Will the promoter facilitate the investing public the same return that he offered to the private equities? Beware of scheming promoters and private equities who act hand in glove!

In three years MedPlus has had as many sets of private equity investors. In 2018 the promoter had to buy-out US-based Mount Kellett Capital Management LP, TVS Capital Funds and Ajay Piramal’s India Venture Advisors who together held a 69% of MedPus’ equity capital. At that time US-based Goldman Sachs came to rescue the promoter. Cleverly two SPVs were created to receive a debt capital of Rs 750 Cr from Goldman Sachs and the buy-out of the three private equity funds were achieved. Post buy-out, the promoters’ stake shot up to 90%.

This year, in order to buy-out Goldman Sachs, the promoter roped in Warburg Pincus-affiliated Mauritius-registered Lavender Rose Investment which invested Rs 656 Cr and became the single largest shareholder of MedPlus with 24.58% stake. Lavender has reportedly sold 6.2% (about 69 lakh shares) before the IPO for a consideration of Rs 550 Cr (Rs 796 a share). In other words, MedPlus promoter has facilitated the foreign short term investor to reap a capital gain of 233% within a year! Will he be able to provide such return to the investing Indian public?    

 

MEDPLUS HEALTH OFFER AT A GLANCE
Offer Type	Book Built
Platform	Main Frame
Offer Size	Rs 1398 Cr (1,75,66,520 equity shares)
Fresh Issue	Rs 600 Cr (75,37,688 equity shares)
Offer for Sale	Rs 798 Cr (1,00,28,832equity shares)
Face Value	Rs 2
Price Band	Rs780–796
Mkt/Bid Lot	18 Nos.
Implied M-Cap	Rs 9,496 Cr
Implied Equity Cap	Rs 23.85 Cr
Free Float	59.57%
Lead Manager	Axis Cap, Credit Suisse, Edelweiss Financial and Nomura Financial
Registrar	KFin Technologies
Listing	BSE, NSE

 

INDICATIVE ISSUE SCHEDULE
Opening          :13-Dec-2021	Closing    :15-Dec-2021
Allotment        :20-Dec-2021	Refunding :21-Dec-2021
Demat Credit :22-Dec-2021	Trading :23-Dec-2021

 

The Offer

The Hyderabad-based MedPlus Health Services Ltd is entering the capital market with a public issue of Rs 1,398 Cr.  The IPO is comprised of a fresh issue of Rs 600 Cr (75,37,688 equity shares) and an offer for sale of Rs 798.29 Cr (1,00,28,832 equity shares) from 17 existing shareholders. The offer is being made through the book-building route with a price band of Rs 780-796 for Rs 2 paid-up share.

Applicants for the IPO should bid for a minimum lot of 18shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on Thursday, December 23, 2021. Axis Capital, Credit Suisse Securities, Edelweiss Financial and Nomura Financial are the lead-managers to the offer. KFin Technologies is the issue registrar. The bidding opens on Monday, December 13, 2021 and closes on Wednesday, December 15, 2021.

The company proposes to utilize the proceeds of the fresh issue net of issue expenses towards funding working capital requirements of its subsidiary Optival (Rs 467.17 Cr) and general corporate purposes.

 

Lineage

Gangadi Madhukar Reddy (54), an Indian physician with an MBA from the University of Pennsylvania’s Wharton School, set up his first medical store in Hyderabad in 2006. Today, MedPlus reportedly has over 2000 stores and the company is ranked second among private drug retailers. MedPlus also runs businesses such as diagnostics chain MedPlus Pathlabs, RiteCure, a distributor of medical and surgical supplies to hospitals, MedPlusMart.com, an online medical store, and MedPlusLens, an optical store. Most of them are co-located with the pharmaceuticals stores.

Though MedPlus’ offer document presents Madhukar Reddy, Lone Furrow Investments P Ltd and Agilemed Investments P Ltd, the corporate Promoters are not the original promoters of the company. Agilemed was originally incorporated in 2008 as Ritecure Pharma which was renamed as Agilemed Pharma in 2019. In 2020, apparently to execute the buy-out plan entered with Goldman Sachs, the ownership of this company was changed from MedPlus Health to Gangadi Investment and the name of the company too was changed to Agilemed Investment.

This company, having a paid up capital of less than Rs 10 lakh acquired MedPlus shares for a consideration of Rs 275 Cr. Thus from the status of a subsidiary company, Agile became a `corporate promoter’! Lone Furrow was incorporated only in November 2020 and was used as the second SPV to execute the buy-out plan along with Agilemed. Lone Furrow’s capital is just Rs 1 lakh but, acquired MedPlus shares worth Rs 300 Cr. Both these deals were executed on the same day, February 5, 2021.

MedPlus’ promoter seems to have engineered a complex operational structure.  His operations are primarily distributed between the issuer company (MedPlus Health) and its subsidiary companies, and include the manufacturing and contract manufacturing of private label pharmaceutical, wellness and FMCG products, wholesale and retail sale, import, distribution, and pathology diagnostic laboratory testing.

While the private label manufacturing and contract manufacturing business and pathology laboratory testing business is carried out through MedPlus, the wholesale and retail sales operations, including sales to franchisees, are carried out through its subsidiary Optival Health Solutions P Ltd. MedPlus manufactures and supplies pharmaceuticals to Optival. Nova Sud Pharmaceuticals P Ltd is the holding company of Sai Sridhar Pharma P Ltd, Venkata Krishna Enterprises P Ltd, Shri Banashankari Pharma P Ltd, Deccan Medisales P Ltd and Sidson Pharma Distributors P Ltd who are engaged in distribution of pharmaceutical, wellness and FMCG products.

MedPlus acquired Kalyani Meditimes P Ltd in 2019 through which it owns and manages software used to transcribe doctor’s prescriptions into e-prescriptions. Another subsidiary, Clearancekart P Ltd does not have any significant operations as on date. Two more subsidiaries, Wynclark Pharmaceuticals P Ltd and MHS Pharmaceuticals P Ltd are involved in contract manufacturing of private label pharmaceutical, wellness and FMCG products and supply the same to Optival.

 

Key Management

Promoter Gangadi Madhukar Reddy is the managing director and chief executive officer of the company. Anish Kumar Saraf is a non-executive director nominated by Lavender Rose. He is a chartered accountant and also holds a post-graduate diploma in management from IIM, Ahmedabad. He is the managing director of Warburg Pincus India P Ltd. Atul Gupta is an another non-executive director, representing PI Opportunities Fund. He holds a bachelor’s degree in technology from IIT, Bombay and a master’s degree in business administration from the California University. He is employed as an investment partner at Prazim Trading and Investment Company P Ltd.

 

Stakeholders

As per MedPlus’  RHP Warburg Pincus’ Lavender Rose was holding the largest chunk of 24.58%, followed by Azim Premji’s PI Opportunities Fund 22.07%, Lone Furrow 15.42%, Agilemed 14%, Madhukar Reddy 13.74% and sixty-six other shareholders collectively holding 10.19%. In last one year, no one has acquired shares at a rate more than Rs 175.72 a piece.

Post-IPO, Lavender will continue to hold the largest stake of 18.3% at an average residual cost of Rs 51.52 a share. PI Opportunities Fund will have 14.98% at a negative cost. In fact, nine other high net worth investors will hold shares at negative cost. Whereas the two corporate promoters will have an aggregate 29.25% at an average cost of around Rs 175 a share, the average cost the individual promoter stake of 13.66% will be just 55 paise per share!

 

Business Model

MedPlus is the second largest pharmacy retailer in the country in terms of revenue from operations and number of stores at the end of financial year 2021. It offers a wide range of products, including (i) pharmaceutical and wellness products such as medicines, vitamins, medical devices and test kits, and (ii) FMCG products such as home and personal care products, including toiletries, baby care products, soaps and detergents and sanitizers. MedPlus was reportedly the first pharmacy retailer in India to offer an omni-channel platform and continue to scale up its retail store network.

The company has three manufacturing plants in Telangana, located at Jeedimetla, Moosapet and Pashamylaram. At Jeedimetla, it manufactures a range of plastic products including medicine trays, nebulizers, vaporizers, plastic bottles and caps, and other plastic products in relation to the promotions offered by the company. The company manufactures optical frames and spectacles at Moosapet and liquid disinfectants, toiletries and cosmetics at the Pashamylara plant.

 

Financial Track

MedPlus has maintained a steady focus on scaling up its store network. From the initial 48 stores in Hyderabad, the company’s retail network has now exceeded over 2,000 stores distributed across Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Odisha, West Bengal and Maharashtra. 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.

Stemming from its focus on growing and achieving leadership in the key cities where it operates, for fiscal 2021, its 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. Total revenue has increased from Rs 2302 Cr in 2019 to Rs 3175 Cr in 2021. Operating margin has improved from 5.2% to 6.8% during this period.

Industry insiders vouch that retail pharmacy business offers respectable margins. No wonder, online pharmacy has, of late, attracted many a conglomerate such as Reliance, Tata and Amazon. Whether MedPlus will be able to compete with these giants in the long run thus remains to be seen.

 

MEDPLUS CONSOLIDATED FINANCIALS (Amount in Cr)
Year Ended	Mar-21	%	Mar-20	%	Mar-19	%
Operating Revenue	3069		2871		2273
Stock Increase	105		248		29
Gross Revenue	3175	100.0	3119	100.0	2302	100.0
Material Cost	8	0.3	4	0.1	2	0.1
Purchase Stock Trade	2521	79.4	2581	82.8	1871	81.3
Employee Cost	339	10.7	272	8.7	211	9.2
Other Expenses	90	2.8	96	3.1	98	4.3
Operating Margin	217	6.8	166	5.3	119	5.2
Other Income	22		17		12
Interest	55	1.7	47	1.5	50	2.2
Depreciation/Amortization	88	2.8	75	2.4	59	2.5
Fair Value Change	0	0.0	32	1.0	0	0.0
Net Profit	95	3.0	29	0.9	23	1.0
Equity (Implied)	23.86		0.19		0.19
Reserves (Implied)	1720		528		291

 

Valuation

MedPlus’ fiscal 2021 profit of Rs 95 Cr yields an EPS of Rs 7.96 on its proposed equity capital of Rs 23.86 Cr. The IPO cap price of Rs 796 thus discounts the earnings 100 times which is certainly a risky proposition.  Moreover, when some large shareholders of the company have acquired shares at less than one-fourth of the IPO price within one year, how can one justify such steep valuation?

 

Concern

• After the lapse of the six months lock-in period, the existing shareholders, whose average cost is negative or minimal, may rush to the market as the IPO valuation is highly beneficial to them