Should You Invest in MedPlus for the Long Term? Stock Analysis by Finology

MedPlus, India’s 2nd largest pharmacy retailer, generates a remarkable 50%+ ROE on a store level.

Finology Research Desk has analysed the company this week, providing a clear verdict on whether MedPlus Health Services Ltd. is a good long term stock or not. Find out in this article.

What makes India’s Pharmacy Retailing Industry special?

The Indian pharmaceutical industry is one of the largest industries in the world, ranking 3rd in terms of production volume and 14th in terms of value. It was valued at USD 50 billion in FY24 and is expected to reach USD 130 billion by 2030, growing at a CAGR of 17% over this period.
 

Source: IBEF report on the pharma industry

With the rapid expansion of the Indian pharmaceutical industry, the pharmacy retail market is also witnessing significant growth. It comprises the sale of pharmaceutical products, including both over-the-counter (OTC) and prescription drugs, along with a wide range of FMCG and wellness products and medical devices. Valued at USD 18.89 billion in 2022, this market is expected to reach USD 40.19 billion by 2030, growing at a CAGR of 9.9%, driven by an increase in population, rise in chronic diseases (such as diabetes and asthma) and increasing demand for affordable and convenient healthcare services.
 

Source: Annual report FY24

The pharmacy retail market is broadly classified into unorganised and organised segments, where the unorganised segment (comprising small and independent chemist shops) dominates the market with a share of 90% as of 2024. However, the share of the organised segment is increasing gradually and is expected to capture a 23% market share by 2027.
 

Source: Statista.com, Annual report FY24
 

Business Model of MedPlus

Founded in 2006 by Gangadi Madhukar Reddy, MedPlus Health Services Ltd. is the 2nd largest pharma retailer in India. The company operates in the business of retail and wholesale sale of pharmaceuticals, wellness and FMCG products. It is also engaged in manufacturing and contract manufacturing of private label products, which are sold under the MedPlus brand but produced by third-party manufacturers. Beyond retail, the company also operates in the diagnostic segment, which it currently operates only in Hyderabad. 

With a strong network of 4,612 stores across 10 states and 1 union territory in India, the company also operates online through MedPlusmart - an e-pharmacy platform which allows customers to order products for home delivery or pickup from the store.
 

Source: Investors presentation Q3FY25
 

Revenue Mix of MedPlus
 

Source: Annual Report FY24

MedPlus derives 98.7% of its revenue from the pharmacy retail segment (with 53% of pharma retail revenue from metro cities and 47% from non-metro cities) whereas diagnostic services contribute just 1.3% as of 2024. 

The pharmacy retail segment is broadly classified into branded products and private-label products. Branded products generate approximately 82% of their revenue whereas private labels contribute only 14%. However, the share from high-margin private label products has been increasing over the last 5 years from 4.5% in 2019 to 14.2% in 2024 which has also increased the company's gross margins during this period.
 

Source: Investors Presentation Q3FY24
 

Porter's 5 Forces Analysis of MedPlus
 

 

Source: Finology Research Desk

1. Low Threat of New Entrants: The company has low threat of new entrants in the business because the pharmacy retail market operates under strict government regulations, requiring specific qualifications for obtaining a license and following various guidelines. Medplus’ large customer base, supported by loyalty programs and substantial investment also plays a key role in mitigating this challenge.

2. Low Bargaining Power of Suppliers: MedPlus sources products from multiple suppliers which reduces its dependence on a single supplier, ensuring an uninterrupted supply. Due to its large-scale operations, the company can also negotiate better pricing and terms, reducing the influence of suppliers.

3. High Bargaining Power of Customers: The company has limited pricing power over its customers because the majority of customers in India are price sensitive and various pharmacy options are available. Thus the company has to keep their prices low in order to remain competitive in the industry. 

4. High Competition in the Industry: The pharma retail market is highly dominated by unorganised players, with a market share of 90% as of 2024. The company faces intense competition from players like Apollo Pharmacy, Wellness Forever and local pharmacies, along with online platforms such as PharmEasy, NetMeds, Tata1mg, etc. 

5. High Threat of Substitutes: In the pharmacy retail market, price remains a key factor influencing customer decisions. With various pharmacy options available, MedPlus faces a high risk of substitution as customers may gradually shift to the competitors providing better discounts or services if MedPlus fails to meet their expectations.

Why did we reject Medplus Health Services Ltd. for Finology 30?

1. High Debt Burden and Promoter Pledging: Although the company's balance sheet reflects no long and short-term borrowings, the company has, in reality, higher debt at the group level. Here's how:

1. MHSL's promoters created two SPVs (LFIPL and AIPL) to buy MHSL shares.
2. These SPVs had no income or business operations.
3. They funded the purchase using NCDs.
4. Debt repayment depended on MHSL dividends or refinancing, but MHSL doesn't pay dividends, and the SPVs have no income.
5. Total debt raised: ₹632 Cr. (LFIPL ₹357 Cr., AIPL ₹275 Cr.).
6. AIPL repaid its debt; LFIPL's remains outstanding.
7. This setup keeps MHSL's balance sheet debt-free but adds financial strain at the group level.
8. Promoters pledged 55.2% of MHSL's shares as collateral to refinance.
9. If they fail to repay, lenders could take control of the shares, risking MHSL's stability.
    

 

Source: Finology Ticker

2. High Competitive Intensity: The retail pharmaceutical market is dominated by large, fragmented, unorganised players. These players together account for ~90% of the unorganised pharmaceutical retail market. Unorganised players often provide higher discounts compared to organised players due to low set-up and operating costs.

To compete with these players, Medplus has to operate its business on wafer-thin profit margins. Over the last 5 years, MHSL's net profit margins have been pretty low, averaging ~2%. This limits the company's ability to scale its operations faster (using its own funds), especially in the offline channel. This raises a concern over the company's ability to grow faster and sustainably without the use of leverage.
 

 

Source: Finology Ticker

3. High Working Capital Requirement:The company has a high working capital requirement to operate its business. The company operates on a long cash conversion cycle of 90+ days. This is due to its long inventory days (100+ days). Longer inventory days indicate that the company’s business takes a long time to churn its existing inventory.

The Bottom Line

Medplus Health Services Ltd., India's second-largest pharmacy retailer, has demonstrated impressive growth with a compound annual growth rate (CAGR) exceeding 20% in both sales and profits over the past five years. As of 31 December 2024, the company expanded its store network to 4,612 locations.

However, we found concerns about Medplus's financial stability, notably the promoters' pledge of 55.2% of their holdings, which also raises concerns about potential control issues. Additionally, the company's low profitability in a cluttered market, along with high working capital requirements, suggests challenges in generating significant shareholder value.

For Finology 30, our ideology has been to focus on business models wiith good business models, robust financials and strong management pedigree. For now, Medplus failed to pass our investment checklist. So, we decided not to go ahead with Medplus Health Services Ltd.

However, there are very few stocks that made it to Finology 30. Check them out here.