MedPlus Health IPO review (May apply)

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Review By Dilip Davda on December 8, 2021

•    MHSL is the second-largest pharmacy retailer in India.
•    It operates via physical stores as well as omnichannel mode.
•    The company suffered a major setback for FY20.
•    The issue is aggressively priced discounting all near term positives. 
•    Sustainability of super earnings posted in the last 18 months raises concern.

ABOUT COMPANY:
Medplus Health Services Ltd. (MHSL) is the second-largest pharmacy retailer in India, in terms of (i) revenue from operations for the financial year 2021, and (ii) the number of stores as of March 31, 2021, according to the Technopak Report. It offers a wide range of products, including (i) pharmaceutical and wellness products, including medicines, vitamins, medical devices and test kits, and (ii) fast-moving consumer goods, such as home and personal care products, including toiletries, baby care products, soaps and detergents, and sanitisers. 

It has maintained a strong focus on scaling up store network, having grown from operating initial 48 stores in Hyderabad at the conception of business to operating India's second-largest pharmacy retail network of over 2,000 stores distributed across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal and Maharashtra, as of March 31, 2021, according to the Technopak Report. 

Stemming from its focus on growing and achieving leadership in the key cities where it operates, for the financial year 2021, MHSL's share of the organized pharmacy retail market, based on revenue from operations, in Chennai, Bangalore, Hyderabad and Kolkata stood at approximately 30%, 29%, 30% and 22%, respectively, according to the Technopak report. Its number of stores has grown since the conception of business and, as of September 30, 2021, it operated 546 stores in Karnataka, 475 stores in Tamil Nadu, 474 stores in Telangana, 297 stores in Andhra Pradesh, 224 stores in West Bengal, 221 stores in Maharashtra and 89 stores in Odisha. 

As of September 30, 2021, it has a primary warehouse, in each of Bangalore, Chennai, Hyderabad, Vijayawada, Kolkata, Pune, Bhubaneshwar, Mumbai and Nagpur. These warehouses are supported by smaller warehouses in cities where MHSL has a higher store density. These technologically enabled warehouses form hubs for stores, and stores' inventories are replenished through a centralized inventory management system, which is capable of tracking the sales and inventory levels at stores and warehouses in real-time. It has also emerged as the first largest pharmacy omnichannel retailer in India. 

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for investment into a material subsidiary and working capital (Rs. 467.17 cr., and general corporate purpose, MHSL is coming out with a maiden combo IPO via book building route to mobilize Rs. 1398.30 cr. (approx. 17566574 shares at the upper cap). The issue consists of a fresh equity issue worth Rs. 600 cr. (7537680 shares) and an offer for sale (OFS) of Rs. 798.30 cr. (10028894 shares). The company has fixed a price band of Rs. 780.00 to Rs. 796.00 per share of Rs. 2 each.  Minimum application is to be made for 18 shares and in multiples thereon, thereafter. The issue opens for subscription on December 13, 2021, and will close on December 15, 2021.  Post allotment, shares will be listed on BSE and NSE.  The issue constitutes xx % of the post issue paid-up equity capital.

MHSL has reserved shares worth Rs. 5 cr. For its eligible employees and offering them a discount of Rs. 78 per share. From the residual portion, it has allocated 50% for QIBs, 15% for HNIs and 35% for the Retail investors. The four joint Book Running Lead Managers to this issue are Axis Capital Ltd., Credit Suisse Securities (India) Pvt. Ltd., Edelweiss Financial Services Ltd., and Nomura Financial Advisory and Securities (India) Pvt. Ltd., while KFin Technologies Pvt. Ltd. Is the registrar to the issue. 

Having issued initial equity at par, the company raised/converted further equity in the price range of 1158.20 to Rs. 13259.02 between February 2007 and November 2021. It has also issued bonus shares in the ratio of 1.25 for 1 in January 2021. 

The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.02, Rs. 0.55, Rs. 94.35, Rs. 94.38, Rs. 94.41, Rs. 158.02, Rs. 165.69, Rs. Rs. 166.09, Rs. 166.39, Rs. 166.41, Rs. 166.43, Rs. 166.45, Rs. Rs. 174.08 and Rs. 175.72 per share. 

Post-IPO MHSL's current paid-up equity capital of Rs. 22.35 cr. (111761165 shares) will stand enhanced to Rs. 23.86 cr. (119298845 shares). Based on the upper price band of the IPO price, the company is looking for a market cap of Rs. 9496.19 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, MHSL has (on a consolidated basis) posted turnover/net profits of Rs. 2284.94 cr. / Rs. 11.92 cr. (FY19), Rs. 2887.89 cr. / Rs. 1.79 cr. (FY20) and Rs. 3090.81 cr. / Rs. 63.11 cr. (FY21). For the first half of FY22 ended on September 30, 2021, it has reported a net profit of Rs. 66.37 cr., on a turnover of Rs. 1890.90 cr. 

For the last three fiscals, it has posted an average EPS of Rs. 3.15 and an average RoNW of 5.19%. The issue is priced at a P/BV of 11.11 based on its NAV of 71.67 per share as of September 30, 2021, and at a P/BV of 6.78 based on its post-issue NAV of Rs. 117.43 per share (at the upper cap). 

If we annualize FY22 earnings and attribute it to fully diluted post issue equity, then the asking price is at a P/E of 71.52. Even though it has posted super earnings for the last 18 months, the issue is priced aggressively. Will the company be able to sustain such earnings going forward is a major concern.  According to the management, they did one-time provisioning of over Rs. 32 cr. for FY20 that dragged their bottom lines, but are confident of sustaining the margin levels with one or two percentage here and there.

COMPARISON WITH LISTED PEERS:
As per offer documents, the company has no listed peers to compare with. 

DIVIDEND POLICY:
The company has not declared any dividend for the last three fiscals as well as for the ongoing one. It will adopt a prudent dividend policy based on its financial performance and future prospects.

MERCHANT BANKER'S TRACK RECORDS:
The four BRLMs associated with the offer have handled 53 public issues in the past three years, out of which 20 issues closed below the offer price on the date of listings.

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