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Medplus Health Services (Medplus) IPO opened at a strong 28 per cent premium to IPO price of ₹796. It has built on those gains and is currently trading at ₹1,100 per share or 38 per cent premium to IPO.
The omnichannel retail pharmacist’s valuation is now at 3.5 times EV/Sales and 41 times EV/EBITDA (based on 1H FY22 numbers annualised). IPO investors who were allotted the shares of Medplus can exit the stock at such premium valuations.
Medplus operates 2,326 modern format pharmacy retail stores across several States in India. The company differentiates from independent pharmacists by order fulfilment capability across a wide SKU range (1,00,000+) and implicit guarantee in discounts and quality, supported by in-house technology.
Private label (product/margin diversification) and online sales (channel diversification), currently contribute to 12 and 9 per cent of sales, respectively, both of which figure prominently in growth strategies for the company.
Also read: Medplus Health Services lists at 27.5% premium
In our IPO note published in our portfolio edition dated December 12, we had noted the fast growth potential for the company based on continued momentum in store growth and same store sales growth in the medium term.
But at the same time, we had also noted the highly competitive pharmacy retailing industry, which dims long term prospects of stock returns for Medplus’ shares given its expensive valuation. Medplus can show revenue growth of around 30 per cent CAGR in FY22-24, if the company maintains a store count growth of 20-25 per cent per annum (50-60 stores per month) combined with same store sales growth at 12 per cent.
The company as of H1 FY22 already operates at the higher end of industry margin range at 8.4 per cent EBITDA. While the growth expectations are strong, the omnichannel segment itself must compete with well entrenched independent pharmacists (90 per cent market share) on one hand and the rising threat of online-only players offering 30-40 per cent discounts on the other hand.
Also read: IPO Screener: CMS Info Systems subscription ends today
There is also strong competition from companies like Apollo Pharmacies and Wellness Forever in omnichannel segment. The result being a price competitive industry with multiple players outdoing others in terms of service offering, pricing, reach/flexibility, and acceptable margins.
The company will require a high investment to retain market share with little prospects of improving margins in the foreseeable future.
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