MedPlus Health Services Ltd
NSE:MEDPLUS
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MedPlus Health Services Ltd
Earnings Call Analysis
Q2-2024 Analysis
MedPlus Health Services Ltd
The successful introduction of MedPlus products in Hyderabad and Telangana at the end of June 2023, followed by Andhra Pradesh, has yielded a significant 15% surge in revenue for Hyderabad in September compared to June. This growth was threefold higher than that observed in Bangalore and Chennai. Crucially, 9% of this increase is attributable to the MedPlus store brands. The regions outside Hyderabad in Telangana and Andhra Pradesh also experienced substantial growth compared to similar areas in Karnataka and Tamil Nadu. As a testament to consumer acceptance, these product lines have now been launched across all states in October.
Despite demonstrating the best quarter in terms of store aging in the last two years, with only 20% of stores being less than 12 months old and private label sales nearing all-time highs, operating EBITDA margins have not reached the peak of 5%. The drag from newer stores and those opened in the last 12 to 24 months was identified as a factor hindering margin improvement. However, once stores reach maturity, this impact is expected to subside. For stores over 12 months old, EBITDA margins are around 4.2%, still short of the 5% target, with gross profit contributing significantly. The management acknowledged the need for these stores to achieve INR 15 lakh in sales per month per store to enhance margins.
The company has obtained authorization for a Qualified Institutional Placement (QIP), but any funds raised would strengthen the balance sheet and support growth initiatives, particularly in the pharmacy sector and diagnostic services. Additionally, working capital requirements could necessitate funding as the company scales up.
The management highlighted the expansion of private-label products, with significant adoption in Hyderabad and Andhra Pradesh. These products have achieved sales accounting for 15% of total revenues. The goal is to demonstrate the impact of an expanded private-label range on gross merchandise value (GMV) across all states, setting the stage for further revenue growth.
Store maturation occurs within 24 to 30 months, with a payback period of 3 years. Stores older than 1 year show an 8.9% EBITDA, reflecting a collective performance of all mature stores. Management predicts that stores will break even within 3 to 6 months, with EBITDA levels reaching approximately 10% on average at store level once fully mature.
With an investment of INR 6 to 7 lakh per store primarily in inventory, the company can afford to be flexible in selecting store locations, even amid competition. The adaptability of their store setup, characterized by largely modular fixtures, allows for minimal financial loss when relocating stores, supporting the company's aggressive market penetration strategy.
The company faces an attrition rate of around 28-30%, which has not shown signs of decline. The main reason is not competition but rather the trend of employees moving after gaining experience, possibly to set up their own stores in smaller towns. This hints at a transient workforce, particularly among individuals who first venture into urban areas seeking entry-level retail opportunities.
With an investment totalling INR 101 crores, the diagnostics division is approaching a break-even point at the central level, fostering management's confidence in the business's future prospects. Even without providing explicit guidance, the overarching trend of growing sales and shrinking losses is seen as a positive indicator.
The company expects that its established stores, particularly with the private label offerings and non-pharma products, will drive growth higher than the yearly cost increase. Although specific numbers are not disclosed, the combination of private label discounting and traction in non-pharma segments is envisioned to substantially increase revenues.
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Ladies and gentlemen, good evening, and a warm welcome to the MedPlus Health Services Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prasad Reddy from MedPlus. Thank you, and over to you, sir.
Thank you, Aman. Good evening, everyone. On behalf of MedPlus, it's my utmost pleasure to welcome you all to the MedPlus Q2 FY '24 earnings conference call to discuss the financial results of MedPlus for the second quarter of financial year '24, which were announced earlier today. We have with us today the senior management team represented by Mr. Madhukar Gangadi, Chief Executive Officer and Managing Director; Mr. Sujit Mahato, CFO; and Mr. Chetan Dikshit, 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 are on Slide 1 of the investor presentation shared with all of you earlier. Documents relating to our financial performance have been circulated earlier, and these have also been posted on our corporate website. I will now hand over the call to Mr. Madhukar. Thank you, and over to you, Madhukar.
Thank you, Prasad. Today, I would like to talk to you about the 4 main features of the Indian pharmacy retail industry as we see it. And the opportunities these features actually present to us. And one of the main ones is -- the industry itself is extremely fragmented. Second, there's a big resilient small- and medium-sized set of operators out there, who still have nearly 85% of the overall market. Third, the other factor would be the active involvement of government in promoting low-cost generics. And the fourth, marked absence of store brands in the country, unlike in U.S. and U.K. and all where Walgreens and CVS and all have their midstore brands.
Just to come back to the main points of [indiscernible], the Indian pharma retail industry as I said has over 900,000 retailers, serving a population of 1.4 billion people. To put that in the perspective, Indian market is roughly 20x as many pharmacies as in U.S., while our population is only 4x that of U.S. This market actually has roughly 45,000, 48,000 stores catering to over 350 million people. So 900,000 retailers for a market that is less than INR 200,000 crores makes the average per store at slightly over INR 20 lakhs per year. That's average sales. This, by any normal business standard should be considered extremely low throughput and as a result unviable actually. The reason it still works in India is because of the prevalence of high-margin trade generics. Some of the lower throughput stores have a 50% or more share of trade generics where often the margins are about 70%. This makes even a store that sells INR 20 lakhs per year viable with an average margin of 50%, which takes care of fixed cost and mix, salary level rate for the operator.
If trade generics is how the small operators survive, the reason for the resilience of the mid- to large-size independent retailers is not really much different. As you all know, the retailer and distributor margins in India are 20 and 10 for drugs not under DPCO and only 16 and 8 for those under price control. Most retailers who don't have the advantage of a large operator like Metro, which actually enjoys both retail and distributor margins actually get a margin of around 20 or 21. Despite this, we see them competing with us and with the other large pharmacy guys with a 20% discount. We have seen this happening in most South markets, and we are seeing them actually [indiscernible] some of these stores.
What we have seen and what we have actually observed and we have shared with the stores and what we have from industry knowledge is that most of these operators, a large number of them, at least, do substitution for the prescription which they get with trade generics. So on average, we will 1,500, if or 20% of it is substituted for a trade generic product and they still make INR 150 at least on that, the trade generic of 300 basically [indiscernible] INR 150, 50% margin, which still makes an overall 10% and this is how most people today seem to be competing. So in a super competitive scenario, where online players are willing to use money and those large retailers like us are using our buying power to actually give huge discounts, we actually see a lot of the small operators still continuing to give the same discounts and still continue to actually compete with us.
While the first 2 factors depend on selling change in the [indiscernible] price, the other third big factor on the list that has the potential of changing the industry goes in the opposite direction. [indiscernible] generics [indiscernible] hugely discounted price. Government has introduced Jan Aushadhi stores a while back and the fact that they are even selling anything despite them not being located in the best places and not carrying the full assortment, it's true for the fact that the Indian consumer has started realizing that 80% of drugs sold in the market are only variations of a limited set of actual formulations. While the effect of these stores on the sales of regular pharmacy retailers is not big as of now, if things were not to change, then the effect -- the effect will actually continue to grow should not be in any doubt.
The recent NMC notification, although it was withdrawn after a short while, asking all doctors to write only the generic name in the prescription is one more step in the direction of a generics market. This we can ensure will come in some form of fashion back to take the bandages [indiscernible]. Another key features or lack of, I would say, in the Indian pharma retail market is the absence of store beds. In U.S., for example, customers get to buy either the innovator product and if they the innovator product is no longer on patent or if it comes off patent, the store [indiscernible] so customers could still continue to buy the innovator product even if it is off patent for a slightly lesser cost or driven by the store brand, which would be led by Walgreens [indiscernible] CVS, there's nothing in between.
Indian market, on the other hand, does not have this largely because till now, there was no large chain that had a trusted brand that customers could buy or no large chain that had the scale to get a full assortment of drugs manufacturer. You require a certain number of stores to be able to get the motivation [indiscernible] the large set of drugs and you could perhaps get away with maybe the top 50 or top 100, but to actually give the top 500 drugs or the top 800, it would require substantial scale. And till now, there is no one actually there in the real market. This has led to a proliferation of a large number of new to branded generics, resulting in pharmacies being forced to carry several thousand SKUs to cover the prescription while essentially stopping for a few hundred actual therapeutic type spin. So all the above mentioned 4 resulted in us taking our next step in our path to becoming the largest pharma retailer.
End June '23, MedPlus launched over 400 drugs in Hyderabad and these drugs which could potentially provide substitutes for over 55% of the medicine use of our customers. We launched them with a discount of 50% to 80% on the MRP and the MRP, the Maxim retail size itself was tacked to the price of the market leader for the correspondent that composition. We were able to do this because, we obviously do not have any marketing costs, but we own the channel, and we are able to pass on all the savings to the customer. And we were also able to convince the customer of the value proposition here. Our aim in doing so was to take advantage of the fact that the Indian market has matured and has become knowledgeable of the fact that 80% of the drugs sold in the market are off-patent and are generic substitutes, which work just as well as the innovator product as long as they are manufactured in a good factory.
This was also aimed at bringing customers who otherwise shop using Jan Aushadhi stores and their [indiscernible] and our aim was not just to get these customers, but also anyone who understood the fact that all the drugs are generics in nature, but who was looking for slightly better, I would say, better quality manufacturing than what was available in the market. So to these customers also our appeal actually [indiscernible]. MedPlus, making MedPlus broadband available at 50% to 80% bill to MRP also makes it difficult for small stores to sell at full price trade generics and if they're not able to sell it. As I said, stores which otherwise sell INR 20 lakhs a year or INR 1.5 lakhs a month, or INR 1.6 lakhs a month. If their access to the margin, which is afforded by trade generics is taken away, they actually become unviable and we expect that will be one of the ways in which the market will consolidate as small operator basically stop doing this.
But that is also in phases, plans to make trade generics from companies like Cipla, Alken, [indiscernible] and the likes, available at the same prices as MedPlus store [indiscernible]. This will now make it buffer for stores that are substituting promoted brands [indiscernible] to compete with us and to offer the 20% discount which we actually give on branded products. This approach not only positions MedPlus as a cost-effective choice, but also enables the company to capture a significant portion of the market. That was previously dominated by or at least what's populated by, I would say, a large number of smaller independent players. Thanks to our comprehensive control of the entire supply chain, MedPlus can strategically adjust pricing and discounts, thereby optimizing profitability. This [indiscernible] the company has competitive advantage in effectively managing its profit margins and achieving a favorable financial position in the market.
Additionally, as more and more customers take to our products, we expect our inventory cost to come down significantly. And the cost of stocking MedPlus brands is only a fith for the cost of stocking bandage index. We also expect full rates to get much better as to for customers who adopted [indiscernible] same it is much more easier to stock 500 to 600 new products in sufficient quantities versus stocking the 47,000 SKUs that we now stop across our network.
MedPlus products were introduced in Hyderabad and rest of Telangana at the end of June 2023, followed by the launch in Andra Pradesh in 2023. Notably, Hyderabad revenue witnessed a substantial 15% increase in September compared to June, a growth 3x higher than that observed in Bangalore and Chennai. Out of the 15% portion, a large portion, 9% has been contributed by the MedPlus store plants. Furthermore, the regions outside of Hyderabad in Telangana and Andra Pradesh have experienced remarkable growth when compared to similar territories in Karnataka and Tamil Nadu. We are happy with the way the customers have taken to our brands, and we have now launched them across all the states in October. We will, of course, update you on what happens in this quarter in the coming quarters and all. And meanwhile, I will now hand over to Mr. Sujit to give our quarterly updates.
Thank you, Madhukar, and good evening, everyone. As of September 30, we have been serving the healthcare and household needs of our community in 599 cities across 9 states through our extensive network of 4,089 pharmacy stores. During the current quarter, we have successfully expanded our presence into 18 additional cities. In addition to a pharmacy operations in Hyderabad, MedPlus operates 4 full-service diagnostic centers, 7 Level 2 centers and 120 collection centers. These facilities play a crucial role in our commitment to providing affordable diagnostic services to our customers. An update on the network. Our store expansion program remains on track as we continue to balance growth and profitability. Over the past 12 months, we have added a net total of 761 stores with 139 stores opened in Q2.
Notably, West Bengal and Karnatka saw the highest number of store additions with 32 and 26 outlets, respectively. Of the store openings in Q2, 48% were in tire 2 cities and beyond, reflecting our strategic focus on these markets. Currently, out of our 4,089 stores around 1,819 stores reflecting 44% are located in tire 2 cities and beyond. We recognize the potential of these markets and aim to further expand due to the maturity of our operations and robust supply chain capability.
During Q2, we experienced 25 store closures. Considering both openings and closures, we achieved a net addition of 114 stores in Q2 compared to 153 stores in Q1. In terms of our age of our store network, approximately 21% of our stores are less than 1 year old, around 26% of our stores are in the second year of operations. and the remaining 53% of our stores have been operating for 2 years and beyond. It's important to note that all stores in the less than 2 years age bracket are still in their ramp-up phase. From a financial perspective, they continue to have a negative impact on our operating EBITDA. However, as these stores mature, we anticipate them contributing positively to our profitability. We only monitor the time it takes for our new stores to break even. For stores opened between October '22 and March 2023, approximately 64% of them achieved breakeven within 6 months of operations.
Additionally, as a cohort, all the stores combined achieved breakeven in just 5 months. In terms of the network store size, as of the end of the quarter, our network has grown to 4,089 stores with 2.1 million plus square feet compared to 3,320 stores and 1.8 million square feet at the end of September '22. The average store size is 538 square feet. To give you a sense of spread in store sizes, we have 2,958 stores that are less than 600 square feet and 1,131 stores that are greater than 600 square feet.
In terms of the revenue mix, with our expanded scale, we are strategically positioned to enhance our revenue share from private label products. Our private label range is designed to offer customers high-quality products at affordable prices. Currently, MedPlus offers around 1,400 thoughtfully curated SKUs spanning across pharmaceutical and non-pharmaceutical category. Private label sales accounted for around 14% of our total revenue. Furthermore, our expanding presence in Tier 2 cities and beyond is making a significant impact on our revenue mix. Sales from these markets accounted for 34% of our pharmacy revenues in the current quarter, demonstrating an increase from 31% in the same period last year.
Financial numbers. Now on our quarter performance, our consolidated revenue was INR 14,086 million with growth of 25.7% year-on-year and 9.7% sequential basis quarter-on-quarter. Our consolidated operating EBITDA stood at INR 410 million, representing 2.9%. Around 99% of our revenues is from our pharmacy operations. The pharmacy operating EBITDA stood at INR 450 million, representing 3.2% of sales. Our store performance, I would like to update on our store older than 12 months. Revenue from these stores in quarter 2 was INR 12,520 million or 91% of pharma revenue. These stores had a store level EBITDA margin of 9%. The store level ROCE of these stores stood at 50.6%, a word here on the store level EBITDA margin by vintage. While stores greater than 12 months had a margin of 9%, this was 9.8% for scores greater than 24 months and 6.5% for stores in the 13 months to 24 months age bracket. If we allocated nonstore related costs, then the operating EBITDA of store greater than 12 months would be INR 532 million, which translates to a margin of 4.2%.
Our diagnostic numbers. Diagnostics revenue have grown to INR 182 million in quarter 2 compared to INR 58 million in quarter 2 FY '23, which is primarily due to launch of the new centers in Hyderabad. Diagnostic segment recorded an operating EBITDA loss of INR 29 million compared to a loss of INR 53 million in Q2. On the working capital, our net working capital for Q2 was 64 days. The inventory in our warehouse was 37 days. As you are aware, because of the sales trajectory of new stores, their inventory turnover is lower in the first year. In Q2, the inventory level of our first year store was 110 days. In comparison for our stores older than 12 months, the inventory was 41 days.
Now I request Chetan to update on our Diagnostic business. Over to you, Chetan.
Thank you, Sujit, and good evening, everyone. To recap what Sujit has already said, in our pilot market of Hyderabad, we have 4 full-service diagnostic centers, 8 level 2 centers and 120-plus collection center. In July 23, we had increased the price of our plants by INR 150. This was a 15% increase. On earlier occasions, we had modified prices, but at the test level. So this was our first instance at testing price increase at scale, and it has not affected the offtake of our plants. This is positive. In July, we sold 348 gross plants per day. In August and September, this was 381 and 408, respectively. As on 30th June, we had 105,000 active plans and 186,000 underlying lives covered under our plans.
As of 30th September, we had 117,000 active plans and 207,000 underlying lives. Our current observed on-time renewal rate is 15%. But in 6 months post expiry, we have observed the renewal rate to be 40%. That's our update on diagnostics. We are handing back to Madhukar.
Thank you, Chetan. I think we can open up the floor to questions.
[Operator Instructions] The first question is from the line of Tanmay Gandhi from Investec.
Sir, my first question is on the profitability. So if you look at the operating metrics for this quarter, right. So we have probably the best quarter in last 8 quarters, right, in terms of store aging. So we have only 20% of the scores less than 12 months. In terms of private labels, we are very close to all-time high of 14.1% or 14.2%, right? And still, we are -- in terms of EBITDA margins, operating EBITDA margins, we are nowhere close to the recent peak of 5%, right. So what exactly is the dragging our EBITDA margins?
So I will take this question. So I think thank you for that question. In terms of -- in the investor presentation, we have guided on the second last slide, that the drag from the new stores and the stores which were opened in the last 12 to 24 months, they are still a drag on our P&L. And on a mature state basis, we should see that reaching northwards.
Sure, sir. But sir, even if you look at the EBITDA margins for stores, which are more than 12 months old, right? And within that also, we have a very favorable mix in terms of stores which are more than 2 years old, right? Still, it is only 4.2% versus what -- versus 5 percentage we had seen. So again -- and we have a very high contribution coming from gross margins. What exactly is dragging our margins even in case of older stores.
No, Tanmay for us. The overall maturity is only at the level of 24 months and more, 24 to 30 is when we actually hit the 10% gross margin. And below that, then we have the portion of cost of the corporate and warehousing at all, and that's what [indiscernible] at 5. So I don't think we are quite there. The mix is not quite there. So yes. So it's just that we definitely need these to come to the level of the INR 15 lakh or sales per month per store kind of number, for it to actually get to that number.
So sir, actually, my question was.
We are going in the right direction.
Okay. But even where I'm coming from even more than 2 years old stores are at 53%, which is 5 quarter high and still we are not near 5 quarter high in terms of [indiscernible] so that's why I understand. And secondly, in terms of store addition, right, so we had initially guided for 1,000 plus stores, right? And now I think we are at 800 to 1000 stores. So just wanted to understand that, do you want to adjust your guidance given that we have only added about 260 stores in last -- in the first 2 quarters of the year.
No. So in the beginning of the year, we said 800 to 1,000 [indiscernible] looking more at 800 stores. I really don't want to adjust the guidance and all right now. We think we will actually be able to ramp up in the Q4. We may be somewhere close to that. But if the revenue need for us to adjust the numbers, we'll do next quarter. But I don't think it is necessary.
Sure. So sir, have we seen any -- are we facing any challenges in terms of store opening, maybe in some regulatory challenges or some bandwidth rated challenges because in last 2 quarters, it has meaningfully come down. And again, this coincides with our new initiatives of diagnostics of generic or other medicals branded generic side? So are there any constraints in terms of bandwidth? Or these are just timing issues in terms of regulation -- regulatory approvals?
No, no. No, definitely nothing in terms of bandwidth. That's not a bandwidth related issue at all. There have been some regulatory issues here and there. Those we expect are normal. While we should have basically had something like INR 400 stores, we are at from 260. But these numbers are usually adjusted towards the end of the overall year anyway. Last 4 years, our Q4 has been the best and so we expect that we will continue to ramp up going forward. Definitely not a bandwidth issue. Yes, we are going into some new states. That is taking us a little bit of time, Kerala, Madhya Pradesh and Chhattisgarh, but that is to be expected. I would say whatever adjustment we have made is mainly to make sure that we can just get to the guided number of 800-odd stores that's all.
Sure. And last question from my end. So we have recently obtained an enabling resolution for QIP. And as on September '23, we already have about INR 220 crores of cash on books, right? And anyways, our store additions have come down, right, our quarterly additions. So can you give us some color on where will you deploy such kind of funds? And -- what is the exact number of funds you are looking at in the near term?
No. As we've said, this is mainly an NAV resolution only. If we do decide to basically go get the money, then it will be only to bolster the overall balance sheet and we will use the money in the best way. But yes, I would say. At this point, it is just being ready to raise if necessary. And again, just to clarify, if all we end up actually doing the raise, then it will be for growing the pharmacy faster, I would say, one. And second, definitely, on the diagnostic side. And of course, we'd also require some money to working capital as we go forward.
The next question is from the line of Harith Ahamed from [indiscernible].
So can you talk a little bit about the seasonality in the business in the second half versus the first half? When I look at our quarterly margins for the Pharmacy Retail segment last year, the second half was much stronger. So should we expect a similar trend this year as well?
So there's definitely a little bit of seasonality. I'm not sure if it extends all the way to the second, third and fourth quarters and all. But the first quarter typically, we have seen a softening normally during the peak summer months and especially the summer [indiscernible] gets extended, then you definitely see a dip in the overall pharmaceuticals and just largely because people obviously tend to fall less sick because of infections or at least lack of, right? Other than that, we don't see too much [indiscernible] there's always the festival factor, which comes in during the extended for Diwali period and all and the rotation period. That is not a time in which people typically tend to go to hospitals or to doctors, nothing elective gets done during those days.
Doctors themselves are on vacations and all. So we see a small dip during those times. But otherwise, there's not much, I would say.
Okay. A couple of questions on the MedPlus branded private label that we've launched. So when I look at the contribution of private label pharma, it's a 7.9% of our revenues this quarter, and it's come down by roughly 100 basis points. I know it's the impact of the higher discounts. That's probably leading to this lower share, but we were also expecting the higher volumes to kind of offset the impact of discounts, right? So how should we look at the contribution from private label pharma, should it inch back to the previous level of close to 9% that we saw in the September quarter FY '23?
And then second one on the same foray would be on our plans to expand beyond Hyderabad and rest of AP, Telangana into our other key markets.
Sure. So obviously, the second part of the question answers the first one. We have seen a significant increase in volumes, where we have introduced private label. On the 50% to 80% discount. In Hyderabad, rest of Telangana, and in Andralwhere we did it successively. We started in Hyderabad in end of June, then after that in July. We did it in rest of Telangana in September. We did it Andhra. We have actually seen on a GMV basis, close to 15% pharma private label in these states. So if you are not seeing the overall thing, it is because Hyderabad and rest of Telangana are a portion of the entire country. But we are now going to be reporting on a GMV basis all our sales on this overall -- to show you the effect of the overall private label and all, and you will see a significant increase in these.
Okay. And then -- and the expansion beyond.
Just to give you an idea here Harith. So we introduced roughly around 433 products on -- in the end of June in Hyderabad. Those accounts for 55% of all the medicine mix which we have, which is we sale at 80% of all my sales are medicine and out of that 55%, that's 44% of overall sales. We had a substitute for 44% of the medicines, which we sold. What we saw at the end of the quarter was that 15% of our sales now are coming from these discounted products. So which means 15 out of 44, which is a 1/3 of what we offered was coming in from sales of private label products in Hyderabad, and rest of Telangana, and slightly higher in rest of Telangana and Andhra actually.
Okay. And then our preparedness to go beyond Hyderabad and AP, Telangana with this portfolio.
So we have now launched except in Karnataka and Maharashtra where we had a little bit of hurdle, but otherwise, we have launched across the rest of the country. We'll probably be doing that also in those 2 states also shortly. But yes, so as of at least now as of November 1st at least you can assume that we are there across the country with our private label in all the states [indiscernible] working that is with our private label offering.
Understood. Okay. That's helpful.
The next question is from the line of [indiscernible] from [indiscernible] Ventures.
So firstly, on the Pharmacy business, there were 14 stores closures. [indiscernible] in the presentation, you have mentioned that the reason as others. So what is basically involving this?
Yes. So for us, the others are mainly due to various reasons, it could have been lease, which have expired or we have changed it because of locational problems or whatever, which has come up in the middle. So as you can see, the age of the other store is also 5.6. The average age is 5.6. So they're not stores, which we just took and made a mistake and had to move. These are stores which, where we found better locations to actually move to. So that would largely be the cause. I can get back to you with the exact details after the call though, but the fact that the average age of these stores is 5.5 years should tell you that these were regular stores, which we had to move for other reasons.
Okay. Got it. [indiscernible] on the diagnostics business -- when do we expect the business to break even? And what are the target after subscriptions by end of FY '24.
Sure. Chetan, do you want to take this up.
Yes, sure. I'll take a stab at it. [indiscernible], we are -- we want to take advantage of Q3 and Q4. Q4 tends to be slightly strong seasonally. But at this stage, we are not giving a firm guidance.
And on the second part of your question was in terms of what are the plans, active plans, goals that we have set. See, we currently have -- we kind of look at the active plans as well as the active lives. The target that we are currently looking at is 250,000 lives. We expect to close the year below 150,000 plans sold, active plans. Again, we're not in a position to give a guidance at this stage.
Okay. Any plans to take the diagnostics business to other cities or states.
At this stage, we do have -- see, we do have residual legacy diagnostics business in few cities. These are legacy from our earlier phase. What we talk about is the current experiment that is being carried out in Hyderabad. There is no plans to go outside of Hyderabad as of now.
Lastly, of the asset subscription that is 117,000 currently. How much of this is renewed and how much of this is new subscription base?
Of these roughly 20,000 are those which have gotten renewed.
Next question is from the line of Lokesh Manik from ValamCapital.
My question first was a clarification. In the DRHP it was given store payback period is 3 years, majorities, 4 years. In your presentation, you are reporting numbers at 2 years plus. Today's presentation is showing stores greater than 12 months are operating at [indiscernible] EBITDA margin. So I'm just confused as to what is the exact on an average, what is the maturity period for a store that you consider?
Sure, the maturity period continues to be the same. It is around 24 to 30 months or so. The payback period is 3 years is what we say. If you're getting stores more than 1 year at 8.9% EBITDA, that's just a mix of all the stores which we have in the basket, right?
Yes. But ideally wouldn't that be maturity 8.99%.
No, that's a full basket. That's only the stores which are more than 1 year, that's -- I don't think the stores just about 1 year or at 8.9% EBITDA at the store level.
So just to walk you through that, we expect our stores to breakeven anywhere from 3 to 6 months, which is when they have 0% EBITDA. So the 1 year time frame, they probably have around 3% to 4% and at the end of 2 years, they should have roughly around 7% to 8% or 10%, and that could go on up to be in the [indiscernible] in which they are around 10% EBITDA at the store level on average.
Sure. My second question was on store closures, what we've ideally seen in the retail industry is the store closures, the age of the stores are usually younger. In our case, these are older. And what is happening is that stores with an average in of 6 years will get closing is significantly impacting our return matrix given these are maybe 60%, 80% [indiscernible] higher EBITDA margin stores, greater throughput stores. Given that we are operating on thin margins, so what are the steps we've taken to avoid this? As for my understanding, store closure is 5% of the number of stores, roughly close over year, and these are in the higher 5-, 6-year age bracket. So [indiscernible].
Sure. So it is not as high as 5%, but we'll get back to you on that. The reasons for store closures for us are the average lease for us is around 9 years. If you feel -- or the 9-year period, if you see that the landlord is not renewing the lease for various reasons or we are not happy with the location, we could tend to move so there, in that case, we'll probably move. And those movements, which happened because of landlord not renewing or we're not being happy with the rent and all, they could significantly increase the overall age of the store closure rate. That's one.
Second, for us, unlike most stores, we opened at the rate of around 50 to 100 stores a month sometimes, right? So what that means for us is, so -- and the way we do it and largely because of the way the economics of the store are structured. We setup up a store at roughly around INR 25 lakh to INR 30 lakh cost, out of which INR 2 lakh to INR 3 lakh goes towards the rental deposit and INR 6 lakh to INR 7 lakh goes towards the buildout of the cost store and rest is all inventory. So for us, we don't necessarily need the best of the best locations for us to start. Because of the fact that we have great availability in our stores and we have the best value pricing for the customer, we are confident that we could actually go in to any market in which there is a reasonable density even if there is competition, we could actually get that business from those guys.
So hence, we go in a location by location, market by market and set up the store in the best available location at that time. And we constantly look to upgrade the location as our business increases or as new locations open up in the same market. For us and the reason we do this is because inventory, store deposit and everything all of those are completely recoverable. 80% to 90% of the cost of our fit-out is modular furniture and stuff which can be moved from 1 store to another. So we actually lose less than INR 2 lakh when we move the location. So we don't really consider it a big, let us say, a problem if you have to move the store, especially when we come across a location which is better than what we currently have.
Understood. So also in the DRHP, it is mentioned, the attrition rate was about 28%, 30%. DRHP was about [indiscernible]. Are we seeing a drop from there now at that attrition level?
Most of the people are working at [indiscernible]. I don't think the attrition is going to come down anytime soon. We are figuring out different ways of solving this problem. But yes, we'd be happy to solve it. No, attrition has not come down.
Is it because of competitive intensity or they're opening up their own after gaining experience at our store. Are you seeing some.
Neither here or there. Obviously, there's always different kinds of things out there. It is definitely not competition. Some of the people after coming to Hyderabad to set up or to any other big cities to actually work with us for a few years, may end up going to their small towns to go set up a store, that is completely possible, but that's also not the largest thing. It's neither this nor that. It's just that people today, definitely, are -- see, retail is almost like the first step for most people who come in from small towns into big cities. They come in, get some experience and then try to move on to better jobs as they go forward. We also expect that they work with us only for 2 to 3 years. We don't really expect them to work for longer than that.
Understood. Sir, in Diagnostics business, when do you plan to break even or there -- if I'm not mistaken, we have invested over the last few years about INR 200 crores in [indiscernible].
No, no, no. I don't think so. We have invested only around INR 110 crores. You probably are seeing some of the leasehold thing out there as capitalized expense. Our investment is only INR 101 crores. We are now more or less breaking even at all the central level, I would say. At the company level, we don't want to give you guidance on this right now. We're not yet ready to give you guidance on the exact kind of the [indiscernible]. But our sales continues to grow, and our losses continue to go down. And we are seeing a huge uptick by all the, I would say, childrens of Hyderabad will expect that -- the value proposition of what we have is really good and we're seeing a really good uptick. So we feel confident about the prospects of overall business.
Great. And sir, on the strategy, you're getting operational leverage to scale. So if I understand correctly, your fixed cost is about 2%. There's not much fixed cost left to create operating leverage. So then are you then looking at expansion of gross margin because the chain that you are competing with that is the retail industry gross margin level is about 28% to 35%. We are at 21.4%. So then is that where you're expecting operating leverage to kick close into that gap?
No, no. I still think operating leverage is possible as we go forward in the [indiscernible] and all that has taken us slightly longer than what we expected, but we will -- that will happen. So today, 3% of the cost goes towards warehousing and 2% on corporate. Now as we grow from INR 4,500 crores to whatever number it is this year, I don't expect that end the year after, I really don't expect that our corporate costs or warehousing costs will grow in tandom with that. There is still a lot of room for leverage out there I think. Gross margin, definitely, but that is going to come on the back of better adoption by customers or at least higher penetration of private label among our customers for us. So private label is where we expect even on the discounted private label model which we have today, we still expect margins to be better as we go forward.
The next question is from the line of Saion Mukherjee from Nomura.
Sir, I wanted to understand the growth rate that you mentioned 12 years -- 12 months plus at around 15%. So for older stores, let's say, which are 2 years or more, if you can give some detail as to how those stores are growing.
We don't have -- Saion -- we are currently not sharing those numbers whatever is there in the presentation is what it is. We expect the older stores to grow slightly slower than this obviously. But given the fact that we now have 2 levers out there, private label and non-pharma products, which are also -- which will continue to gain traction. Second, our own private label, which is now going to go at the 50% to 80% discount, we expect growth is going to be much higher than inflation, much higher than the cost, which increase every year for us. I can't give you the actual numbers here.
Okay. Sir, on this experience on generics. Hyderabad, you have launched it in June and there is some month of experience. So let's say, if you are doing INR 100 at EBITDA in Hyderabad, where it stands now with the kind of transition? Is it more than 100, how much more than 100 or less than 10, if you can provide some color on that and how we should take this number going forward?
So give you a long-ish answer for this. I explained the 4 main kind of features of our Indian industry and all. And I also said how we are going to go and take more top line. I expect our EBITDA to grow both as a result of higher SFT as we go forward as we take market share from the smaller independent retailers and all, one. And two, also, as the private label goes from the current 15% pharma, which is in Hedrabak to 20 and above. We have already seen a pretty significant growth in the overall top line, and I expect that to continue. The margin growth though will take a little while because although the private level is more profitable than the branded generic. It has also in the first stage, [indiscernible] slightly more profitable, full cost private level which we had earlier. So right now, what we have is a MedPlus brand. And but earlier to that, we had a MedPlus subsidiary brand, which we used to sell at full price. So cannibalization of that has resulted in a slight degrowth of, I would say, of the margin out there, but has been more than made up by the increase of overall sales and by the increase of 8% to 15%.
So for us if Hyderabad trending at a better EBITDA definitely compared to earlier. The exact numbers I think you'll probably be able to see it as we go forward in the next quarter when we give you results for the full country.
Okay. And finally, sir one question, the plans that you have. Is there any -- any scope for acquisitions, both at the distributor level or at the retail level? Is that something which makes sense given the plan for expansion that you have at this point?
We are always willing to look at acquisitions out there. But as of now, we have nothing in mind. We are not really seeing any direct targets for acquisitions. But I'm pretty sure at some point, we will -- we will continue their value, as we say. And there's a good deal out there on distant total will take it. But as of now, we [indiscernible].
But you would pursue. I mean, so this is mainly because of valuation.
Absolutely.
Okay. So the issue is valuation, because if the industry is consolidating, I would assume that you would have target would like to consolidate with a larger player and you could then add value. So I was wondering if something which can as we can see in the near term.
See the couple of things. One, valuation, definitely. But two, also the kind of model, right. If their business philosophy is completely different and the way they actually go about giving their customers in their value proposition to customers is completely different. Then it may not really blend very well with our own model. Then the only way in which you could basically run it is have 2 independent brands supplied by the same back end. That would be one possible thing, but we are not really seeing any, I would say, immediate opportunity out there. But yes, if we see a huge synergistic thing definitely. We don't see anything out there. They have to now look for complementary models. We obviously work at. We are a value player and we basically do discounting on everything else, but there could be someone out there who caters to a different audience and who is profitable and which can be acquired at a decent price, we could perhaps look at it at that time.
The next question is from the line of Madhav Marda from [indiscernible] .
My question basically was that as we see this mix of private labels, new private label, which we have launched, the MedPlus for brand generics, I think if I picked up right, you're saying gross margins are better, and we are seeing higher volumes in the stores that we've launched them, which means there should be better operating leverage. Is it fair to understand as we go ahead, the EBITDA that we make per store should structurally improve because we get better gross margin and better operating leverage. I'm taking like a slightly longer view. If you think from like a 1- or 2-year view? Do you think that's how it should play out.
100%. As I said earlier, the reason why we have so many stores out there is because a lot of them depend on trade generics for the viability. Store, which does INR 5,000, INR 10,000 per day is selling 30%, 40%, 50% of its overall thing, making around 50%, 60% margin. Now that we are in the market basically saying that if it is not something which [indiscernible] brand, then we are there with a 50% to 80% discount on it. And in Hyderabad and rest of Telangana, we are also selling trade generics at the same price, and we're testing it out to see how this works. If trade generics are available at that number, 50% to 80% discount, that will automatically mean a lot of the smaller stores will find it very difficult to sell it at that full price. And if the tried to sell though that are at a price which matches us, the low throughput will not allow them to actually survive. We will see a consolidation. We will see the benefit of that coming to us. That is for sure.
And again, as I said, the Indian consumer is also getting, I would say, more knowledgeable about the overall medicines and all. We're also seeing a bunch of people saying it's not a big deal. We know all these brands are same now that you guys have something to offer. We're more than happy to actually take it and save money. So we're seeing a lot of those people come to. So between the both, between some of the stores not giving up and selling their customers to us and people switching to our things, both in terms of top line and on the margins, I expect we will see positive outcomes as we go forward.
Got it. So payback time per store that we introduced, obviously, just mathematically should come down, right, over a period of time as these unit economics of the store increases or sort of ROIC profile, I mean, I'm just [indiscernible] one, but that should happen, I would assume.
No, no long run, definitely, mainly because of this. The cost of private label is 1/5 of what it cost for us to buy a brand.
Yes. So working capital is --
Yes, see -- INR 18 lakh out of INR 30 lakh basically goes into inventory for us. As the inventory cost comes down and our overall investment in the store comes down, definitely, [indiscernible] will improve. And as we continue, right? And today, we're making, let us say, after all the discounts, which we give and all the incentives, which would give our employees for selling our private label. We still made at least, I would say, 75% to 100% more than what we would make on branded generics after all the discounts. Now this number, where this can end -- can only go up from here. Because today, the average discount in Hyderabad is roughly around 58% to 59% or even 60% on the price label MedPlus private label. This need not always be that number. It can easily move anywhere from 60 to 55 or even 56. So that's 1 lever which we have, and that will actually improve our overall margin. And the normal inflation which the government allows every year of 10%, right, on the drug price. That will also -- some of it will pass to the customer because that 10% will get passed on [indiscernible] 50%, 60% discount to the customer. But the rest should come to us because I don't expect that the price of manufacturing it will go up as much.
Ladies and gentlemen, due to paucity of time, we'll take our last question for today. That is from the line of [indiscernible] from UBS.
So my question is regarding the private label portfolio. So if I look at the private label portfolio and considering that there would have been some cannibalization to the earlier paid generics that we were selling. So is it fair to assume that, say -- if I just look at the 14% portfolio, 14% revenues that are coming from private label, the gross margin sequentially could have come down. And considering that the pharmacy gross margin has increased. So in the branded pharma business, probably the gross margin would have increased quarter-on-quarter and hence [indiscernible] which would have come down? Is that a fair assumption or if something [indiscernible].
No. So you're saying our margins because of the cannibalization of our earlier high-margin branded private label. We'll have [indiscernible]. Yes. So earlier in Hyderabad, we had roughly around 7%, 7.4% of private label. Now it's standing at 15%. So we assume that all 7.5% has been, let's say, subsumed by this, then we would have lost roughly around 2% of that, but the additional 7% which we actually got here would have basically secured another, I would say, another 1% would have basically been made up by the extra private label which we sold, and that would have replaced the regular brand [indiscernible]. Now what we are also not seeing is the fact that our sales also grew significantly because of this. So a growth of even 10% extra at a 20% margin, more than makes up for all this. And we expect that we'll continue to grow as we go forward. From now on what -- I would say in Hyderabad, whatever margins we have lost because of the -- because of merging both the old and new ones, that effect is long gone. So we continue to grow from there.
In the other states though, in Karnataka and all these other places, we are now till now kept these separate. So we continue to operate the old private label as it is. We are seeing some cannibalization, but not complete. So to that extent, we will see some loss. But overall, since the private label is growing out there, we expect to make more money out there.
Okay. That's clear. That's very clear. And another question related to private label is when you have chosen 400 FTUs, which catered to 55% of the customers need. So -- are these the ones where probably the fill base were lower earlier? Or are these top-selling SKUs that you see in branded Pharma? And the 15%, which is say, as you explained, 1/3 of the addressable market that you were able to convert. So do these customers had prior awareness? Or is there some belwo the length activity, which has been done to create awareness, which led to this uptake in private labeLandstar System.
Okay. So 2 things. Everyone is aware because the private label was sold only to people who had MedPlus membership and MedPlus membership was sold at some price of super discounted price. The original price, which we thought of was INR 499, but we ended up selling at INR 49 as a initial thing, but they had to actually become a member, pay that money to actually obtain this discount. So they were told. And in the stores when they came in, and we also had some marketing materials, which went outside. We also did a little bit of advertisement and all. We talked about only this. That 80% of all the drugs in the country are of packet. All these are these branded generics or generics only. And we basically just said that MedPlus with 4,000 store network and a INR 4,500 crore turnover as of last year has the size and capability of getting these drugs manufactured in the same places and to the same level of quality as any of the larger brands. And so -- and given that we did not have any marketing cost and all, and we made it very clear that the discount was coming to them because we didn't have any channel cost, and we didn't have any marketing costs.
And so customers bought that, and that's -- and a significant portion of them ended up actually buying [indiscernible] 1/3 of whatever we put out the offer basically got taken.
It is the fast-moving products by the way. These are not products the fill rate as a problem or anything like that. These are the fastest-moving products.
Got it. Got it. So it's like -- there is substitution which is happening. It's not that probably a patient is coming and you were able to fulfill 8 out of 10 and 2 were the gaps and you had introduced [indiscernible]. So it's probably the ones which would you be selling and you have a substitute now available for the customer.
Yes.
And just final question. So -- if I just do a CapEx per store, it comes to around 1.4 million, which is INR 14 lakhs. So we have set out cost of INR 600,000 to INR 300,000 of deposits. So where is the remaining 500,000 to 600,000 coming from assuming that none of the CapEx is going into diagnostics for this quarter?
No, I don't think -- we will try and come back to you. I'm not sure if it is leases just capitalize or something like that. I don't think the CapEx for our store goes beyond 6 to 8, maybe a little bit of the maintenance. We actually did tell the investors last time that we are going to refurbish I would say, a refit roughly around 1,000 stores to accommodate the private label products, nonpharma private label products, which would now start going from being served from behind the counter to in front of the counter. So maybe a little bit of that, but I don't think it's going to be -- it should have changed it so much. Happy to come back to you with more details on this. Please reach out to us after this.
Ladies and gentlemen, that would be our last question for today. I now hand the conference back to the management for their closing remarks. Thank you, and over to you.
Yes. Thank you, everyone, for the call.
Thank you very much. Ladies and gentlemen, on behalf of MedPlus Health Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.