs.

Okay. So around 40 lakh have gone to 44 lakh kind of a number.

Yes.

And not only that, we also actually increased our price, right?

Yes. INR 99 to INR 149.

Yes. Despite that...

We will see a lot of renewals going forward at INR 149.

Okay. So this was implemented recently, INR 149?

Yes, a month ago.

Month ago. Okay. And sir, one last question. I've seen your employee expenses also have gone up. So is there any impact? Because you had earlier mentioned about a lot of attrition and all of that. So as the pharmacy level employee compensations, those have gone up significantly, anything on that side if you want to highlight?

So on a year-on-year basis, the major impact is coming from people which we had added in the various warehouses. So we are getting the full quarter impact now. Additionally, we articulated on the labor force changes, especially in Karnataka and Telangana, where the increase has been more than, I would say, significantly more than the average of generally 4% [indiscernible]. We have seen 60% increase in Karnataka and 25% plus in Telangana. We have factored that. However, these were effective 1st June, which means, going forward, in the Q1 quarter, we have the impact of only 1 month. Going forward, we will have the impact of the full quarter. We are taking steps to mitigate that in terms of, one, the retention bonus plan which we had has been stopped effective 1st of March, which means there are no new additions because, by design, the wages have gone up. Two, we are also looking at the nonstatutory payments, for example, the private label incentives and other incentives, how we can optimize and structure that in a manner to get a relief. And three, as we just articulated on the private label mix, that should also help us in addressing this cost trend.

We have a next question from the line of Divyansh Gupta from Latent PMS.

First question, on the private non-pharma products, the absolute revenue dipped from March to June. So just wanted to understand why would that happen. Is there a supply issue or a demand issue? Or is it just purely seasonality?

So yes, absolutely, you pointed out right. From quarter 4 to quarter 1, which is a sequential quarter, we had an impact on the margin of around 100 basis points because of the private label mix, both on pharma and non-pharma. In non-pharma, we had a steeper fall from the last quarter. For certain categories of our non-pharma products, especially the diaper range, there were disruptions in terms of supply. It's now coming back on track. By the end of this current quarter, we should see the full impact coming back. So we are very confident on the non-pharma contribution to sales, and we expect that to further grow in the coming quarters.

Understood. The second question was on the franchisees. You mentioned that 24 stores are moving from co-co to franchisee. So is it our -- the staff there which is taking it up or someone else is? I'm just trying to understand the...

Predominantly, it is the offering to the senior staff members who have been with the company for 3 years plus. So that's a retention strategy. And so that they also become individual entrepreneurs. They have learned with the company, they have been with the company. And as a model, we said that's the only way we can facilitate them to become individual entrepreneurs. And I think more than 95% of these stores will be taken up by the existing employees.

Got it. And the other question was the franchise stores which were closed during the quarter. The average age was only 0.7 years, which is far -- whatever, it's just like 8 months. The previous quarter, you had mentioned it was -- the closure was of the older franchisee networks, which therefore had a higher age. Why would this be? Is it -- I understand that franchisee is experimental, but any signals from the market that the franchisee model is not necessarily working out for them and we will tweak to make it much better?

You're absolutely right. That's the same observation we are having, that, look, as we speak, we have 600-plus franchisees. However, there is -- in some cases, what we are observing also is there is an expectation mismatch both from the franchisees who are first-time entrepreneurs, they get into this, their expectation is X, they'll end up getting Y. And very quickly, they are taking decisions, which we have to honor them. So that's what we are reporting, that this is, again, this will have to take some time to stabilize from both. One is from our end in tweaking the model. As we speak, we continue to look at this model to make it a win-win model. We have made certain adjustments, for example, in helping the franchisees reach to a breakeven in a much faster pace, helping them with -- supporting them with fees in the first year. And therefore, we will have certain cases where it still does not double up to their expectations. And this is only an outcome of that.

And what were these expectations, just the ramp-up of it or like we were expecting that we will do more private label?

It's a closure by the franchiser. And therefore, we are not directly involved. We do respect when they come back and say that, look, we did a mistake, it's not meeting our expectations. The numbers do not tie up. So we would like to go back. In 99% of the case, we do relook at that and maybe help them with the exit or we find another franchisee who is ready to take up that unit and give them an exit. So this will continue to happen, Divyansh.

Got it. And sir, 2 more questions. Average store size you mentioned is 539 or 529?

539.

Given that, let's say, last quarter, it was more 520-something range, is it fair to assume that the new stores are much, much larger in size?

So there are a few stores that, as a strategy, we have been opening some large store formats, because as a strategy, we would like to even test out that, which means that it is as good as 3 stores coming up as 1 store. And then you can put in more people, more focus, much better fill rate and a larger assortment of both the brand as well as the private label offering to the customers. So that's one reason why you see an uptick in the average SFT per store.

But then that limits us, penetration into like we'll be the neighborhood pharmacy...

We will continue to do that, Divyansh. This is a very small portion. I think as we speak, around 47 to 48 stores have been launched under this format. So when compared to the 6,000-odd, this is a very small number, which also helps the company in garnering, I would say, local attention, instead of spending good money for advertising.

Understood. So sort of a marketing -- understood. And sir, the last question. You mentioned that, let's say, because of all the minimum wage hikes and everything, we are tweaking the -- we are not allowing any new signup into the retention plan that we had designed. But then how does it address the attrition problem due to which we had launched the retention program in the first place? Because if the minimum wages have gone up and, let's say, they don't have the retention plan, they can even go to...

I understand your question. I'll try to address that. The underlying issue itself was lower wages, especially when compared to employees in the quick commerce business. And now since the minimum wages have gone up, we expect and, definitely, we would very closely monitor this that much better kind of employees will be available for this higher range of wages. And therefore, sense should prevail. And we will closely monitor this, how it works. And if something is required, this is again a nonstatutory area which the company can very quickly address it if there is need in each of these pockets wherever possible. So what we wanted to inform you is, one, there is no knee-jerk reaction, only continuously, only the new guy from 1st March, if this plan is no more available for them. But for colleagues and employees who are already part of this plan, it continues. So whatever amounts have been accrued to them as on date will be absolutely paid by the company or honored by the company as and when time comes. So therefore, we do not see a higher risk. But as you rightly pointed out, we continue to monitor this space and we will look at what interventions, along with our HR, we need to do to attract and retain such talent.

We have our next question from the line of Jasdeep Walia from Clockvine Capital.

That diagnostics business has been scaling up well. So what are your thoughts on scaling it further by way of either densification in the same market or maybe expanding into other markets?

See, while it has been doing reasonably well and it is profitable also, it has not really gone to the level we wanted. That is a model in which the subscription plans should have come both from the B2B and B2C side. We have not had much success in the B2B, and B2C also has languished around 220,000 or 210,000 kind of members. By now, we should have had anywhere between 250,000 to 300,000 members. So for that reason, while we may do a little bit of maintenance kind of work here and there and replace 1 or 2 machines here or there, in -- on the whole, I don't think we'll be expanding that in a significant fashion, at least the radiology part.

Got it, sir. Sir, is there an inventory charge also this time in the -- on the expenses side? Inventory provisioning charge?

So the inventory provision charge this quarter is on the normal level. When compared to the previous quarter on a sequential basis, we had a release on the inventory provision line. Because whatever we had provided for, the company was able to liquidate. And therefore, it appears that this quarter has a higher charge, but the charge is a normal number.

Got it. So what's the annual inventory provisioning charge for your company?

Roughly 0.8% to 1% on the total sales.

Got it, sir. But I'm guessing that there will be no inventory obsolescence on the branded pharma or branded FMCG side. So this inventory charge is primarily to the private label, right?

So a large portion is linked to the private label. There is also a small portion which comes as a charge on the branded as well. But you're right, predominantly, more than 90%, 95% of our branded pharma and non-pharma products, we are able to successfully return back to the manufacturers.

Sir, then if we look at this expense only on the private label side, I think the annual expense would be somewhere close to 300, 350 basis points, right? That looks to be pretty high. So what are the reasons why you need to do such a large amount of provisioning?

So let's take it this way. For the branded pharmaceuticals or the branded nonpharma products, these are generally made-to-shelf products. They don't make for MedPlus, they make it for the whole market. Whereas if you take a private label product both on the pharma and non-pharma, it is made to order, which means the entire risk of obsolescence, damage, non-salability and slow-moving is on the books of MedPlus. So it's a conscious call based on the margin availability, the overall economics of the product that up to 5% is what we consider as a very normal range on the private label. And as you highlighted, it is well within that number.

Got it, sir. And sir, as the business scales up, do you have any targets that this expense would be coming down in the future? Or this will remain close to...

As a target itself, we said we do consider approximately up to 5% as a charge. But we obviously will continue to keep working to minimize this number because the amount, whatever we minimize, is straight bottom line.

Got it, sir. And sir, are there any plans on launching your own private label for GLP-1?

Not yet. If we do that, we'll definitely inform the market. Not for the moment. We have not yet launched.

Got it, sir. Sir, last question, sir, on the issue of promoter leverage, is there any time line to reduce leverage levels?

So that is actively being looked at by the family office. But at present, there is no such plan. And as and when that happens, adequate disclosures will be made to the market.