MedPlus Health Services Ltd
NSE:MEDPLUS
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
602.95
807.25
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
MedPlus Health Services Ltd
You don't have any saved screeners yet
Ladies and gentlemen, good evening, and a warm welcome to the MedPlus Health Services Limited Q3 FY '23 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, Prasad.
Thank you, Sandy. Good evening, everyone. On behalf of MedPlus, it's my utmost pleasure to welcome you all to the MedPlus Q3 Earnings Conference to discuss the financial results of MedPlus for the third quarter of financial year 2023, which was announced on 4 February 2023. We have with us today the senior management team represented by Mr. Madhukar Reddy Gangadi, CEO and MD; Mr. Sujit Mahato, CFO; and Mr. Chetan Dikshit, CSO.
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 have been circulated earlier and these have also been posted on our corporate website. Please note that we have uploaded the revised augmentation to the stock exchanges today, including correction of few typos on Page #8 and 21.
I would now hand over the call to Mr. Madhukar for his opening comments. Thank you, and over to you, Madhukar.
Thank you, Prasad. Good evening, everyone. At MedPlus today, we are over 21,000 colleagues. I would like to thank my team for their business and hard work that goes into providing the vital service to our customers. As on 31st December, we cater to the health care and household needs of neighborhoods in 497 cities across 7 states through our network of 3557 pharmacy stores. We have now expanded into the 43 new cities during the current quarter.
We are continuing with our store expansion program. We have added 1,080 stores in the last 12 months, that's net stores. In Q3, we opened 246 stores and the highest additions were in Tamil Nadu and Maharashtra, 65 and 58, respectively. In Q3, 58% of our store openings have been in Tier 2 cities and beyond. We have 1,523 of our 3,557 stores in Tier 2 cities and beyond. These are good markets from a store economics standpoint, and MedPlus continues to expand in these markets because of the maturity of its operations and supply chain capability.
There were 17 projects in Q3 versus 14 in Q2. And so overall, we have had a net additions of 229 in Q3 versus 348 in Q2. For the last 12 months, net additions have been 1080. To give you an idea of the way our network is split into. 32% of all our stores are less than a year, 17% are between 1 and 2 years, and 51% of the stores are 2 years and older.
So we ended Q3 with 49% of our stores in the less than 2 years age bracket. In comparison for Q3 FY '22, 36% of our stores were less than 2-year-old. All stores in the below 2 year age market are still in the ramp-up phase and from a financial point, they are a drag on that operating EBITDA. However, as they mature, we expect these stores to contribute to our profits.
We closely track the time to bring them for a new store. The stores opened between July '21 and June '22, 69% of the stores achieved breakeven within 6 months of operation. To give you a sense of how rapid the ramp-up to break as at the 6 months and beyond level, 79% of stores went break-even in the 7th month. So more than 10% growth in just 1 month after that. At the end of the quarter, our network has now grown to 3,557 stores with 2 million plus square foot compared to 2,477 stores and 1.5 million square foot at the end of December 2021. The average store size 558 square foot. To give you a sense of spread in store sizes, we have 2,474 stores size [indiscernible] square foot and 1,083 that are greater than 600 square foot.
With our scale, we are now better poised to increase our overall share of private label -- overall share of revenue from the private label side. What the scale does is allows us to add new products for which we did not have the minimum order quantity earlier. And scale also allows us to establish a brand, which makes all the products much more easier for customers to accept. Our private label range is intended to provide quality products at affordable prices, that just today has over 900 curated products across pharma and non-pharma. Private label sales at the end of last quarter was 13.8% of our overall revenue.
Overall, the trajectory of increasing share of our private labels in our customer basket continues. Within private label, our Pharma range has also been gaining share. 8.6% of pharmacy revenues is from private label pharma. Our increasing presence in Tier 2 cities and beyond is reflecting in our revenue mix. Sales from Tier 2 cities and beyond contributes to 33% of our pharmacy revenues this quarter, this is up from 29% in Q3 of last quarter.
We continue to extend our range of pin codes for our online orders, which complements our physical stores. As such we will continue to focus on increasing the coverage of our 2-hour delivery offering. Store pickups as a share of online orders continue to maintain a higher share than home delivery, reflective of the convenience and accessibility of our store network. Our strategy on online remains unchanged. We have not spent heavily to acquire customers online. In fact, in the last quarter, we spent -- we hardly spent -- we have not spent at all, I would say on acquisition of online customers. And we continue to maintain our omnichannel as a profitable channel. The way we think of our omnichannel is, when we set up a store and we enter a neighborhood, we are automatically drawing the 100 customers per day kind of footfall. And all of these people are immediately -- we let all these customers know that we also have the same service online. And we let the customers according to their convenience chose to either go online, off-line or in a lot of cases go between both. We don't see -- and given that we are distributing the products only in that particular neighborhood. We -- for us every single transaction becomes a profitable transaction, neither is their cost of acquisition, nor is the extra cost or extra discounting issue here, not to be spend too much on the delivery side. So for us, while we believe that online is a very critical part of our overall supply chain -- overall selling process out there, we think that the customers will pick it based on their convenience and there's actually no need to spend a lot of money to acquire customers or at least to 10 customers into going online.
So anyway, with that, I will actually let our CFO, Sujit to give you an update on our numbers.
Thank you, Madhukar. Now on our quarter's performance, our consolidated revenue was INR 11,903 million, growth of 27.5% year-on-year and 6.2% quarter-on-quarter. Our consolidated operating EBITDA stood at INR 371 million, representing 3.1%. This is a 1.2% year-on-year and 31% quarter-on-quarter improvement. Around 99% of our revenue is from our pharmacy operations. The pharmacy operating EBITDA was INR 406 million, representing 3.5%. On our store performance, I would like to update on our stores older than 12 months. Revenue from these stores in Q3 was INR 9,895 million or 85% of our total pharmacy revenue. These stores had a store level EBITDA margin of 10%. The store level operating ROP of these stores stood at 60.8%. A word here on the store level EBITDA margin by age, while stores greater than 12 months had a margin of 10%, for stores in the greater than 24-month category, this was 10.6% and for store in the 13-month to 24-month category were 7.2%. If we allocated long store-related costs, then the operating EBITDA of stores greater than 12 months, would be INR 490 million, which translates to a margin of 4.9%.
On working capital, our net working capital for quarter 3 was 63 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 Q3, the inventory level of our first year stores were 109 days. In comparison for our stores older than 12 months, the inventory was 38 days.
On our segmental data, I would like to add an important note. In Page 17 of our earnings update, we have presented the business segments, which are different from the regulatory filings. For example, opticals have been grouped under others in the presentation, whereas in the regulatory filings opticals is grouped under retail. We hope this information will be useful to you.
Now I request Chetan to update us on the Diagnostics business. Over to you, Chetan.
Thanks, Sujit. Good afternoon, everyone. I'm Chetan Dikshit, and I'm the Chief Strategy Officer of MedPlus. We currently have 3 full service diagnostic centers in Hyderabad and just over 100 collection centers. Any member can avail the full range of radiology tests, example MRI CT and pathology tests at 75% discount to MRP. To recap, there are 4 differences in our model versus our typical peer. Firstly, we do not operate via franchisees, and so there is no revenue sharing. Secondly, our collection centers are housed within our pharmacies, so there are only marginal incremental establishment costs at a consolidated level. Thirdly, our plan is designed such that we do not spend -- we do not depend on the referral network for patient workings. Lastly, we expect our centers to achieve scale faster than peers. As an indication, the capacity utilization for our advanced radiology machines in 6 months of operations is nearly twice that of a typical new center in the marketplace. Up to 31st of December, we have sold plans with 119,000 underlying lives. In October, November and December, we sold 250, 281 and 275 plans per day, respectively.
That's our update on Diagnostics, handing back to Madhukar.
So what can you expect from MedPlus going forward? We operate in attractive pharmacy space and are poised for growth on the back of our store expansion. Our cluster-based network enables profitable omnichannel service and scale allows a large share of our private label basket. Our diagnostic product has proven that we can use our pharmacy stores to cross-sell other health care selections and we'll explore other recent avenues that can add incremental sales without increasing costs.
With this, I'd like to open up the line for questions.
We will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Aashita Jain from Nuvama Group.
First question is on the ramp-up of new stores. About 69% of our stores achieved breakeven within 6 months versus your 75%, 80% seen in the past. It seems like your new stores are taking longer to breakeven. Is it to do more with the opening of new stores on Tier 2, Tier 3 cities? Or is there a competition in general? What is your take on the current competitive scenario?
As I said 69% opened in the 6 months. No, I don't think opening them in Tier 2 is actually a cost of slowing down or even speeding up there or whatever, I don't think there's any difference out there. While stores in Tier 2, the topline for them is slightly lower. Typically, their rent and other costs are also much lower. The share of private label, which makes for more profitable sales is actually higher. So they end up breakeven at the same time. But there is some variation once in a where it goes to between 65% to 75%, and goes higher at 80%. It is just -- I won't -- this is not something which we're too concerned about. And as I said in my call, if you look at the -- when we look at the seventh month, the overall breakeven number actually jumped to 79%, [indiscernible]. So for us, breakeven is exactly meeting all the operational expenses of the store to the large extent. And sometimes there are few stores which fall short that are 500, or go over the 500. So I won't stress too much about that actual number.
Sure. This is very helpful. And secondly, on the expansion plan, any new states that you are targeting apart from the 1 already disclosed and your expansion plans in terms of number of stores for FY '24 and '25?
We are actually going to be looking at Kerala, Chhattisgarh and Madhya Pradesh stores, we will be opening stores in Indore, Raipur and Cochin actually. This will either happen this quarter or we will probably end up opening some stores this quarter or definitely in the next quarter after that. But this year, definitely, we will be looking at least 3 new states to kind of start operations, take the store count starting with maybe 20, 30 to 50 or 60 later and get -- as you would say, [indiscernible] out there. And once we are comfortable then we'll start expanding. That's the plan.
And your expansion plans in terms of number of stores remains intact, 1,000 stores for '24 and '25?
More or less, they will -- at least 1,000 stores, I would say. Yes, it falls in line with our current numbers.
Okay. And just lastly, on your discount, why your blended discount have remained the same? Is there a change is a discounting bucket in any of the regions? Or the ranges are same? Order value?
More or less the same. We have not seen any big difference in the about 1,000 or below 1,000 kind of bill sizes, number of bills. It is more between 16.5% to 17 kind of percentage, but not a significant increase, I would say. We haven't changed the discounts.
[Operator Instructions] The next question is from the line of Avnish Khara from VT Capital.
Hello. Am I audible?
Yes.
So if I look at the contribution from lower tier city over the past 6 to 8 quarters, it's been slowly inching up. So what I wanted to understand is what is the -- are there any difference in the store economics in the metro cities versus the lower tier and we're also going to be -- that number is going to continuously be going up? So I also wanted to gauge what is the cycle of your consumers in lower tiers versus a metro city and what our strategy is for those regions?
If I understood you right, you're asking if there's any particular reason for us to actually go to Tier 2 and Tier 3, right?
Correct.
No, it is just to see, we have been in the 7 states, at least in 3 or 4 states for quite a while. We're fully established in AP, Telangana, Karnataka, Tamil Nadu and West Bengal where we have our main warehouses in the capital cities of these states. And I wouldn't say we are saturated, but we have had -- we have a fairly good presence in each of these cities. Hyderabad, Bangalore and Chennai, we've got over 400 stores and Kolkata we are now nearing 300. So to sweat the asset out there, which is our warehouse and the supply chain out there, it is right for us to actually go deeper into Tier 2, Tier 3 and Tier 4, which is what we're doing. Because once you -- the setting up of a warehouse is fast, once that is amortized then you would want to basically do as much as possible in the state and that's the reason why we are going deeper into the Tier 2 and Tier 3.
Another reason is we started the company when we said that there's a lot of fake drugs in the market, 30% of all drugs in the market are actually fake is what we -- what I had read in our WHO report when we actually started the company. We think the value proposition which MedPlus has of providing genuine medicines and also providing a great price, driven by our scale, of course, is even more -- that value proposition is even more relevant in a small town where there are a lot of small operators, they don't give as much discounts. And they are certainly, I would say, is more prevalent of nonstandard or non-quality kind of drugs. So on both [indiscernible] our main mission of actually doing this to the value proposition resonating with the local public and to making the best use of our asset, I think we are best -- we would best served by putting in as many stores as possible to Tier 2 and Tier 3.
Now is there -- are there economics same? Absolutely. While the top line is slightly lower than a metro city in a small town, given that the rents and staff costs and the private label mix are all favorable to us in a small town, but EBITDA actually in a small town is much better.
Right. And also, I just wanted to understand that, is it -- I mean from your past experience, do you think that in the lower-tier city, it's more easy to push our private label product because they might be a little lower priced than the branded ones?
Our private label is not necessarily lower price. It is almost on the same price. No, it was easier mostly because a lot of people do come for OTC kind of drugs, and a lot of the OTC kind of medication is sold, a lot of the medication in current label is OTC. No, it is not about the price as much as the type of customer who walks into a store in a smaller town.
Right. And I'll just squeeze in 1 last one. So the -- you had amalgamated MHS pharma this quarter. So what exactly happened over there? Could you just throw some light on that?
I will explain that. Thank you for asking this question. The amalgamation was part of an older transaction. In FY '20, the company had disclosed a BT arrangement between MHS and through a slump sale, the company had acquired the entire business of MHS. It is now only being formally amalgamated. So there is net impact, there is a payable in the books of MedPlus of INR 17.5 crores to MHS, which will be set off against this amalgamation. So net-net, at a group level, MedPlus would have INR 17.5 crores of extra cash.
The next question is from the line of [indiscernible] from InCred Capital.
Congrats on continued good performance. Just few questions on the Diagnostic side, the revenue of the cash that we get by selling this membership, how is it recognized? Is it right away recognized as revenue or over a period of year or so?
This is Chetan. I'll just take it up. So here's what we don't do, when we sell a plan and the cash comes into our system, we don't recognize it as revenue. So that's probably the first part I would like to say. The second is how the specifics of your question -- like how do we -- how does it move from the balance sheet into revenue recognition? Well, there are really 2 buckets to it. That's the 75% bucket and a 75% -- 25% and 75% bucket. The 25% bucket gets recognized on the first instance of use of the plan. The balance, 75% of the bucket is then amortized over the course of 1 year. You see the membership plan is a 1-year plan. Yes. So it will basically get recognized as a deferred revenue.
The next question is from the line of Prakash Agarwal from Axis Capital.
Just 1 question on the discounting. I don't know if you've already discussed, but how is the discounting fee in the last few quarters? Has it improved? The pricing improved as the discounts remain very high? I hear that there has been some month-end kind of discount increases and then it fades away to 20%. But if you could just share some thoughts on the competitive landscape that you are seeing?
Yes. For us, of course, it's a standard discount which we operate through the year. If we change it, then we change it for good out there on that index state. As you know, we have a 10% discount for all bills under 1,000 and 20% above 1,000. For us, it doesn't really change much. So the only way the overall discount can change for us is if a higher portion of people are buying for bill size above 1,000. And it more or less remains the same for us across all the states. In some states, of course, in West Bengal while it's slightly higher, whereas in Telangana it's slightly lower, bill size is slightly lower in Telangana.
But on the competition side, we see that competition is in the game of, I would say, offering a discount which is not really viable with just 25% discount in the initial stage. So which means they can only offer it for a certain amount of time or for a certain number of times. So either they go around saying that okay we will give it to you on the first 3 bills or sometimes they come in and do a flash sale where they say, okay, we'll do it in the first bill, second bill, third bill, which is all very great, but our only problem is the amount of money required to communicate this kind of message is actually more expensive than the discount itself and it often gets misused most of the time. So we don't see much benefit, I would say, of doing that. So it is just more of everyday low price. We continue to make offer better and better for the customers. But we have been kind of steady at the same number for a while now Prakash.
So what I understand is you're saying competition still is at 25%. There is not much of a breather there. And despite that, we are growing 25% plus.
The question is, is the competition still doing 25%? Yes, absolutely. In fact, we sometimes even -- I myself get text messages of various competitors saying that they are willing to offer 30% once in a while. So yes, I don't think they're really let up on that.
Okay. And some color on the growth outlook and margin outlook because this is the first time where your store addition has been a little softer, which in right spirit, it has also helped in improving some EBIT and EBITDA. So would the strategy be followed? And would it be at the expense of growth? Or what is the right balance you want to follow for the next few quarters and years?
So Prakash, if you look at our last quarter, it was around 348 this quarter was around 248. So once in a while, these numbers go up and down, the plan is to grow at the rate of anywhere between 250 to 300 stores per quarter, it could go up or down a little bit. A lot of times, last -- this quarter, I think we were affected a little bit by the rate at which the licenses came in, because of Dussehra and Diwali they did not come in time in some states. So there is a process inspection, sometimes the inspection itself takes a while and then the licenses are issued. So sometimes it could take a while, that's the only reason. We are not calibrating that right now. We plan to remain steady between the 1,000 to 1,200 kind of number for the year. So that is going to be the plan for next year.
And on the revenue side, I think we can basically say anywhere from 20% to 25% is what we're thinking will be the our revenue estimate for the next year, over this year.
Okay. Fair enough. And lastly, in terms of using the cash, is there a thought of buying out some of the smaller chains? Are there actually some in the market? If you could give some color there?
We come across some chains, but we have never found anyone which is priced right, honestly, given that we are able to open mostly at the rate of around 100 stores a month, and given that the next largest chain is only around 300 stores. We really don't see too much benefit of paying a big premium for that. So we have kind of shied away from that, given that our ability to open stores is pretty good.
Okay. And 1 more question, if I may, on the Diagnostics side. So earlier thought was to have the pilot and still doing okay. But I mean, is there any key takeaway in terms of next 6, 12 months plan of adding more pilot for itself in Hyderabad and how to take it forward?
Okay. So it remains a pilot. It is now going to go beyond Hyderabad. The pilot of course, was an integrated radiology and a path lab kind of service. So that will always remain only in Hyderabad for now at least. The plan is to open 12 stores, 12 diagnostic centers, 4 of which will be large, one with MRI and CT and 8 would be smaller ones, so that continues. The plan is to actually -- so we need to see a certain number of subscriptions in our kitty before we can take a call on opening at another place. But then, of course, that is going to be -- I don't expect us to make the decision this quarter or next quarter on that as of now.
Okay. And on the large 4 ones, 3 are already open or 2 are already opened?
Right now, there are 3 large centers open. And I think we are at least 2 smaller ones open out there, currently running.
Okay. So you have 5 and your plan is to take it to 10?
Yes, the plan is 12 overall, 4 plus 8.
The next question is from the line of Sayantan Maji from Credit Suisse.
So my first question is on other expenses which has remained flat quarter-on-quarter. And I believe that the key components of other expenses are packing in forwarding charges, then debit card commission charges and electricity charges which are mostly variable in nature. So what has caused this other expenses run rate to be the same quarter-on-quarter? And do you expect it to increase going ahead?
No, I don't see any reason to think that will actually change too much out there. Well, part of it could be variable, not all of it is variable out there. For us the moving expenses don't really change if we had, let's say, 5 stores or 10 stores in the same territory and all. The credit card that is, of course, are a function of the number of bills which were there, not a significant change. It's a small percentage overall. So I don't see any difference out there.
Okay. Okay. And my second question is on the store addition run rate. So we continue to maintain a guidance of 1,000 to 1,200 stores per year. So while we are entering new states, do you see enough clusters for growth in key states of say, Andhra Pradesh, Telangana, Tamil Nadu, Karnataka where we see sufficient headroom in Tier 2, Tier 3 towns in these states?
Yes. In 3 of our current states, we are very big in the main cities and Tier 2 and Tier 3 is completely open for us even in those states. In the other states, they're not even big in the Tier 1. For instance, in West Bengal, except for Kolkata. And even there, we are -- we only have slightly under 300 stores compared to the 400-plus stores in Bangalore, Chennai and Hyderabad. I think there is room for growth in those cities. In almost all of Maharashtra, we are not there at the full potential even for the larger cities, forget about the Tier 2, Tier 3. So answer to your question, is there enough scope for growth in the Seven states? Absolutely. We're only feeding 3 new states just to make sure -- not just to make sure, it's just a vertical extension, I would say, of our overall growth, we're growing in contiguous states. We are leveraging the warehouses in the states before. We just want to add a few -- figure out how the market is, to get the supply chain all set up and then grow rapidly after that. So for us, it is not for lack of opportunity in the current state that is going outside.
Okay. So -- and what would be our key focus still stay in Maharashtra apart from, say, Mumbai and Pune?
For us, we look at it as 2 different regions. One is the overall Vidarbha region and then there's Marathwada region. And then there is region around Mumbai and all, Mumbai and Pune. So in the Vidarbha region, we are pretty strong in Nagpur. We are now actually extending rapidly into Amravati, Akola and a bunch of other districts around that. And similarly, around Nanded, we have a bunch of new stores coming up. So these 2 -- apart from these 2, then there are districts around Pune, Mumbai, of course, being a place where we expect that we will go very, very cautiously with slightly smaller stores and all. Yes, this a lot of different areas of growth for us in Maharashtra.
Got it. And so what was the average store base, I missed that for this quarter?
558.
558. And basically, the declining trend is mainly due to smaller stores coming up in Maharashtra?
Smaller, not just in Maharashtra, but also in the smaller town. We don't necessarily need a very large store in a very small town of 50,000 kind population. A lot of times those locations are also not really available when we go into our Tier 2, Tier 3 kind of locations.
Okay. Got it. And my last question is on Diagnostics. So Chetan, you mentioned that you had witnessing of faster scale up in operations compared to peers. So one, what would be the primary reason for that? And basically a related question is how much have we spent so far? I remember that you had allocated INR 90 crore for this pilot. So how much have we spent? And what would be the spend, say, in the next 1 or 2 quarters?
All right. So first, on why our utilization rates are more, the prices are incomparable. I mean, especially at the high-end radiology machines like MRI CT, 75% discount when we say that it's to be comparable diagnostic centers. But if you compare it to the rates for these machines within the hospital, this is even more staff. So the price is driving the utilization. In all our 3 centers, we have right up to midnight, and we do have patients coming in after 9:00 p.m. So price and hours are 2 contributors to higher utilization of high end machines.
The next question from your side was on...
How much have we spent.
Our budgeted advocation for the financial year, April to March was INR 85 crores to INR 90 crores, and we are pretty much on that track. I'll just check with Sujit, if he wants to add anything further on the CapEx side.
No, that's it. We're fine. I mean unless you have a more detailed follow-up on this question?
So this INR 85 crores to INR 90 crores is only for FY '23?
Yes. That was our guidance for the financial year.
Only for FY '23. So FY '24 would have an additional spend on top of this?
Yes. Really, as Madhukar said, what we have is an outlay for the project in Hyderabad. So there really is no material CapEx that is intended for FY '24. But within centers, we may -- for example, if we have 2 ultrasounds or 3 ultrasounds, we may go to a fourth one. So think about more as regular CapEx rather than CapEx, which is going to fuel new centers or expand the network.
The next question is from the line of Kunal Randeria from Nuvama.
My first question is in the last maybe year or 1.5 year you said 1,000-plus stores. So I mean, have you -- maybe because of the scale and size now, have you started to see some procurement benefits?
See for a while now, we've been buying directly from the companies. While there is still a small set of companies for whom we end up actually purchasing to distributors and to a very, very small set, and that has been. In those companies, we are in operation directly and we will end up actually halving the 10% in the next 2 quarters or so. I don't think there's going to be a significant procurement benefit as far as buying from companies is going to be concerned. But that said, the scale is going to help us benefit on the private label. And also in getting in new products that were otherwise not available to us -- because we were not able to make the minimum order quantity for purchase of that product. So those are all going to come in with scale, more than, I would say, the purchasing benefit.
Going forward, as we continue to work closer to more closely with companies, we expect with sharing of data, and we expect by looking at [indiscernible] the new launches and all, we will be able to get some kind of a feel out there. We already do get a significant push on that. But we expect to better as we go forward. But on a direct purchase, I really don't see too much happening.
Right. Okay. So I mean, then would it be fair to understand that let's say, maybe double in size in the next 3 years? Our procurement cost per, let's say, product company remains the same despite [indiscernible] let's say [indiscernible] company XYZ? Or does it get better -- maybe got a couple of percent more discount because of your size?
So I'm sorry, it is not -- the question was not very clear. The audio did not come through very well.
If you're speaking through your phone, we request you to speak to the handset.
I'm speaking through the handset only. I hope this is clearer. So Madhukar, what I wanted to say was -- ask was, so maybe as you increase your size and scale, will the same company from which you are buying, do they offer slightly higher discounts because of the size?
No, I don't think anyone has any reason to offer us more because of that. Because to be quite honest, we don't really influence the overall sales out there, right? It is the doctors who have to write the subscriptions. And companies typically end up spending their marketing money out there. But on the supply chain side, when they actually want to launch a product across the country, let's say they want to launch it across 4000 stores in 7 states, we will be the person who we will approach. And for that, we will definitely end up getting slightly better margins than the overall thing.
So in terms of managing the expiries, in terms of managing the supply chain, in terms of making sure that their products are launched across uniformly, I think we would be able to do a better job as we grow bigger and bigger. And we will definitely be able to get a slight benefit from those companies, that's one. Second, as you may have noticed from our presentation, today, 13.7% of our overall sales is from private label. Now here, we can definitely make -- as the scale continues to grow, this is where we continue to benefit from. So while the margins are good right now on these products, I see no reason why they can't be better as we continue to increase our sales.
My second question, I think 1 of the comments that you made was some of the discounts given by online players are clearly unsustainable. So while I take your point, one of the online players have maybe stated the intention having around 2,000 pharmacies across India. So do you believe a discount to worsen from here?
So what are the question? I know one of them is doing 2,000 stores, but -- what are the question you asked?
The question is do you believe the discounting could maybe from 16.5%, do you think it could maybe go to 17%, 18%? Or you think this discount level is manageable?
No, no. For us, I don't think so. See, today, we are close to 3,700 odd stores as of now or slightly more. We're not even -- it is not as if we have taken the whole market. I don't know how addition of another 2000 stores is really going to affect the overall market. I don't want to really expect with them coming in that we have to suddenly change. I don't think that's going to be the case at all. As it is, I'm pretty sure whatever advantages we have on scale, they will also get the same, but whatever discounts or whatever costs they are in running stores, everyone is going to have them. I don't really see anyone else being able to sustainably beat our prices out there. And even if they did for a little while, we are not too concerned. Because as far as we are concerned, there are 2 aspects to it. Every country in the world have at least 2 or 3 or 4 large players like U.S. has got Walgreens, Rite-Aid, CVS along with Walmart and all doing their own pharmacy and all that sort of stuff. So there's the equivalent of a superstore doing it, there's also a large chain of pharmacies. And most of the countries will require more than one. As we have been saying over the last several quarters, it is Apollo right now. I'm pretty sure Netmeds and Tata 1 mg and a couple of other guys may come in, at least that will be the 3 to 4-player kind of thing if not for some more superstores also coming in and doing this. So we fully expect they will come. I don't think the market will completely be upset just because 1 or 2 players have entered out there. I don't think it will push us to do more discounts immediately. For us, given that what we're looking at in the Indian market is a shift from unorganized to organized, and given that the organized is so small, even if 1 or 2 new players are going to enter, there is enough market share for us to gain from the unorganized side, and that's what we'll be focusing on. So as long as we are ahead of the other 85% of the market, which is there in the hands of mom and pop retailers, I don't see any problem in continuing to actually expand if we wanted to. So short answer, are we going to expand the discount? I don't think so.
Got it. And just 1 last one. You have around INR 320 crores of cash lying on your books. You made a negative free cash of INR 73 crores in the quarter. So I mean, to fund your expansion, do you think this is enough or maybe need to go for funding at some stage?
So on the cash balance and cash in bank, the store expansion would continue in the same manner, and we would use this cash only for our store expansion the way I explained by Madhukar earlier.
I mean is this pool enough? Or I mean you will need to raise some more because you're still investing in diagnostics, right?
Yes. As on date, as you are aware, we are debt free. So we have a good headroom if required. So I think as of now, there's no plan to take up any debt on the balance sheet. But as and when required, we will definitely consider.
The next question is from the line of Saion Mukherjee from Nomura.
Sir, on the growth that you report for mature stores, just above 10%, is that something which is sort of in line with your expectation or slower than your expectations? And are there any geographical differences that in certain geographies this is faster than the other geography or Tier 1 versus smaller cities? Any color you can give on the mature store growth rate?
No, it is actually in line with what we actually thought. We have been slightly lower than what we have thought at the beginning of the year -- last year. The competitive intensity has been fairly high, okay. But other than that, now it has kind of become stable. For us, we expect to grow at the rate of inflation on the old stores, and we also expect to take some market share from the local mom and pop retailers out there, as we continue to play on the value proposition, which we have for our customers. Great prices, great availability and guaranteed general medicines. So not, I would say, completely in line with what we are thinking right now.
Is there a significant difference between small and large towns? No, not really. It will be a function of the number of stores we have in that area and the number of stores -- and that's all there is so say honestly. Maybe a little bit of cannibalization in some of the larger cities where we set up for the first 1 month or so. For instance, if we have a store in the neighborhood, and we go and open a store, which is 500 meters away or 700 meters away, all the people are coming to that store from that cash will probably shift to the new store in the first month. But after that, then it kind of settles down. So nothing which is outside of what we expected.
Okay. And sir, similar question on the private label. I mean, on an average numbers are going higher, is it again, how should we -- and how is the dispersion like? I mean, across your clusters and towns that you operate, this 13.7%, is there a wide variation that you see across regions in India or it is more or less on average?
Small accounts definitely have slightly more private label penetration out there. So the nature of kind of our customers who walk in and the value proposition of our private label, nonpharma products, resonates more sometimes with a smaller town guy. So we could possibly have slightly higher ones out there. The range though is more so the stores tend to be between, let us say, a little bit this way. Very few stores have less than 8%, 8.5% overall private label. There are some stores which are as high as 20%. But the average falls in the 12% to 14% kind of number.
Sir, you -- I think, had guided for this number going up 100 basis points every year, so you continue to maintain that?
On the overall I don't really see any problem at all. 100 basis points should be easy. On the pharmacy side, we'll be able to go ahead and give guidance maybe in the next quarter or so. On the pharma retail -- on the pharma private label, in the whole 13.7% is composition of devices, FMCG, nonmedical products and medicines.
The next question is from the line of Utkarsh Maheshwari from Reliance General Insurance, please go ahead.
Good evening. Hello? Yes. Sir, just a housekeeping question. I mean is there a possibility where you can share the average sales per day for the stores, which are like more than 2 years in operation, which are like less than two years in operation?
Right now, I think we give you as much data as we can. It is a little bit more tougher for us to share everything out there. I think -- but yes, so we -- I believe we are in line with other retail operators right now. Like we're trying to stick to the pharma, which are currently in prevalence across the Indian retail markets.
Okay. And just to reconfirm 1 thing. I mean, as of now, I think the diagnostic is it INR 90 crores of which we have planned, right? Nothing beyond that has been thought about, right? Because that was a pilot for the Hyderabad.
Absolutely. No further CapEx outside of the routine maintenance kind of stuff is planned for in the integrated path and radiology kind of centers in Hyderabad -- in the pilot as we started it.
So I think the run rate of adding the new people has actually gone a little bit slow, I think, because I think we had to plan for 100,000 plus, right, as a plan or something of that sort? And we added something 25,000, 30,000 in the first month, now we have 60,000 70,000-odd. So is the accretion is slow in this particular thing -- that new membership additions?
Not really. The addition of our -- so we expect it to get all up to -- at least the majority of our 12 stores up and running, that has taken slightly longer than what we expected, probably it will be delayed by a month or so. I don't see a big difference other than that.
And the number of -- I mean, how many -- what is the target for us in terms of number of members we look enrolled?
The first number which we are kind of looking at its 100,000 members, then after that we will see depending on the pace of expansion of that number from 100,000 to 200,000 we'll take a call on whether we plan to go to other states, yes.
The next question is from the line of Amit Kadam from Canara Robeco Mutual Fund, please go ahead.
Yes. Two questions. Sorry, I joined late. The gross margin, what was commentary that why there was a...
Sorry to interrupt you sir. Sir, your voice is really feeble, if you can just speak up a bit?
I'll try again. Is this audible now?
Yes, you may go ahead.
So just with the initial commentary on the gross margin, sir. Madhukar sir, what is that particular commentary narrative that why gross margin improved sequentially? Was it lower discount or mix?
Sorry, the question, why is sequentially the number is going up?
Yes. Gross margin improved sequentially, so a reason for it.
It is a private label mix. We have not really reduced the overall discount. The discount is being maintained. If anything, it has gone up slightly, I would say, by a fraction out there, but it is mainly the mix of products and maybe there's possibly a slight betterment in the procurement side. But yes, it is not to do with the reduction of discount.
Because private label, what I see was 13.9% in Q2 FY '23 which is 13.7% this time. So hence, I thought that sequentially that can't be the reason for that particular 50 basis point of improvement when the mix or the private level is down 20 basis points sequentially.
Yes. See, private label is also a broad basket of products out there with margins ranging anywhere from 30% to 90% to 95%. So it is not a one-to-one mapping of 1% being exactly that. It's a kind of -- it depends on exactly what we sold in private label, that's one. Second, as I said, there would also be a small improvement in the procurement side for us. And the other thing was that we also had a COVID loss earlier for [indiscernible] which is no longer there at the start and then will also basically increase the overall margin slightly.
But sir, sequentially, that would be the third one wouldn't be the reason?
Sequentially like quarter 2, quarter 3.
Yes. See, we took a loss on inventory, which was already there, bought during COVID and not sold. There's some small inventory that happened in the last quarter. And so yes, that could be one difference between Q2 -- Q2 and Q3.
This is Chetan. I just thought to add to Madhukar's question. If you look at Slide #9 of our investor presentation, it gives the gross margin split between the consolidated business and pharmacy. So in pharmacy, from Q2 to Q3, it's only been 0.3% increase in gross margin. And that's in line with the gradual increase in private label that we are seeing. It is only -- yes -- so I just thought I'll answer.
Okay. because I wanted to just check this aspect of the business also, like one of the participants also did ask, is that as we grow in size, does that economy of scale or size really starts benefiting us in terms of better procurement. And it is helping us in terms of margins -- in terms of gross.
Sorry, was there a question?
I'll move to the second question. So I'll just -- on the SSG where you mentioned that it's 10%, I just wanted to know bifurcation between price and volume, so what would be the inflation part in that SSG?
It is difficult to split the exact number between price and inflation. Inflation for pharma is typically around 4%, but...
No. Because this year, Madhukar sir, there is a limit said because WPI had been on a higher end where both NLEM and non-NLEM got a good price hike for this particular year, hence, they were all [indiscernible] , hence, I was just checking specifically for this particular quarter, what was the price and volume mix.
So for us, a little difficult to split between volume and inflation.
The next question is from the line of Pathanjali Srinivasan from Mirabilis Investment Trust. Please go ahead.
Am I audible?
Yes, you are.
Yes. So sir, how do we make customers to our own brand with respect to private label? And we've also mentioned that we are not necessarily a lower price, so how does the customer choose from our brand over a branded pharma?
See, as you're well aware, in the Indian pharmaceutical industry, there are hundreds of thousands of marketing companies, which are selling the same products. Every single molecule which we sell has got over a few thousand different marketing rights, not in companies selling the product. The result is this -- despite the best effort on our side to stock the right product in the right store to make the exact demand to that supply, we often find that out of our prescription, which has got 7 or 8 products, we find ourselves not having 1 or 2 of them.
In the past, we would basically say this is a product which I've asked for and this product is from a company like Cipla or Ranbaxy or whatever. I don't have it, and I'll be able to give you something from some pharma or something like that. So we will do that, we will just give them a substitute there. But over a period of time, what we have started doing is basically offering a substitute of the unavailable product with our own product. Customers, because they believe us, they are able to actually pick it up and go. And that's the one place where private label actually comes on to play. And that's why we're not really looking at doing a price substitution. We're not saying that take something else from us, it is actually a lesser cost. So basically, just think this is not available. Instead, something else is available, that is one, of course. And second, quite a significant number of people basically come in for pure generic. They basically come in asking for a headache or cough or cold kind of medication with the OTC products. And there, if the customer has not asked for let's say Crocin or Calpol, he will always get paracetamol from our company. So neither case do we basically use price to sell more of our pharmas.
So what would be the mix difference between our private level between chronic and OTC?
Chronic would be 50-50.
Yes. And sir, did you mention some sales growth guidance during the call from 30% to 35% or something for next year?
Sorry, what are you saying?
Do you give any sales guidance on this call? Like I couldn't hear you properly sometime during the call. For the next year.
Our overall sales for the next year could be anywhere from 20% to 25% over the current year sales.
20% to 25%. Okay. And sir, what is the store mix tier-wise?
Tier-wise?
Yes.
Okay, one second, let me just pull it up and then I will just give a number, it was there on our presentation.
Mix is there. I wanted the store mix tier-wise.
I think 32% of our stores are Tier 2 and Tier 3. Rest are in metro.
32% are in Tier 2, Tier 3 and rest are in Metro.
So if you're asking about the location of the stores, right?
Yes, that's right. That's right.
So non-metro would be 44% versus metro at 56%.
Ladies and gentlemen, due to time constraint that was the last question for today. I now hand the conference over to the management for closing comments.
Thank you, ladies and gentlemen. I thank all participants on this call for their interest in the MedPlus journey. Our Investor Relations team can be contacted at ir@medplusindia.com. Thank you.
Thank you, members of the management. Ladies and gentlemen, on behalf of MedPlus Health Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.