Stock under ₹40 jumps 11% after their net profit grows by 226% YoY
Medplus Health Services is India's second-largest pharmacy retailer in terms of the number of stores and revenue. The company’s initial public offer of Rs 1,398.30 crore (price band Rs 780 – Rs 796) is slated to open on December 13 and close on December 15. The IPO consists of a fresh issue of Rs 600 crore and offers for sale (or OFS) of Rs 798.3 crore. The Medplus Health IPO market lot size is 18 shares or Rs 14,328. A retail individual investor can apply for up to 13 lots (a maximum of 234 shares or Rs 186,264). The company intends to use the IPO proceeds for funding working capital requirements of subsidiary—Optival and general corporate purposes. The shares will be listed on both BSE and NSE on December 23, 2021. The company promoters are Gangadi Reddy, Lone Furrow Investments Pvt Ltd, and Agilemed Investments Pvt Ltd.
Medplus Health business
Established in 2006, Medplus Health Services is the second-largest pharmacy retailer in India. The company is the second-largest in terms of the number of stores and revenue. It provides pharmaceutical and wellness products i.e., medicines, vitamins, medical devices, test kits, and fast-moving consumer goods (or FMCG). The FMCG goods sold by the company include home and personal care products, baby care products, sanitisers, soaps, and detergents, etc. Medplus is also the first pharmacy retailer in India to offer an omnichannel platform. The omnichannel platform offers customers the facility to purchase products through stores, place orders over the telephone, online orders, and a Click and Pick facility.
Medplus has a strong pharmacy retail network of 2,165 stores across Tamil Nadu (NS:TNNP), Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal, and Maharashtra as of June 31, 2021. In fiscal 2021, the company’s share of the organized pharmacy retail based on revenue from operations in Chennai stood at 30%. For Bangalore operations, the same was 29%. For Hyderabad and Kolkata operations, the same remained at 30% and 22% respectively. Medplus follows a cluster-based approach for the expansion of its store network. The company first opens high store density in a populated residential area within a target market. Its warehouses are located in Bengaluru, Chennai, Hyderabad, Vijaywada, Kolkata, Pune, Bhubaneshwar, Mumbai, and Nagpur.
Medplus financial performance
A quick look at the following table reveals that Medplus Health has uneven financial performance. Although revenue grew year on year, the growth rate remains very dicey. Topline jumped at Rs 2,887.9 crore in FY2020 representing a 26.4% y-o-y growth. In fiscal 2021, revenue stood at Rs 3,090.8 crore, up 7% over FY2020’s level. What surprised us is the dismal revenue growth during Covid-19’s first wave. Note that FY2020 ended on March 31, 2020, when Covid lockdowns just began. Ideally, FY2021’s revenue growth should have been far more superior than its previous year’s rise. Operating profit in terms of margin and growth looks good. Profit after tax remains very uneven in terms of growth and margin as well. From an 85% slump in y-o-y profit in FY2020, profit after tax jumped a whopping 3,425.8% in fiscal 2021. However, when looking at assuming FY2019 as the base year, it jumped 5.29 times at Rs 63.1 crore in FY2021 from Rs 11.92 crore in FY2019.
The vivid negative aspect of Medplus’ financials is the very thin net profit margin. The company’s PAT margin was just 2.04% in FY2021. The operating cash flow trend is also uneven. During the non-Covid era (FY2019), its cash flow from operations was Rs 146.68 crore. It came down to Rs 2.89 crore in FY2021, before turning negative at Rs 6.59 crore in fiscal 2020.
Valuation
The grey market premium for unlisted shares of Medplus on December 13 is Rs 280. It means the grey market is anticipating the IPO to list around Rs 1,076 (Rs 796 + Rs 280). It appears that the market is expecting ~35% listing gains from Medplus IPO. Based on FY2021’s EPS of Rs 30.64 and an upper price band of Rs 796, the company’s PE ratio stands at ~26x. As there is no listed company in India that engages in a business similar to that of Medplus, investors should take a prudent call.
Investment rationale
All of us go to a nearby pharmacy for buying medicines. Have you ever visited a Medplus store near your home? Do you prefer to buy medicines from Medplus or another pharmacy if both of them are located close to each other? Rather than put it straightway, do you prefer a branded pharmacy for your medicine/drug needs? Do you think it is advantageous to procure medicines from a branded pharmacy over an unbranded pharmacy if the former is offering rewards for loyalty? Well, these questions have the potential to answer your basic investment premise in the Medplus IPO. The major risks faced by the company include intense competition from online pharmacies and the government’s regulation on price caps of a wider range of therapeutics. You should also note that a portion of the promoters’ shareholding is pledged which shouldn’t be perceived well.
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