Medplus Health: Nomura Sees Store Additions To Aid Revenue Growth, Margin

Medplus is currently adding 1,000-plus stores a year versus average store additions of just 105 over FY15-20, says Nomura.

<div class="paragraphs"><p>A pharmacy. (Photo: Árpád Czapp/Unsplash)</p></div>
A pharmacy. (Photo: Árpád Czapp/Unsplash)

Medplus Health Services Ltd. got a ‘buy’ from Nomura as it expects the pharmacy channel’s revenue growth to accelerate on aggressive store additions.

“Medplus is well funded. It’s currently adding 1,000-plus stores per year versus average store additions of just 105 over FY15-20. The new stores not only strengthen the company’s presence in existing markets, but also expand its presence in new large markets such as Mumbai, adjacent markets to existing clusters and tier 2/3 cities,” the research house said in a Sept. 11 report.

Led by store expansion, Nomura expects Medplus’ year-on-year revenue growth to accelerate to more than 30% by FY24. “We forecast revenue CAGR of 26.9% over FY22-25F.”

“Increased store openings led to operating Ebitda margin (adjusted for rental expense and ESOP cost) correcting to just 2.2% in Q1 FY23 vs 3.45% in FY20 (pre-Covid) as overhead costs increased,” it said. “We expect operating Ebitda margin to expand to 3.2% by FY25F, and further to 7.7% in the long run driven by operating leverage as revenue growth accelerates; and increased contribution from private label.”

Also, vertically-integrated operations supported by technology, omni-channel presence and a step-up in store expansion would lead to Medplus gaining market share within organised retail in the near to medium term, Nomura said.

Nomura initiated coverage on the stock with a ‘buy’ call and set a target price at Rs 925 apiece—implying a potential upside of 24% from current levels.

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Well-Funded For Expansion

According to Nomura, the retail pharmacy chain is a net-cash company with net-cash balance of Rs 550 crore after its initial public offering in fiscal 2022.

“The funds will be deployed largely to drive store expansion,” the brokerage said. “We estimate the company will require marginal debt funding in FY25F with estimated net debt-to-Ebitda ratio at a comfortable level of 0.1x.”

Nomura estimates that the company will see 20% of its revenue coming from private label brands by fiscal 2030. This is compared with a share of 12.7% in the first quarter of fiscal 2023.

The brokerage also predicts 6,400 store openings between fiscals 2022 and 2030 and an 11.5% cost of equity capital.

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Other Key Highlights From The Nomura Report:

  • The company, over the past 12 months till June 2022, added 815 stores with an annualised run-rate of about 1,000 stores over the past two quarters.

  • Estimates 300 basis points lower (versus Nomura’s estimates) contribution from private label, 30% lower store openings, 50 basis points higher cost of equity capital to adversely impact the brokerage’s DCF valuation by 24%, 8%, 11%, respectively.

  • It’s not appropriate to assess the stock valuation based on P/E as Nomura expects Medplus’ near-term earnings to be materially suppressed from Ind-AS116 lease accounting standards.

  • Net earnings impact is 83-69% in fiscal 2023-2025 and reduces to 9% by fiscal 20230 due to Ind-AS116 accounting.

  • Emerging market pharmacy peers have larger revenue and market cap compared with Medplus’, suggesting scope for value accretion for the retail pharmacy in India.

  • India’s pharmacy segment presents prospects of larger scale than most emerging markets.


The downside risks include:

  • Control on prices of prescription medicines

  • Regulations on trade margin

  • Rise of Janaushadhi kendras

  • Risks associated with opening new stores like cannibalisation of sales from existing stores

  • Inventory obsolescence risk for FMCG products

  • Adverse changes in lease terms