Operator: Ladies and gentlemen, good day and welcome to the MedPlus Health Services Limited Earnings Conference Call. As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivas from MedPlus Health Services. Thank you and over to you, sir.
DRN Srinivas: Thank you. Good evening, everyone. On behalf of MedPlus, it is my utmost pleasure to welcome you all to the MedPlus Q2 FY 2027 earnings conference call to discuss the financial results of MedPlus for the second quarter of FY27, which were announced earlier. We have with us today the senior management represented by Madhukar Reddy Gangadi, CEO and MD, and Sujit Mahato, CFO. 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 on slide one of the investor presentation shared with all of you earlier. Documents relating to our financial performance were circulated earlier, and these have also been posted on our corporate website. I would now hand over the call to Sujit. Thank you, and over to you, Sujit.
Sujit Mahato: Thank you, Srinivas, and good evening everyone on this call. An update on our network in terms of openings and closures. We have opened 219 stores, and there were 53 store closures, including 14 relocation cases and 23 franchise outlet closures. We achieved a net addition of 166 stores, including net addition of 82 franchise outlets during the quarter compared to the 146 stores added during the last quarter. We continue with the outlook for adding 800 net new stores, including the franchise outlets in FY 2027. An update on the store network. In terms of our store network's age, around 29% of our stores have been operational for less than two years. The remaining 71% of our stores have been operational for two years or more.
Sujit Mahato: In terms of the store size, at quarter end, our network consists of 5,642 stores, including 849 franchisee outlets spanning over 3 million square feet. This compares with 5,476 stores, including 664 franchisee outlets as of June 2023. The average store size stood at 539 square feet. During the quarter, we added 82 franchisee stores and converted 103 COCO stores to franchisee model. An update on the revenue mix. Presently, MedPlus offers a large range of SKUs spanning across pharma and non-pharmaceutical categories. Private label sales for Q2 FY27 constitute 21.4%, pharma being 10.7%, and non-pharma 10.7% of our total revenue.
Sujit Mahato: Private label non-pharma sales grew by 18% quarter on quarter, with the sales mix improving from 9.8% to 10.7%, primarily due to improvement in supplies post Q4 FY26. We plan to further expand the product range to drive growth and increase the private label non-pharma sales mix. Private label pharma sales grew by 5.9% quarter on quarter, while the sales mix declined marginally from 11% to 10.7%. Gross margins increased from 24.5% in Q1 FY27 to 25.1% in Q2 FY27, driven by a higher private label sales mix and lower discounts. During the quarter, we updated the presentation of revenue mix by product category on slide 13 of the investor presentation by reclassifying revenues from franchisees previously included under others into the respective product category.
Sujit Mahato: To ensure comparability and consistency, the same reclassification has been applied retrospectively to the preceding quarters, covering all the periods presented. Our consolidated revenue for the quarter stood at INR 20,371 million. Our consolidated operating EBITDA for the quarter stood at INR 981 million, representing 4.8%. This quarter included a one-time benefit of INR 79.6 million. This relates to the reversal of retention bonus provision for store employees. Excluding this reversal, consolidated operating EBITDA for the quarter would have been INR 901 million, representing 4.4%. Revenue from pharmacy operations grew by 21.3% on a year-on-year reported basis. The pharmacy operating EBITDA stood at INR 885 million, representing 4.4%. An update on our store performance. Stores older than 12 months.
Sujit Mahato: Revenue from these stores in Q2 was INR 17,325 million, representing 93% of pharmacy revenue. These stores had a store-level EBITDA margin of 11.7%. A word here on the store-level EBITDA margin by age. While stores greater than 12 months had a margin of 11.7%, this was 11.9% for stores greater than 24 months, and 8.4% for stores in the 13 months to 24 months age bracket. On allocating all non-store related costs, the operating EBITDA of stores greater than 12 months would be INR 945 million, which translates to a margin of 5.4%. An update on our working capital. Our net working capital for Q2 was 54 days. The inventory in our warehouse was 34 days.
Sujit Mahato: In Q2, the inventory level of our first-year stores was 86 days. In comparison, for our stores older than 12 months, the inventory was 34 days. An update on our Diagnostics numbers. Diagnostics revenue for the current quarter grew to INR 410.5 million compared to INR 332.5 million in Q2 FY26. Diagnostics segment recorded an operating EBITDA of INR 97.9 million, representing 23.8% compared to INR 50.9 million in Q2 FY26. In July, we sold 648 plans per day. In August and September, this was 640 and 657 respectively. As on 30 September, we had around 2.16 lakh active plans. That concludes our update for the quarter. I request the host to open the line for questions.
Operator: Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question comes from the line of Paresh Choudhury with Latent Advisors PMS. Please go ahead.
Paresh Chaudhary: Hi, can you hear me?
Madhukar Reddy Gangadi: Yes, Paresh, please go ahead.
Paresh Chaudhary: So in the previous calls, we had given a commentary that we expected the franchisees to have a higher share of private label products as compared to the COCO. How has it played out on ground? If you could give some like-to-like comparison of, let us say, some geography.
Madhukar Reddy Gangadi: We will have to come back to you with details on that. Maybe starting next quarter, we will actually start splitting out the franchisee numbers for all of you. But for now, I think it is more or less in line with what the company has. The private label sales are a function of two things. Typically, the region in which the store is and the vintage of the store. So for a rural franchisee, the private label is bound to be higher versus a city store. And obviously, while we expect that the franchisee will do more private label as we move forward, initially, it is still going to be less. So given that most of our guys are still new, it may still not be at the same level as the overall company.
Paresh Chaudhary: Got it. That is it from my side.
Operator: A reminder to all participants, you may press star and 1 to ask a question. The next question comes from the line of Sudarshan Agarwal with Axis Capital. Please go ahead.
Sudarshan Agarwal: Hey, hi. Just checking on the private label mix. This quarter, we have seen spending on the private label pharma side, I guess. So where do you see this going ahead in quarters ahead on the private label pharma? Secondly, on non-pharma also, we are seeing consistent growth on a YoY basis as well. So where do you see this kind of moving in the next, let us say, three to four quarters?
Madhukar Reddy Gangadi: Sure. On the pharma side, as we mentioned in the past, the sale growth got muted. In fact, it actually went down a little bit in percentage terms because we wanted to make sure that our employees are not misselling. I would say where they are not being too aggressive in pushing the private label. That was causing a little bit of a problem with our regular customers since we got it muted down. Hence, over the last three or four quarters, you would have seen that we have gone down by around 0.5 or 0.6 quarter on quarter. This quarter, though, I think that largely got arrested. The growth was much smaller. In absolute terms, the number was actually higher than what we had sold in Q2. The big difference though was that the brand sale went up.
Madhukar Reddy Gangadi: While even the private label sale went down slightly on the pharma side, overall it actually grew in absolute terms. That is one. On the non-pharma side, that was a problem more of supply chain and pricing being not quite right and all that. Both of those have been corrected now. I think it went up from 9.8% to 10.7% quarter on quarter. This is now going to be just a function of us adding as many new categories as possible. Obviously, we have to do only the adjacent categories.
Madhukar Reddy Gangadi: We cannot just sell anything out there. It is also going to be a function of how many stores come up in the newer format, which has got a self-service kind of thing, which is slightly more amenable to the private label, non-pharma kind of sales. But I do not see any cap on that. I do not see any reason why it should not continue to grow.
Sudarshan Agarwal: Yeah, but I think a few quarters back, you used to allude to the fact that maybe we can increase the private label mix by 50 to 100 basis points on either net or the other basis on a quarter on quarter basis. Does that trajectory now start back given that.
Madhukar Reddy Gangadi: If you take both the components of private label, which is pharma and non-pharma, I do not see any reason why we should not grow in the range of around 0.5% every quarter. Maybe slightly less, but yeah, on the whole, I think that is the number we will be at if you combine both. The pharma side may actually grow slightly lesser, maybe a 0.2%, 0.3%. But the other one may be 0.1% or 0.2%, or something like that. The balance will be made up by the non-pharma side, where it is not a question of substitution, it is just a question of adding new products and taking a larger share of the wallet.
Sudarshan Agarwal: Got it. Lastly, I think I saw that your discounting has come down a bit, 1% on broadly membership or otherwise. This is in relation to the wage hikes to offset the wage hikes, et cetera, that has happened. Will this kind of remain at these levels, the discounting? Is there a similar trend being observed in the industry as a whole, that discount rates are coming off a little bit?
Madhukar Reddy Gangadi: No, not really. We kind of had this in our thing even earlier. Unfortunately, the increased wage hike did not let us get the full benefit of this. Otherwise, we should have had a slightly higher EBITDA, obviously. Given that we are the biggest discounters out there, I do not think anyone else is really following that out there. I do not think there is anything. It is not a general trend in the industry, let me put it that way. This is part of a plan for us to decrease the discounts over a period of time.
Sudarshan Agarwal: Got it. That is it from my side. Thank you.
Madhukar Reddy Gangadi: Thank you.
Operator: Participants, please press star and one to ask a question. The next question comes from the line of Rikan Singh, an individual investor. Please go ahead.
Rikan Singh: Hello, sir.
Madhukar Reddy Gangadi: Yeah.
Rikan Singh: Hello. Sir, profitable margin, INR 2,000 crore sale, net profit INR 56 crore. It should improve. Last quarter, supply chain disturbance, net profit margin. At least it should be near 10% as an investor. It should improve. Plastic price, raw material price change, negative quarterly negative 3%, 4% fluctuation is normal. Management, sir.
Sujit Mahato: I think thank you for your question, Rikan Ji. It is a journey. If you look at the retail business, I think what you alluded is 10% PAT, that is wishful thinking. But yeah, the process to it is, between what we have been there for last two years, you would see a continuous steady improvement on the PAT levels, and that journey will continue as Madhukar explained, as in how we expand the EBITDA margin that flows down to the PAT, and that continues to increase. But definitely, we would not allude anywhere between 10% of PAT. Currently, we are at 2.5% and 3.5%, and that is the trajectory we would take and slowly increase.
Rikan Singh: Okay, sir. Thank you, sir.
Sujit Mahato: Thank you.
Operator: A reminder to all participants, please press star and one to ask a question. The next question comes from the line of Akhil Parekh with 360 ONE Capital. Please go ahead.
Akhil Parekh: Yeah, thanks for the opportunity. My first question is on the margins front. Last quarter, you had said you will be in a better position to guide how the EBITDA margins will look like for remainder of the year. Going forward in FY28, if you would like to guide on the EBITDA margins front, that would be helpful.
Madhukar Reddy Gangadi: I think this quarter we are at around 4.8% EBITDA. I expect that we will only get better in the next coming quarters. I cannot tell you exactly how much, but it will definitely improve as we do two things. One, streamline the costs and, more importantly, actually improve the product mix. Both of those are happening. I expect it will increase. I think for the year though, the overall EBITDA may be in the range of, I would say conservatively around INR 380 to INR 400 crore is what I think the number will be, depending on how the next two quarters are. But yeah, that is something which we can easily commit to. I do not think that is a challenge.
Madhukar Reddy Gangadi: The AOP, though, I think, which got by mistake circulated out there, had a slightly higher number, and unfortunately, after the AOP, we saw a huge increase in the salaries across Karnataka and Telangana and all. That has actually been a pretty big impact, I would say. If it were not for that, we should definitely be at a much higher number. But yeah, as a percentage basis, though, the EBITDA will continue to grow. I would say that the last quarter was an aberration. This quarter will probably be back in the 4.8%, 4.5% kind of thing as we move forward.
Akhil Parekh: Yeah. So INR 380 to 400 crore annual pre-interest EBITDA is what roughly we can make it this year.
Madhukar Reddy Gangadi: Yes.
Akhil Parekh: Got it. Second, on the cash flows. For the H1, they are softer as compared to last year because of the increase in working capital needs. While if I look at last couple of years, our cash flows have been very strong, like FY25 and FY26, they have been roughly in between INR 500 to INR 540 odd crore. Is it fair to assume our cash flow generation for full year FY27 and FY28 will get back to what we have delivered in terms of, say, EBITDA to OCF conversion will be similar to what we did in FY25, FY26?
Madhukar Reddy Gangadi: So a fair portion, yes, because if you also look at it is a function of the number of new stores that we are adding, because as and when we add new stores, there is a gestation period of when the stores start delivering positive cash. To that extent, subject to that, absolutely we will be back on track.
Akhil Parekh: Great. That is very good to hear. Last two questions from my side. One is on the aging structure of our stores that has kind of deteriorated from 79% to 71%, if I look at it for last four quarters, obviously because we are adding stores at an aggressive pace. Do you think the streamlining of cost and private label going up, that can get offset because of the inferior aging structure of our stores going forward? So will that play a role on the margins?
Sujit Mahato: I think for a growing company like ours, that trade-off will always be there. That is historically. That is the only reason we explain the details about the network age, because as you rightly pointed out, there will be a play between the mature stores versus the stores which we believe are still in the nascent stage. To that extent, that drag as the network size increases versus our growth, for sure will offset and still we should be able to deliver a positive growth net.
Akhil Parekh: Okay, sure. That is helpful. Lastly, sir, promoter pledging of the shares. Given that our business fundamentals are so strong, as an analyst, I feel we are not getting the right multiple, and probably the share pledge is one of the overhang. Any thoughts on that would be helpful, and if any corrective measures will be taken by the promoters that I think that can lift up the price pressure of the stock.
Madhukar Reddy Gangadi: The pledging is only a function of the pricing of the stock, unfortunately. We are not really selling or taking any cash or doing any extra loans or whatever stuff. I believe it is the wrong time for me to sell any stock and get the debt down. Although that is on the cards, but it is not going to be immediate, or it is not going to be in the next quarter or so. We will probably do other things to make sure that the price goes up, but eventually it is the overall, I would say, performance of the company which will take the share price up is my belief.
Madhukar Reddy Gangadi: One of the things which we think is that the whole thing around the private label and our ability to sell a high-value product like a medicine and make it in our own brand and be able to sell is not getting communicated properly, I guess. I am sure eventually the message will go. Just look at the fact that today, out of the INR 650 to INR 670 crore which we sell every month, 21% comes from private label and INR 70 crore is general goods.
Madhukar Reddy Gangadi: So if you take it, that is almost INR 800 crore of our own brand selling out there in general goods and an equal amount selling in the medicine side, which is again, a pretty substantial amount. We are seeing a small but steady growth in both these things. I think this is what will help us get the EBITDA up, get the overall percentage up, and get the share price up.
Akhil Parekh: Sir, appreciate your detailed answer, sir. Thanks a lot, and wish best luck for the coming quarters.
Madhukar Reddy Gangadi: Thank you.
Operator: The next question comes from the line of Akash Shah with Investec Capital Services. Please go ahead.
Akash Shah: Sir-
Operator: Akash, please unmute. Yes, now you are.
Akash Shah: Yeah. Sir, in Q1 you had guided for same stores growth to remain at 9% to 10% for FY27. Do you maintain that? Second is, you had alluded to quarter-on-quarter improvement of 30 bps to 50 bps in the share of overall private label going ahead. Just wanted your confirmation on these two things. Thank you.
Madhukar Reddy Gangadi: Yeah. So private label pharma, non-pharma combined, I think that should be pretty easy to get. We have already seen that in this quarter. Private label pharma, which had actually dipped for a while, has now basically started to plateau out. And although it is growing in terms of absolute numbers, as a percentage, it has actually dipped a little bit. But I think this will be the end. We will probably start seeing a growth out there in that also as a percentage.
Akash Shah: All right. So 0.5 percentage points improvement every quarter should be achievable in your opinion, right?
Madhukar Reddy Gangadi: Yes. That ballpark number should be achievable.
Akash Shah: All right. And on SSSG growth, sir?
Madhukar Reddy Gangadi: On the mature stores, we continue to believe it will be between 9% and 10%, 10.5%.
Akash Shah: All right, sir. Last question. Any thoughts on the CapEx plans that we had withheld?
Madhukar Reddy Gangadi: No. I do not think we are going to be visiting that anytime soon. CapEx now is out of the question. Our focus will be only on opening new stores and doing our private label.
Akash Shah: All right, sir. Just lastly, in Q4 of FY26, you had mentioned that you would be maintaining the gross and EBITDA margins, which was back then. Should we assume that the percentages that were reported in Q4 could be normalized from FY28 and onwards?
Madhukar Reddy Gangadi: Should be. This year also, we would have been able to do it fairly easily, if not for the two events which happened. One, of course, was the huge increase in salaries across a couple of states. In fact, across the board also, we had seen several different revisions to all sorts of things on the wage bill. If not for that, we should have been able to do it easily. But yeah, going forward.
Akash Shah: Right. I think for FY27, it is impacted because of that private label issue and the salaries. That is what you wanted to allude, right?
Madhukar Reddy Gangadi: That is right.
Akash Shah: All right. Thank you, sir. That is it.
Operator: The next question comes from the line of Ashutosh Parashar with MIT. Please go ahead. Ashutosh, please unmute your line in case if you are on mute.
Ashutosh Parashar: Hello.
Operator: Yes, Ashutosh, please go ahead with your question.
Ashutosh Parashar: Yeah. A few questions on the gross margins front. Given that the mix improvement on the private label side will largely come from non-pharma versus pharma, how should we expect that to play out in the gross margin front? Firstly, on that. On the EBITDA margin front, given that we have a huge headwind of minimum wage hike, apart from the discounting that we have reduced, what else are we doing? I have a couple more questions that I will ask on the phone.
Madhukar Reddy Gangadi: Sure. The impact of the general side is not going to be very high, I must say. It will just help us grow the sales because that will be a larger share of the wallet, private label general goods, because the margin is roughly in the range of what we actually get normally. That does not mean that we are not going to grow the private label pharma side. The overall growth will be around 0.5, but we expect that the private label pharma will also end up growing, and there, the impact is going to be much better for us. So that is one. I think you had one more question.
Ashutosh Parashar: Yeah, just on the apart from discounting, what else are we trying to do?
Madhukar Reddy Gangadi: I do not think there is going to be any more shocks on the wage side. I do not think we really want to do anything more out there. I think now it is just going to be improvement in the SSSG, adding new stores and product mix, and streamlining our costs at the back end. These are going to basically do it. I do not think we are going to do anything on the discounting side as of now.
Ashutosh Parashar: Okay. On the store addition side, given that we are close to around 310 in H1, are we on track towards that 800 store addition this year and next year also, probably? In terms of the size of store, are we doing something different there in terms of new store we are opening, let us say, bigger size stores in order to accumulate more of the non-pharma private label stuff, et cetera. Any tweaks are we doing there? Lastly, on the Diagnostics front, we have seen very good margin pickup over the last two quarters. What are the plans there? That would be it.
Madhukar Reddy Gangadi: Yeah. For us, I think we have a net addition of 340 stores, I think overall. That makes it around 458. We will easily get the number of 800 for this year. Next year, we will guide you maybe next quarter or so. I think the number is going to be higher next year. It is not definitely 800, but I would think much higher than that. On the size of the store, we have around 100, 150 large format stores now.
Madhukar Reddy Gangadi: What has happened is, over a period of time, our size of store has actually grown significantly. Every store which we add right now has a space for us to display our private label non-pharma products outside the counter. That is anyhow happening. So irrespective of what size, how many large format stores we have, the non-pharma side is still going to grow. That is our issue.
Ashutosh Parashar: Got it. Just last follow-up if I may. What would be the minimum kind of SSSG that you would need in order to keep that additional EBITDA margin expansion in order in order to
Operator: Sorry to interrupt, Ashutosh Parashar, you are not audible. Could you please use your phone on the handset mode in case if you are using a hands-free device?
Ashutosh Parashar: Hello. Is this better now?
Operator: Yes.
Ashutosh Parashar: Yeah. Just last question on the SSSG front. I just wanted to understand what would be the minimum kind of SSSG that we need in order to continue that operational EBITDA margin expansion. We are currently at double digit, but that base will also get a bit stiffer in the second half. So what kind of SSSG do we expect, and what would be the minimum threshold that will allow us to kind of continue getting that margin expansion?
Madhukar Reddy Gangadi: For us, given our gross margins and everything else, and given that the rents increase by roughly around 5% every year, and salaries increase by roughly around 6% to 7% at the store level, overall growth of around 4% is enough to actually keep us steady at the same EBITDA level for a steady store.
Operator: Does that answer your question, Ashutosh?
Ashutosh Parashar: Yes. Thank you.
Operator: The next question comes from the line of Paresh Choudhury with Latent Advisors PMS. Please go ahead.
Paresh Chaudhary: Yes. Thanks for the follow-up. Just wanted the current quarter's number. If you could give the EBITDA margin breakup across categories, across branded pharma, both for private label pharma and branded pharma.
Madhukar Reddy Gangadi: That is a little difficult to give right now, Paresh. Maybe you can reach out to us later, and then we will come back to you.
Paresh Chaudhary: Okay. For that I will connect offline. Other question was regarding the quantum of the one-time benefit which we got. What was it for exactly, and the amount was INR 8 crore, right?
Madhukar Reddy Gangadi: Yeah. The amount is right. It was related to the store level retention plan, employee retention plan. Post the increase in the minimum wages and the other factors, the company evaluated.
Sujit Mahato: The first change was effective 1 March, where new enrollments had stopped. This quarter, there was a modification to the existing plan. For all the existing employees, the company gave an option of encashing the accrued benefit to the employees, which most of the employees exercised, and due to that, future costs related to this plan was reversed in the current quarter.
Paresh Chaudhary: Okay, got it. Thank you.
Operator: A reminder to all the participants, you may press star and one to ask a question. The next question comes from the line of Viresh Sangwan, an individual investor. Please go ahead.
Viresh Sangwan: Oh, hi. I am a bit new to the company. Just wanted to know on the franchisee model. If I am not wrong, I heard you stating once we refine this model, we can grow it at a pace of approximately 3,000 franchisees a year. Just wanted to know, where are we at in that refining and what is stopping us to press the accelerator on that?
Madhukar Reddy Gangadi: As we said earlier, we will come out with the numbers maybe starting next quarter or so. But the model itself is more or less done. It will take us maybe, when we guide you for the next year, we will let you know how many more franchisees we can put and how fast we can actually start accelerating.
Viresh Sangwan: Okay. On the Diagnostics business, I have been hearing we are still in planning stage, but do you want to share any developments on that? Or for how long will we stay in that planning or watch mode?
Madhukar Reddy Gangadi: The Diagnostics, I think, we had actually started this on a subscription model basis. For it to really work effectively and to get the level of returns which we want, we would have needed at least 300,000 to 400,000 subscriptions on an annual basis. By now, we should have had that. Given the fact that we are at still 216,000, we are still waiting. The day we hit that at least 300,000 number, then we will be ready to take a call on any further investments with that. Otherwise, it is a profitable business. It is growing. But we are still figuring out what are the best way for us to go forward on that is.
Viresh Sangwan: Okay. Do we have any large format stores as well? I am based in Australia, actually. The big players here, they open large format stores which help in building the brand and the premiumness of the brand. Do we have such things or plan such thing in at least good catchment area where our sales are good?
Madhukar Reddy Gangadi: Yeah, actually, we do. Our large format stores are roughly around 1,200 to 1,500 square foot. Some of them are as large as 2,000 square foot too. I think we have around 80 of these stores now functional. The plan is to basically open maybe another 70, 80 this year. We will see how it is working for us. But largely, they have been quite effective, both as being profitable ventures and also for building the brand. We will most likely continue this format as we go forward.
Viresh Sangwan: Lastly, if I may, any revival of the plans for epics which you highlighted last quarter, something like concierge or wellness concierge?
Madhukar Reddy Gangadi: No. We have withdrawn the plan. I don't think we are going to be doing that.
Viresh Sangwan: Okay. Thanks.
Madhukar Reddy Gangadi: Thank you.
Operator: The next question comes from the line of Harith Ahamed with Avendus Spark. Please go ahead.
Harith Ahamed: Hi. Good evening. Thanks for the opportunity. Under the franchisee model, this quarter, the net store addition I see is around 80. It is a bit lower than what we had done in previous quarters. What is the outlook here? Sujit, if you could share the revenue from franchisee stores which you had shared for the last quarter. What would that number be for this quarter? A related question, if you could provide some color on the economics under the franchisee model, what would be the revenue per store compared to our own stores and the gross margin, as well as the EBITDA margin profile from franchisee stores, whether it is currently dilutive to the overall margins.
Sujit Mahato: Sure, Harit. Thank you for the question. In terms of the revenue from the last quarter, it was INR 83 crore or INR 830 million, and current quarter is INR 116 crore. This is the net revenue from the franchisee business. The other details, as you mentioned, we also plan to bring out these details on a regular basis from maybe next quarter. At the very high level, as we had explained the model, the same INR 100 MRP, when we sell to the franchisee, the gross margin that gets split. If the gross margin of pharmacy business, let's say, is 24%, we retain around 13% to 14%, and we pass on 10% to 11% to the franchisee. I am sorry.
Sujit Mahato: We retain around 10% to 11%, and we pass on around 14% to 15% to the franchisee, which means we recognize revenue of 85, and we have a margin of absolute 10 or 11, which translates to more or less the similar store level margin when compared to the COCO store. But more details in terms of what you also asked, I have made a note of it. Going forward, we would maybe provide that on a quarter-on-quarter basis.
Harith Ahamed: Just to confirm, Sujit, majority of these franchisee stores will be in the less than 12 months cohort as of today, right?
Sujit Mahato: Yes.
Harith Ahamed: Their revenue profile will be a bit lower on a per store basis.
Sujit Mahato: Absolutely.
Harith Ahamed: Okay. The second one is on the operating EBITDA margin. Good to see the sharp improvement on a quarter-on-quarter basis. Given that we have seen the pharma private label share stabilizing now going forward, and also some of the cost impacts in terms of wages, et cetera, is already in the Q2 and the H1 numbers. How should we think about the margin profile, the operating EBITDA margin profile, in the H2 and for FY28?
Madhukar Reddy Gangadi: Sujit, we have taken the hit as you said already. So it is going to impact the overall EBITDA for the year, unfortunately. What we had actually planned for around INR 420 crore, INR 440 crore and all, is now going to be around INR 380 crore to INR 400 crore, is what I think it will be. Obviously, the percentage is going to be in a similar line, 4.8%. Will probably go up to 5% max. But the goal, though, is for us to keep going from here, both by streamlining our costs at the back end and also by increasing the private label overall in the front end. While it has stabilized, it does not mean that it is going to be there at that number. It is definitely going to start growing right now.
Madhukar Reddy Gangadi: We are feeling very confident that we can grow the private label both on the pharma and non-pharma side. Pharma, a little, I would say, with a slightly smaller increment every quarter, but definite growth.
Harith Ahamed: Okay. Thanks, Madhukar. Last one. Not sure if you have explained this previously, but the increase in inventory that I am seeing in the H1, what exactly explains that?
Sujit Mahato: I think on a full year basis, I think this should be taken care of. What happened is previous quarter, at the fag end of the quarter, we had certain purchases for which there was also payables outstanding as at 30 June. Therefore, from a cash flow perspective, it shows an adverse number. This quarter, those payables, as well as the normal payables, got paid off, and there is an increase in inventory. So you are seeing the net working capital increase. What I have looked into that and discussed internally also, I think going forward by the year-end, we should be again coming back to the normal level.
Harith Ahamed: Got it. Thanks for taking my questions.
Operator: Participants, please press star and 1 to ask a question. The next question comes from the line of Jatin Chawla with RTL Investments. Please go ahead.
Jatin Chawla: Yeah, hi, good evening, and thanks for the opportunity. My first question is on the franchisee side. When I look at your store closures, I see that franchisee withdrawn, that is a very large share on the store closures. Franchisee as a percentage of the total stores would be much smaller number than that. Is this a recurring feature? Is this something that we should expect going forward as well? Or are these kind of initial teething troubles as you are getting the franchisee model right?
Sujit Mahato: I think your observation is right. This is part of the initial setup, I would say, or readjustment. This is an initial teething issue, which we believe going forward it should stabilize the number of store closures on the franchisee part.
Jatin Chawla: Got it. So this INR 116 crore revenue from franchisees that you said, how many total franchisee stores did you have at the end of the quarter?
Sujit Mahato: It is around 849 active.
Jatin Chawla: Okay. Second question. On the hit from the two states where there was a big increase in wage cost, what is the absolute amount hit that you have seen for the full year on account of that?
Madhukar Reddy Gangadi: I think it is roughly around INR 7 crore a month.
Jatin Chawla: INR 7 crore a month. So roughly around INR 80, INR 85 crore for the year. Got it. You said, in terms of trying to improve your EBITDA margins, two things. One is increasing the private label share, and then second, streamlining costs. On the cost side, what are the areas where you are looking for cost reduction, and over what period should we start seeing some of those benefits?
Madhukar Reddy Gangadi: See, over a period of four quarters is what I am thinking. Two things. One, we are using AI. We are using it to do a lot of stuff on the back end to automate a lot of our work. Basically, we are already seeing the benefits of that. Two, over a period of time, we have also grown a little haphazardly as far as our warehouses were concerned. Every time we needed to add 20,000, 30,000 square foot, we kept on adding it, and the result is that in most of the cities in which we started early, we have several warehouses. That is actually a lot of extra cost, both in terms of transportation, manpower costs, and everything else. We are now looking to basically consolidate all of them into one place, in each of these places.
Madhukar Reddy Gangadi: We expect a lot of benefit to come from that. So both on the warehousing as well as on the overall operational costs, we expect that we will be able to use technology better and get to a slightly more rationalized cost on this side.
Jatin Chawla: Got it. Over a full quarter period, any kind of rough ballpark number in terms of what kind of cost reduction we could see?
Madhukar Reddy Gangadi: On the entire thing, I see no reason to believe that we should not get at least a 0.5% to 0.75% reduction in cost.
Jatin Chawla: Got it. Thanks a lot. That was very useful.
Operator: Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for the closing remarks.
Madhukar Reddy Gangadi: I thank all participants on this call for your interest in the MedPlus journey. Our investor relations team can be contacted at ir@medplusindia.com. Thank you.
Operator: Thank you, sir. Ladies and gentlemen, on behalf of MedPlus Health Services Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.
