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, sir.
Thank you, Aman. Good evening, everyone. On behalf of MedPlus, it's my utmost pleasure to welcome you all to the MedPlus Q2 FY 2024 earnings conference call to discuss the financial results of MedPlus for the second quarter of financial year 2024, which were announced earlier today. We have with us today the senior management team represented by Mr. Gangadi Madhukar Reddy, Chief Executive Officer and Managing Director, 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 is on slide one of the investor presentation shared with all of you earlier. Documents relating to our financial performance have been circulated earlier, and they have also been posted on our corporate website. I will now hand over the call to Mr. Madhukar. Thank you, and over to you, Madhukar.
Thank you, Prasad. Today, I would like to talk to you about the four main features of the Indian pharmacy retail industry as we see it, and the opportunities these features actually present to us. One of the main ones is the industry itself is extremely fragmented. Second, there's a big, resilient, small, and medium-sized set of operators out there who still have nearly 85% of the overall market. Third, the other factor would be the active involvement of government in promoting low-cost generics. And the fourth, marked absence of store brands in the country, unlike in the U.S. and U.K. and all where Walgreens and CVS and all have their own store brands. Just to come back to the main points out here, the Indian pharma retail industry, as I said, has over 900,000 retailers serving a population of 1.4 billion people.
To put that in perspective, the Indian market has roughly 20 times as many pharmacies as in the U.S., while our population is only 4x that of the U.S. So this market actually has roughly 45,000-48,000 stores catering to over 350 million people. So 900,000 retailers for a market that is less than INR 200,000 crore makes the average per store at slightly over INR 20 lakh per year. That's average sales. This, by any normal business standard, should be considered extremely low-throughput and as a result, unviable, actually. The reason it still works in India is because of the prevalence of high-margin trade generics. Some of the lower-throughput stores have a 50% or more share of trade generics, where often the margins are above 70%.
This makes even a store that sells INR 20 lakhs per year viable with an average margin of 50%, which takes care of the fixed costs and makes a salary-level wage for the operator. Then, if trade generics is how the small operators survive, the reason for the resilience of the mid to large-sized independent retailers is not really much different. As you all know, the retailer and distributor margins in India are 20 and 10 for drugs not under DPCO, and only 16 and 8 for those under price control. Most retailers who don't have the advantage of a large operator like MedPlus, which actually enjoys both retail and distributor margins, actually get a margin of around 20 or 21. Despite this, we see them competing with us and with the other large e-pharmacy guys with a 20% discount.
We have seen this happening in most South Indian markets, and we are seeing them actually mushrooming some of these stores. What we have seen and what we have actually observed when we have shopped at these stores and what we have from industry knowledge is that most of these operators, a large number of them at least, do substitution for the prescription which they get with trade generics. So an average bill of INR 1,500, if 20% of it is substituted for a trade generic product, they will still make INR 150 at least on that, the trade generic of INR 300 , basically fetching them at least INR 150, 50% margin, which still makes an overall 10%, and which is how most people today seem to be competing.
So in a super-competitive scenario where online players are willing to use money, and whereas large retailers like us are using our buying power to actually give huge discounts, we actually see a lot of the small operators still continuing to give the same discounts and still continuing to actually compete with us. While the first two factors depend on selling trade generics at full price, the other third big factor on the list that has the potential of changing the industry goes in the opposite direction: selling generics at a hugely discounted price.
Government has introduced Jan Aushadhi stores a while back, and the fact that they are even selling anything despite them not being located in the best places and not carrying the full assortment is proof of the fact that the Indian consumer has started realizing that 80% of drugs sold in the market are only variations of a limited set of actual formulations. While the effect of these stores on the sales of regular pharmacy retailers is not big as of now, if things were not to change, then the effect will actually continue to grow, should not be in any doubt. The recent NMC notification, although it was withdrawn after a short while, asking all doctors to write only the generic name in the prescription, is one more step in the direction of a generics market.
This, we can be sure, will come in some form or fashion back to take the branded generics out. Another key feature or lack of, I would say, in the Indian pharma retail market is the absence of store brands. In the U.S., for example, customers get to buy either the innovator product, and if the innovator product is no longer on patent or if it comes off patent, the store brand. So customers could still continue to buy the innovator product even if it is off patent for a slightly lesser cost, or they would buy the store brand, which would be either by Walgreens, Rite Aid, or CVS. There's nothing in between.
The Indian market, on the other hand, does not have this, largely because till now, there was no large chain that had a trusted brand that customers could buy or no large chain that had the scale to get a full assortment of drugs manufactured. You require a certain number of stores to be able to get the MOQ manufactured for the large set of drugs. You could perhaps get away with maybe the top 50 or top 100, but to actually get the top 500 drugs or the top 800, it would require substantial scale. And till now, there is no one actually there in the Indian market. This has led to a proliferation of a large number of non-branded generics, resulting in pharmacies being forced to carry several thousand SKUs to cover the prescription while essentially stocking for a few hundred actual therapeutic types only.
So all of the above-mentioned four resulted in us taking our next step in our path to becoming the largest pharma retailer. In June 2023, MedPlus launched over 400 drugs in Hyderabad, and these drugs, which could potentially provide substitutes for over 55% of the medicine needs of our customers. We launched them with a discount of 50%-80% on the MRP, and the MRP, the maximum retail price, itself was tacked to the price of the market leader for the corresponding drug composition. We were able to do this because we obviously do not have any marketing cost, but we own the channel, and we are able to pass on all the sales to the customer. And we were also able to convince the customer of the value proposition here.
Our aim in doing so was to take advantage of the fact that the Indian market has matured and has become knowledgeable of the fact that 80% of the drugs sold in the market are off patent and have generic substitutes which work just as well as the innovator product, as long as they're manufactured in a good factory. This was also aimed at bringing customers who are otherwise shopping in Jan Aushadhi stores and their like. And our aim was not just to get these customers, but also anyone who understood the fact that all the drugs are generics in nature, but who was looking for slightly better, I would say, better quality manufacturing than what was available in the market. So to these customers also, our appeal actually worked well.
Making MedPlus store brand available at 50%-80% bill per MRP also makes it difficult for small stores to sell at full-price trade generics. And if they're not able to sell it, as I said, stores which otherwise sell INR 20 lakh a year or INR 1.5 lakh a month or INR 1.6 lakh a month, if their access to the margin which is afforded by trade generics is taken away, they actually become unviable, and we expect that to be one of the ways in which the market will consolidate as small operators, basically, stop doing this. MedPlus also, in phases, plans to make trade generics from companies like Cipla, Alkem, Zydus, and the likes available at the same price as MedPlus store brands.
This will now make it tougher for stores that are substituting promoted brands with trade generics to compete with us and to offer the 20% discount which we actually give on branded products. This approach not only positions MedPlus as a cost-effective choice, but also enables the company to capture a significant portion of the market that was previously dominated by or at least was populated by, I would say, a large number of smaller independent players. Thanks to our comprehensive control over the entire supply chain, MedPlus can strategically adjust pricing and discounts, thereby optimizing profitability. This grants the company a competitive advantage in effectively managing its profit margins and achieving a favorable financial position in the market.
Additionally, as more and more customers take to our products, we expect our inventory costs to come down significantly, as the cost of stocking MedPlus brands is only a fifth of the cost of stocking branded generics. We also expect fill rates to get much better in our stores for customers who have adopted the MedPlus brand. Needless to say, it is much more easier to stock 500-600 products in sufficient quantities versus stocking the 47,000 SKUs that we now stock across our network. MedPlus products were introduced in Hyderabad and rest of Telangana at the end of June 2023, followed by their launch in the villages in 2023. Notably, Hyderabad's revenue witnessed a substantial 15% increase in September compared to June, a growth three times higher than that observed in Bangalore and Chennai.
Out of the 15% portion, a large portion, 9%, has been contributed by the MedPlus store brands. Furthermore, the regions outside of Hyderabad in Telangana and Andhra Pradesh have experienced remarkable growth when compared to similar territories in Karnataka and Tamil Nadu. We are happy with the way the customers have taken to our brands, and we have now launched them across all the states in October. We will, of course, update you on what happens in the coming quarters and all. Meanwhile, I will now hand over to Mr. Sujit to give our quarterly updates.
Thank you, Madhukar. And good evening, everyone. As of September 30th, we have been serving the healthcare and household needs of our community in 599 cities across nine states through our extensive network of 4,089 pharmacy stores. During the current quarter, we have successfully expanded our presence into 18 additional cities. In addition to our pharmacy operations in Hyderabad, MedPlus operates four full-service diagnostic centers, seven level two centers, and 120 collection centers. These facilities play a crucial role in our commitment to providing affordable diagnostic services to our customers. An update on the network: our store expansion program remains on track as we continue to balance growth and profitability. Over the past 12 months, we have added a net total of 761 stores, with 139 stores opened in Q2. Notably, West Bengal and Karnataka saw the highest number of store additions, with 32 and 26 outlets, respectively.
Of the store openings in Q2, 48% were in Tier 2 cities and beyond, reflecting our strategic focus on these markets. Currently, out of our 4,089 stores, around 1,819 stores reflecting 44% are located in Tier 2 cities and beyond. We recognize the potential of these markets and aim to further expand due to the maturity of our operations and robust supply chain capability. During Q2, we experienced 25 store closures. Considering both openings and closures, we achieved a net addition of 114 stores in Q2 compared to 153 stores in Q1. In terms of the age of our store network, approximately 21% of our stores are less than a year old. Around 26% of our stores are in their second year of operation, and the remaining 53% of our stores have been operating for two years and beyond.
It's important to note that all stores in the less than two years age bracket are still in their ramp-up phase. From a financial perspective, they continue to have a negative impact on our operating EBITDA. However, as these stores mature, we anticipate them contributing positively to our profitability. We closely monitor the time it takes for our new stores to break even. For stores opened between October 2022 and March 2023, approximately 54% of them achieved break-even within six months of operation. Additionally, as a cohort, all the stores combined achieved break-even in just five months. In terms of the network store size, as at the end of the quarter, our network has grown to 4,089 stores with 2.1 million+ sq ft compared to 3,320 stores and 1.8 million sq ft at the end of September 2022. The average store size is 538 sq ft.
To give you a sense of spread in store sizes, we have 2,958 stores that are less than 600 sq ft and 1,131 stores that are greater than 600 sq ft. In terms of the revenue mix, with our expanded scale, we are strategically positioned to enhance our revenue share from private label products. Our private label range is designed to offer customers high-quality products at affordable prices. Currently, MedPlus offers around 1,400 thoughtfully curated SKUs spanning across pharmaceutical and non-pharmaceutical categories. Private label sales accounted for around 14% of our total revenue. Furthermore, our expanding presence in Tier two cities and beyond is making a significant impact on our revenue mix. Sales from these markets accounted for 34% of our pharmacy revenue in the current quarter, demonstrating an increase from 31% in the same period last year.
Financial numbers: now on our quarter's performance, our consolidated revenue was INR 14,086 million, with growth of 25.7% year-on-year and 9.7% sequential basis quarter-on-quarter. Our consolidated operating EBITDA stood at INR 410 million, representing a growth of 2.9%. I'm sorry, representing 2.9%. Around 99% of our revenue is from our pharmacy operations. The pharmacy operating EBITDA stood at INR 440 million, representing 3.2% of sales. Our store performance, I would like to update on our store older than 12 months. Revenue from these stores in quarter two was INR 12,520 million on 91% of pharmacy revenue. These stores had a store-level EBITDA margin of 9%. The store-level ROCE of these stores stood at 50.6%. Year-on-year on the store-level EBITDA margin by vintage.
While stores greater than 12 months had a margin of 9%, this was 9.8% for stores greater than 24 months and 6.5% for stores in the 13 months to 24 months age bracket. If we allocated non-store-related costs, then the operating EBITDA of stores greater than 12 months would be INR 532 million, which translates to a margin of 4.2%. Our diagnostic numbers: diagnostics revenue has grown to INR 182 million in quarter two compared to INR 58 million in quarter two FY 2023, which is primarily due to launch of the new centers in Hyderabad. Diagnostic segment recorded an operating EBITDA loss of INR 29 million compared to a loss of INR 53 million in Q2. On the working capital, our net working capital for Q2 was 64 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 Q2, the inventory level of our first-year store was 110 days. In comparison, for our store older than 12 months, the inventory was 41 days. Now I request Chetan to update on our diagnostic business. Over to you, Chetan.
Thank you, Sujit. Good evening, everyone. To recap what Sujit has already said, in our pilot market of Hyderabad, we have four full-service diagnostic centers, eight level two centers, and 120-plus collection centers. In July 2023, we had increased the price of our plans by INR 150. This was a 15% increase. On earlier occasions, we had modified prices, but at the test level. So this was our first instance at testing price increases at scale, and it has not affected the uptake of our plans. This is positive. In July, we sold 348 gross plans per day. In August and September, this was 381 and 408, respectively. As on 30th June, we had 105,000 active plans and 186,000 underlying lives covered under our plans. As on 30th September, we had 117,000 active plans and 207,000 underlying lives. Our current observed on-time renewal rate is 15%. But in six months post-expiry, we have observed the renewal rate to be 40%. That's our update on diagnostics. Here's handing back to Madhukar.
Thank you, Chetan. I think we can open up the floor to questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchscreen telephone. If you wish to await yourself on the question queue, you may press star and two. Participants are requested to use hands up while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Tanmay Gandhi from Investec. Please go ahead.
Hello. Hi, sir. Sir, my first question is on the profitability. So if you look at the operating metrics for this quarter, right, so we have probably the best quarter in last 8 quarters, right, in terms of store aging. So we have only 20% of the stores less than 12 months. In terms of private labels, we are very close to all-time high of 14.1% or 2%, right? And still, in terms of operating EBITDA margins, we are nowhere close to the recent peak of 5%, right? So what exactly is dragging our EBITDA margins?
I will take that question. I think thank you for that question. In terms of the investor presentation, we have guided on the second-largest slide that we grabbed from the new stores and the stores which were opened in the last 12-24 months. There is still a drag on our P&L. On a matured state basis, we should see that inching northwards.
Sure, sir. But sir, even if you look at the EBITDA margins for stores which are more than 12 months old, right, and within that, also, we have a very favorable mix in terms of stores which are more than two years old, right, still, it is only 4.2% versus what versus 5% which we had seen. So again, and we have a very high contribution coming from gross margins. What exactly is dragging our margins, even in case of older stores?
No, Tanmay, for us, the overall maturity is only at the level of 24 months and more. 24-30 is when we actually hit the 10% gross margin. Below that, then we have the apportion of cost of the corporate and warehousing and all, and that's what lands at 5%. So I don't think we are quite there. The mix is not quite there. So yeah. So it's just that we definitely need these to come to the level of the INR 15 lakh odd sales per month per store kind of number for it to actually get to that number.
No, sir. Actually, my question was that even if you look at.
No, we are going in the right direction.
Sure, sure. Okay. The reason where I'm coming from is that even more than two-year-old stores are at 53%, which is five-quarter highs, and still, we are not near five-quarter high in terms of margins. So that's where I was put. Anyway, I understand. And secondly, in terms of store additions, right, so we had initially guided 4,000+ stores, right, and now I think we are at 800-1,000 stores. So just wanted to understand that do you want to adjust your guidance given that we have only added about 260 stores in the first two quarters of the year?
No. So in the beginning of the year, we said 800-1,000. We were looking more at 1,000 stores. Sorry, 800 stores. I really don't want to adjust the guidance and all right now. We will actually be able to ramp up in the Q4. We may be somewhere close to that, but if there is any need for us to adjust the numbers, we'll do it next quarter. But I don't think it is necessary.
Sure. So sir, have we seen any? Are we facing any challenges in terms of store opening, maybe some regulatory challenges or some bandwidth-related challenges because in last two quarters, it has meaningfully come down? And again, this coincides with our new initiatives of diagnostics, of generic or other MedPlus-branded generics, right? So are there any constraints in terms of bandwidth, or these are just timing issues in terms of regulatory approvals?
No, no. No, definitely nothing in terms of bandwidth. That's not a bandwidth-related issue at all. If there have been some regulatory issues here and there, those we expect are normal. While we should have basically had something like 400 stores, we are at 260. But these numbers are usually adjusted towards the end of the overall year anyway. Last four years, our Q4 has been the best. So we expect that we will continue to ramp up going forward. Definitely not a bandwidth issue. Yeah, we are going into some new states. That is taking us a little bit of time, Kerala, Madhya Pradesh, and Chhattisgarh, but that is to be expected. I would say whatever adjustment we have made is mainly to make sure that we can just get to the guided number of 800-odd stores. That's all.
Sure. Last question from my end. We have recently obtained an in-principle approval for QIP. And as on September, sorry, as on September 23, we already have about INR 220 crore of cash on books, right? And anyways, our store additions have come down, right, our quarterly store additions. Can you give us some color on where will you deploy such kind of funds and what is the exact number of fundraise you are looking at in the near term?
No, as you said, this is mainly an enabling resolution only. If we do decide to basically go get the money, then it will be only to bolster the overall balance sheet. We will use the money in the best way. But yeah, I would say at this point, it is just being ready to raise if necessary.
Sure. Thank you, sir. Thank you.
And again, just to clarify, if at all we end up actually doing the raise, then it would be for growing the pharmacy faster, I would say, one. And second, definitely on the diagnostic side. And of course, we'd also require some money for working capital as we go forward.
Got it. Thanks, sir. Thanks, sir. Yeah.
Thank you. The next question is from the line of Harith Ahamed from Avendus Spark. Please go ahead.
Hi. Thanks for the opportunity. So can you talk a little bit about the seasonality in the business, the second half versus the first half? When I look at our quarterly margins for the pharmacy retail segment last year, the second half was much stronger. So should we expect a similar trend this year as well?
So there's definitely a little bit of seasonality. Not sure if it extends all the way to the second, third, and fourth quarters and all. But first quarter, typically, we have seen a softening normally during the peak summer months. And especially the summer months gets extended, then you definitely see a dip in the overall pharmacy sales and just largely because people obviously tend to fall less sick because of infections and all, or at least lack of, right? Other than that, really, we don't see too much seasonality, honestly, on the other hand. There's always the festival factor which comes in during the extended Dussehra Diwali periods and all and the vacations period. That is not a time in which people typically tend to go to hospitals or to doctors and all. Nothing elective gets done during those days. Doctors themselves are on vacation and all. We see a small dip during those times. Otherwise, there's not much, I would say.
Okay. A couple of questions on the MedPlus-branded private labels that we've launched. So when I look at the contribution of private label pharma, it's at 7.9% of our revenues this quarter. It's come down by roughly 100 basis points. I know it's the impact of the higher discounts that's probably leading to this lower share. We were also expecting the higher volumes to kind of offset the impact of discounts, right? How should we look at the contribution from private label pharma? Should it inch back to the previous level of close to 9% that we saw in the September quarter, FY 2023? Then second one on the same foray would be on plans to expand beyond Hyderabad and rest of AP Telangana into our other key markets.
Sure. So obviously, the second part of the question answers the first one. We have seen a significant increase in volumes where we have introduced private label on the 50%-80% discount. In Hyderabad, rest of Telangana, and in Andhra, where we did it successively. We started in Hyderabad in end of June. Then after that, in July, we did it in rest of Telangana. In September, we did it in Andhra. We have actually seen, on a GMV basis, close to 15% pharma private label in these states. So if you are not seeing the overall thing, it is because Hyderabad and rest of Telangana are a portion of the entire country. But we are now going to be reporting on a GMV basis, all our sales, on this overall to show you the effect of the overall private label and all. You will see a significant increase in these.
Okay. And then the expansion beyond.
Just to give you an idea, yeah, Harith, once again. So we introduced roughly around 433 products in the end of June in Hyderabad. Those account for 55% of all the medicine needs which we have, which is if you say that 80% of all my sales are medicines and out of that 55%, that's 44% of overall sales. We had a substitute for 44% of the medicines which we sold. What we saw at the end of the quarter was that 15% of our sales now are coming from these discounted products, which means 15 out of 44, which is a third of what we offered, was coming in from sales of private label products in Hyderabad and rest of Telangana and slightly higher in rest of Telangana and Andhra, actually.
Okay. And then our preparedness to go beyond Hyderabad and AP Telangana with this portfolio?
Yeah. So we have now launched, except in Karnataka and Maharashtra, where we had a little bit of a hurdle. But otherwise, we have launched across the rest of the country. We'll probably be doing that also in those two states also shortly. But yeah. So at least now, as of November 1st, at least, you can assume that we are there across the country with our private label in all the states in which we're working, that is, with our private label offering.
Understood. Okay. That's helpful. Thank you very much.
Yeah. Thanks, Harith.
The next question is from the line of Vilina Jain from Perpetuity Ventures. Please go ahead.
Hi. Thank you for the opportunity. Firstly, on the pharmacy business, there were 14 store closures. But within the presentation, you have mentioned that the reason is others. What is basically involved in this?
One second. Can you hear me?
Yeah, I can hear you.
Yeah. So for us, the others are mainly due to various reasons. It could have been lease which has expired, or we have changed it because of locational problems or whatever, which has come up in the middle. So as you can see, the age of the other store is also 5.6. The average age is 5.6. So they're not stores which we just took and made a mistake and had to move. These are stores where we found better locations to actually move to. So that would largely be the cause. I can get back to you with the exact details after the call, though. But the fact that the average age of these stores is five and a half years should tell you that these were regular stores which we had to move for other reasons.
Okay. Got it. Chetan, on the diagnostics business, when do we expect the business to break even? And what are the target after subscriptions by end of FY24?
Sure. Chetan, do you want to take the call?
Yeah, sure. I'll take a stab at it. Vilina, we want to take advantage of Q3 and Q4. Q4 tends to be slightly strong seasonally. But at this stage, we are not giving you a firm guidance.
Okay.
The second part of your question was in terms of what are the active plans, goals that we have set. See, we currently have, we kind of look at the active plans as well as the active lives. The target that we are currently looking at is 250,000 lives. We expect to close the year below 150,000 plans sold, active plans. Again, we're not in a position to give a guidance at this stage.
Okay. Any plans to take the diagnostics business to other cities or states?
At this stage, we do have residual legacy diagnostics business in a few cities. These are legacy from our earlier phase. What we talk about as the current experiment that is being carried out in Hyderabad, there is no plans to go outside of Hyderabad as of now.
Okay. Lastly, of the active subscriptions that is 117,000 currently, how much of this is renewed and how much of this is new subscription-based?
Of these, roughly 20,000 are those which have gotten renewed.
Okay. Thank you. That's it on my end.
Thank you. The next question is from the line of Lokesh Manik from Vallum Capital. Please go ahead.
Yeah. Hi. Good evening to the team. My question first was a clarification. In the DRHP, we've been given store payback period is three years. Majority is four years. In your presentation, you are reporting numbers at 2+ years . Today's presentation is showing stores greater than 12 months are operating at 8.89% EBITDA margin. So I'm just confused as to what is the exact or on an average, what is the maturity period for a store that you consider?
The maturity period continues to be the same. It is around 24-30 months or so. The payback period is 3 years is what we say. If you're getting stores more than 1 year at 8.9% EBITDA, that's just a mix of all the stores which we have in the basket, right?
Yeah. But ideally, wouldn't that be maturity, 8.99%?
No. No, but that's a full basket. I don't think that's only the stores which are more than one year. I don't think the stores just above one year are at 8.9% EBITDA at the store level.
Okay.
Just to walk you through that, we expect our stores to break even anywhere from 3-6 months, which is when they have 0% EBITDA. At the one year time frame, they probably have around 3%-4%. At the end of two years, they should have roughly around 7%-8% or 10%. That could go on up to being a 30-month thing in which they are around 10% EBITDA at the store level, on average.
Sure. My second question was on store closures. What we've ideally seen in the retail industry is the store closures. The age of these stores are usually younger. In our case, these are older. And what is happening is that stores with an average age of 6 years that they are closing is significantly impacting our return metrics given these are maybe 60%-80% according to ROCE, generating higher EBITDA margin stores, greater throughput stores. Given that we are operating on thin margins, so what are the steps we've taken to avoid this? As far as my understanding, store closure is 5% of the number of stores roughly get closed every year. And these are in the higher 5-6-year-age bracket. So just your view on what are the steps we're taking to avoid this?
Sure. So it is not as high as 5%, but we'll get back to you on that. The reasons for store closures for us are the average lease for us is around nine years. So if you feel or at the nine-year period, if you see that the landlord is not renewing the lease for various reasons or we are not happy with the location, we could tend to move so. There, in that case, we'd probably move. And those movements, which happen because of landlord not renewing or we not being happy with the rent and all, they could significantly increase the overall age of the store closure rate. That's one. Second, for us, unlike most stores, we open at the rate of around 50-100 stores a month sometimes, right?
So what that means for us is so the way we do it, and largely because of the way the economics of the store are structured, we set up a store at roughly around INR 25-30 lakh rupee cost, out of which INR 2-3 lakh rupee goes towards the rental deposit, and INR 6-7 lakh goes towards the build-out of a store. The rest is all inventory. For us, we don't necessarily need the best of the best locations for us to start because of the fact that we have great availability in our stores, and we have a fantastic and we have the best value pricing for the customer. We are confident that we could actually go into any market in which there's a reasonable density. Even if there is competition, we could actually grab business from those guys.
So hence, we go in a location by location, market by market, and set up the store in the best available location at that time. And we constantly look to upgrade the location as our business increases or as new locations open up in the same market. And the reason we do this is because inventory, store deposit, and everything, all of those are completely recoverable. 80%-90% of the cost of our fit-out is modular furniture and stuff which can be moved from one store to another. So we actually lose less than INR 2 lakh when we move the location. So we don't really consider it a big, let us say, a problem if we have to move the store, especially when we come across a location which is better than what we currently have. Understood. So also in the DRHP, it is mentioned the attrition rate is about 28%-30%. The DRHP was about 21%. So are we seeing a drop from there now at that attrition level?
No, no, no.
See, most of the people are working at minimum wage. I don't think the attrition is going to come down anytime soon. We are figuring out different ways of solving this problem. But yeah, we'd be happy to solve it. No, attrition has not come down. Is it because of competitive intensity, or they're opening up their own after gaining experience at our stores? Have you seen something like that? Neither, neither, neither. See, obviously, there's always different kinds of things out there. It is definitely not competition. Some of the people, after coming to Hyderabad to set up or to any of the big cities to actually work with us for a few years, may end up going to the small towns to go set up a store. That is completely possible. But that's also not the largest thing. It is neither this nor that. It's just that people today definitely are, see, retail is almost like the first step for most people who come in from small towns into big cities. They come in, get some experience, and then try to move on to better jobs as they go forward. We also expect that they work with us only for 2-3 years. We don't really expect them to work for longer than that.
Understood. So then diagnostics business, when do you plan to break even out there? If I'm not mistaken, we have invested over the last few years about INR 200 crore in that business?
No, no, no. I don't think so. We have invested only around INR 110 crores or. You probably are seeing some of the leasehold thing out there as capitalized expense. So our investment is only INR 110 crores. We are now more or less breaking even at all the central level, I would say. At the company level, we don't want to give you guidance on this right now. We're not yet ready to give you guidance on the exact time of breaking even. But our sales continues to grow, and our losses continue to go down. And we are seeing a huge uptake by all the, I would say, citizens of Hyderabad. We expect that the value proposition of what we have is really good, and we're seeing a really good uptake. So we feel confident about the prospects of our whole business.
Great. I'm sure on your strategy, you're getting operational leverage to scale. So if I understand correctly, your fixed cost is about 2%. So there's not much fixed cost left to create operating leverage. So then are you then looking at expansion of gross margin? Because the chain that you are competing with, that is the retail and gross margin level, is about 28%-35%. We are at 21.4%. So then is that there you're expecting operating leverage to kick in to close into that gap?
No, no. I still think operating leverage is possible as we go forward and automate our warehouses and all. That has taken us slightly longer than what we expected, but that will happen. So today, 3% of the cost goes towards warehousing and 2% on corporate. As we grow from INR 4,500 crores to whatever number it is this year, I don't expect that and the year after, I really don't expect that our corporate costs or the warehousing costs will grow in tandem with that. There is still a lot of room for leverage out there at you. Gross margin, definitely. But that is going to come on the back of better adoption by customers or at least higher penetration of private label among our customers for us. Private label is where we expect even on the discounted private label model which we have today, we still expect margins to be better as we go forward.
Understood. That's it from my side, sir. Thank you so much.
Thank you.
Thank you. The next question is from the line of Sayan Mukherjee from Nomura. Please go ahead.
Yeah. Thanks for taking my question. Sir, I wanted to understand the growth rate that you mentioned, 12+ months at around 15%. So for older stores, let's say, which are two years or more, if you can give some detail as to how those stores are growing?
We don't have them. We're currently not sharing those numbers. Whatever is there in the presentation is what it is. We expect the older stores will grow slightly slower than this, obviously. But given the fact that we now have two levels out there, private label in non-pharma products which will continue to gain traction. Second, our own private label which is now going to go at the 50%-80% discount, we expect growth is going to be much higher than inflation, much higher than the cost which increases every year for us. I can't give you the actual number here.
Okay. Is that on this experience on generics? Hyderabad, you have launched it in June, and there is some months of experience. So let's say if you are doing INR 100 EBITDA in Hyderabad, where it stands now with the kind of transition? Is it more than INR 100? How much more than INR 100 or less than INR 100 if you can provide some color on that? And how we should think this number going forward?
So, give you a long-winded answer for this. I explained the four main kind of features of our industry and all. And I also said how we are going to go and take more top line. I expect our EBITDA to grow both as a result of higher SSG as we go forward, as we take market share from these smaller independent retailers and all, one. And two, also, as the private label goes from the current 15% pharma which is in Hyderabad to 20% and above, we have already seen a pretty significant growth in the overall top line. And I expect that to continue. The margin growth, though, will take a little while because although the private label is more profitable than the branded generic, it has also, in the first stage, replaced the slightly more profitable full-cost private label which we had earlier.
So right now, what we have is a MedPlus brand. And earlier to that, we had a MedPlus subsidiary brand which we used to sell at full price. So cannibalization of that has resulted in a slight degrowth, I would say, of the margin out there but has been more than made up by the increase of overall sales and by the increase from 8% to 15%. So for us, is Hyderabad trending at a better EBITDA? Definitely, compared to earlier. The exact numbers, I think you'll probably be able to see it as we go forward in the next quarter when we give the results for the full country.
Okay. And finally, sir, one question is the plans that you have, is there any scope for acquisition both at the distributor level or at the retail level? Is that something which makes sense given the plan for expansion that you have at this point?
We are always willing to look at acquisitions out there. But as of now, we have nothing in mind. We are not really seeing any direct targets for acquisition. But I'm pretty sure at some point, we'll continue to evaluate, let us say. If there's a good deal out there on the listing table, we'll take it. But as of now, we don't know yet.
But you would pursue, I mean, so this is mainly because of valuation?
Absolutely.
Okay. So the issue is valuation because if the industry is consolidating, I would assume that you would have targets which would like to consolidate with a larger player. And you could then add value. So I was wondering if something we can see in the near term?
See, a couple of things. One, valuation, definitely. But two, also the kind of model, right? If their business philosophy is completely different and the way they actually go about getting their customers and their value proposition to customers is completely different, then it may not really blend very well with our own model. Then the only way in which you could basically run it is have two independent brands supplied by the same backend. That could be one possible thing. But we are not really seeing any, I would say, immediate opportunity out there. But yeah, if we see a huge synergistic thing, definitely. We don't see anything out there. We have to now look for complementary models. We obviously work at we are a value player, and we basically do discounting and everything else. But there could be someone out who caters to a different audience and who's profitable and which can be acquired at a decent price. We could perhaps look at it at that time.
Okay. Thank you, sir.
Thank you. The next question is from the line of Madhav Marda from FIL. Please go ahead.
Hi. Good evening. Thank you so much for your time. I think.
Madhav, can I just repeat the volume? Is it pretty low?
Is it better now?
Still the same. Please go ahead.
Yeah. Can you hear me better now?
Yes. Yes. Clear.
Yeah.
Thanks.
My question basically was that as we see this mix of new private label which we have launched, the MedPlus store brand generics, I think if I picked up right, you're saying gross margins are better. We are seeing higher volumes in the stores where we've launched them, which means there should be better operating leverage. Is it fair to understand that as we go ahead, the EBITDA that we make per store should structurally improve because we get better gross margin and better operating leverage? I'm taking a slightly longer view. If you think from a one or two year view, do you think that's how it should play out?
100%. As I said earlier, the reason why we have so many stores out there is because a lot of them depend on trade generics for their viability. Store which does INR 5,000, INR 10,000 per day is selling 30%, 40%, 50% of its overall thing, making around 50%, 60% margin. Now that we are in the market basically saying that if it is not something which you adopt a little bit, it's not a promoted brand, then we are there with a 50%-80% discount on it. And in Hyderabad and rest of Telangana, we are also selling trade generics at the same price. And we're testing it out to see how this works.
If trade generics are available at that number, a 50%-80% discount, that will automatically mean a lot of the smaller stores will find it very difficult to sell it at that full price. And if they try to sell those at a price which matches us, the low throughput will not allow them to actually survive. We will see a consolidation. We will see the benefit of that coming to us. That is for sure. And again, as I said, the Indian consumer is also getting, I would say, more knowledgeable about the overall medicines and all. We're also seeing a bunch of people saying it's not a big deal. We know Medplus. We know all these brands are same. Now that you guys have something to offer, we're more than happy to actually take it and save money.
So we're seeing a lot of those people come too. So between the both, between some of the stores not giving up and selling their customers over to us and people switching to our thing, both in terms of top line and on the margins, I expect we will see positive outcomes as we go forward.
Good. So payback time, payback period per store that we introduce, obviously, just mathematically should come down, right, over a period of time as these unit economics of a store increases. Sort of ROIC profile I mean, I'm just probably doing one plus one, but that should happen, I would assume.
No, no. Long run, definitely, mainly because of this. The cost of private label is 1/5 of what it costs for us to buy a brand.
Yeah. So working capital is.
Yeah. See, and INR 18 lakhs out of INR 30 lakhs basically goes into inventory for us. As the inventory cost comes down and our overall investment in the store comes down, definitely, the ROCEs will improve. And as we continue, right, and today, we're making, let us say, after all the discounts which we give and after all the incentives which we give our employees for selling our private label, we still make at least, I would say, 75%-100% more than what we would make on branded generics after all the discounts. Now, this number where it is can only go up from here because today, the average discount in Hyderabad is roughly around 58%-59% or even 60% on the private label, MedPlus private label. This need not always be that number. It can easily move anywhere from 60%-55% or even 56%.
So that's one lever which we have, and that will actually improve our overall margin. And the normal inflation which the government allows every year of 10%, right, on the drug price, that will also some of it will pass to the customer because that 10% will get passed on as 50%-55% discount to the customer. But the rest would come to us because I don't expect that the price of manufacturing it will go up as much.
Thank you.
Thank you. Ladies and gentlemen, due to paucity of time, we'll take our last question for today. That is from the line of Sayantan Maji from UBS. Please go ahead.
Hi. Thanks for the opportunity. So my question is regarding the private label portfolio. So if I look at the private label portfolio and considering that there would have been some cannibalization to the earlier trade generics that we were selling, so is it fair to assume that, say, if I just look at the 14% portfolio, that 14% revenues that are coming from private labels and gross margin sequentially could have come down? And considering that the pharmacy gross margin has increased, so in the branded pharma business, probably the gross margins would have increased quarter-on-quarter, and hence, the average discounting level should have come down. Is that a fair assumption or is it something that's not correct?
No. So you're saying our margins because of the cannibalization of our earlier high margin private label will have come down. That is what.
So for example, yeah.
Yeah. So earlier in Hyderabad, we had roughly around 7%-7.5% of private label. Now, it's standing at 15%. So if we assume that all 7.5% has been, let's say, subsumed by this, then we would have lost roughly around 2% on that. But the additional 7% which we actually got here would have basically secured another, I would say, point on another 1% would have basically been made up by the extra private label which we sold. And that would have replaced the regular branded generic. Now, what we are also not seeing is the fact that our sales also grew significantly because of this. So a growth of even 10% extra at a 20% margin more than makes up for all this. And we expect that we'll continue to grow as we go forward.
From now on, I would say in Hyderabad, whatever the margins we have lost because of merging both the old and new ones, that effect is long gone. So we'll continue to grow from there. In the other states, though, in Karnataka and all these other places, we have now till now kept these separate. So we continue to operate the old private label as it is. We are seeing some cannibalization but not complete. So to that extent, we'll see some loss. But overall, since the private label is growing out there, we expect to make more money out there.
Okay. That's clear. That's very clear. Another question related to private label is when you have chosen 400 SKUs which cater to 55% of the customers' needs. So are these the ones where probably the fill rates were lower earlier, or are these the top-selling SKUs that you see in branded pharma? And the 15% which is, say, as you explained, one-third of the addressable market that you were able to convert, so do these customers have higher awareness, or is there some below-the-line activity which has been done to create awareness which led to this uptake in private labels?
Okay. So two things. Everyone is aware because the private label was sold only to people who had MedPlus membership. And MedPlus membership was sold at some price, a super discounted price. The original price which we thought of was INR 499, but we ended up selling it for INR 49 as an initial thing. But they had to actually become a member, pay that money to actually obtain this discount. So they were told. And in the stores when they came in, and we also had some marketing material which went outside. We also did a little bit of advertisement and all. We talked about only this, that 80% of all the drugs in the country are off-patent. All these are just branded generics or generics only.
We basically just said that MedPlus, with a 4,000-store network and a INR 4,500 crore turnover as of last year, has the size and capability of getting these drugs manufactured in the same places and to the same level of quality as any of the larger brands. And given that we did not have any marketing costs and all, and we made it very clear that the discount was coming to them because we didn't have any channel costs, and we didn't have any marketing costs. And so customers bought that, and a significant portion of them ended up actually buying. That is, 1/3 of whatever we put out on offer basically got taken up.
Okay. Got it. Got it.
These are fast-moving products, by the way. These are not products in which the fill rate is a problem or anything like that. These are the fastest-moving products.
Got it. Got it. So it's like there is substitution which is happening. It's not that probably a patient is coming, and you were able to fulfill 8 out of 10, and the two were the gaps, and you had introduced only those. It's not the case. So it's probably the ones which were in your setting, and you have a substitute now available for the customer.
Exactly. Yes.
Got it. Just finally, in a question, so your CapEx, if I just do a CapEx per store, it comes to around INR 1.4 million, which is INR 14 lakhs. We have fit out cost of INR 6 lakhs-INR 3 lakhs of deposit. Where is the remaining INR 5-INR 6 lakhs coming from, assuming that none of the CapEx is going into diagnostics for this quarter?
No, I don't think we'll try and come back to you. I'm not sure if it is leases, just capitalized, or something like that. I don't think the CapEx for our store goes beyond 6 to 8. Maybe a little bit of the maintenance. We actually did tell the investors last time that we are going to refurbish, I would say, refit roughly around 1,000 stores to accommodate the private label products, non-pharma private label products, which would now start going from being served from behind the counter to in front of the counter. So maybe a little bit of that, but I don't think it is going to be it should have changed it so much. Happy to come back to you with more details on this. Please reach out to us after this.
Sure. Okay. Okay. Thank you so much. That's all from myself.
Thank you. Ladies and gentlemen, that would be our last question for today. I now hand it back to the management for their closing remarks. Thank you, and over to you.
Yes. Thank you, everyone, for the call.
Thank you very much. Ladies and gentlemen, on behalf of MedPlus Health Services Limited, that concludes this conference. Thank you for joining us. And even now, just connect your line.