Howdy Toasters!

In today’s issue of the Morning Toast, we discuss

• US Fed in a soup?
• Omni-Channel pharmacy retailer MedPlus accesses the markets
• An education concept to keep you chugging along

US Fed in a soup? 😧

• The Federal Reserve is laying the foundation for its interest rate hike cycle
• The Treasuries Yield Curve (i.e the spread between short-term and long-term interest rates) is said to be the flattest in a generation
• The two-year, 10-year spread is about 83 basis points, with futures indicating 55 basis points in June

What are the implications? 🧐

• Yields across the curve are well below the Fed’s long-term policy rate estimate of 2.5% and even the 1.8% projection for 2024;
• The low yields may handicap the Fed not allowing it to do much other than raise interest rates
• It will be very difficult for the Fed to go back to a monetary-easing type strategy in case there is a threat to economic recovery (due to a new variant etc.)

English please? For sure my friend (:P) 😅

• The Fed uses the federal-funds rate as a major monetary policy tool, to stimulate the economy and has kept the rate near zero since the pandemic
• But the real interest rate (which takes into account inflation) are at their lowest levels in four decades and ‘deeply negative’ due to an inflation rate of 5%
• If long-term rates don’t rise as inflation climbs, then real long-term rates may decline even more, providing a stronger incentive for debt-fueled spending

So what should the Fed be doing? 🤔

• Unless inflation or long-term rates change dramatically, the yield curve suggests that a series of Fed hikes in 2022 could cause an inversion (where short-term yields are higher than longer-term ones)
• That’s something that is known to precede recessions and usually leads policy makers to lean against further tightening
• The Federal Reserve will be meeting on Dec. 14 and 15 to discuss speeding up the end of its bond-buying program

Okay! Final thoughts? India perspective? 🤩

• The Fed may double the pace of asset-tapering and end its bond-buying  program in March – a few months earlier than planned
• Indian investors are also waiting with bated breath, with likely action eventually bound to impact Indian monetary policy

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Omni-Channel pharmacy retailer MedPlus accesses the markets: What’s up & What do you need to know? 😎

Company Overview

• Founded in 2006, India’s second largest pharmacy retailer (in terms of revenue & store count) MedPlus Health Services offers a wide range of products, including
  • Pharmaceutical & Wellness, including medicines, vitamins, medical devices & kits
  • Fast Moving consumer goods (FMCGs) such as home and personal care products, including toiletries, baby care, soaps & detergents and sanitizers
• Initiated operations in Hyderabad (48 stores), the company now has presence in 7 states (across West, East & South), and operates >2000 stores, pan-India
• MedPlus is the first pharmacy retailer in the country to offer an omni-channel platform, with customers having the choice to order online (~9% of sales) and visit a store to pick up ordered item / purchase first hand
• The company’s business operations across the value chain are entirely backward integrated, from sourcing products, to warehousing, distribution, store operations and last mile delivery; thus allowing the company to attain significant leverage and scale
• The company follows a hub & spoke model, through multi large warehouses that act a super stores, and are linked to smaller high density area warehouses, which are connected to stores

Interesting! Tell me more? Store Strategy, Unit Economics, Competitor Profile et al. 🙄

• The company employs a data driven cluster-based approach to store network expansion, initially by achieving high store density in a densely populated residential area, before expanding the network to surrounding areas (within that city)
• The above approach has held the company in good stead, with MedPlus’s average revenue per store ~7x the industry average (INR 15.9 Mn vs INR 2.3 Mn)
• Between April 1, 2018 and September 30, 2021, the company opened a total of 1,158 new stores, with ~75% of new stores achieving Store Level Operating EBITDA within first 6 months of operations
• The company recorded a revenue CAGR (b/w FY19-21) of ~16.3% to INR 3069.2 Crore (vs industry CAGR of ~7.3%), while EBITDA grew at a 2 YR CAGR of ~44% to INR 270.4 Crores
• From a bottom line perspective, the company runs on wafer thin margins, only recently touching >2% margins (Profit after Tax); given strong store wise economics & limited overheard, Return on Capital Employed (RoCE) is on average >20% in the last 2 years

Competitor Profile

• MedPlus competes with the likes of Apollo Pharmacy, Wellness Forever (also filed draft papers) and PharmEasy (although e-pharmacies derive a large % of revenue from other operations)
• Apollo Pharmacy is the leader in the space, across revenues & number of stores (~4000+), followed by MedPlus (~2000+) and Wellness Forever (223), although on a revenue / ebitda per store basis, MedPlus and Wellness perform better (inclusion of FMCG products)
• Key differentiating aspect between MedPlus and Wellness is a higher portfolio mix of FMCG products (for Wellness, 45%) coupled with vastly bigger sized stores, with MedPlus focusing more on greater store count, via optimal mix (~20% sales through FMCG products)

Nice! Final thoughts? Future plans, IPO Details, Use of Proceeds? 🧐

• India’s retail-pharmacy market is dominated by unorganised stores, with individual outfits accounting for ~89% of the market, followed by organised retail (~8.5% share) and online pharmacies (~3% share)
• The company is strategizing and gearing for the shift from unorganised to organised, via increased store count, greater control of production, and introduction of bespoke private label products (greater margin accretive)
• MedPlus is raising INR 1400 crores (opened on 13/12), through a fresh issue of shares worth INR 600 crore (growth capital for the company) and an offer for sale of shares worth INR 798 crores (sale by existing shareholders)
• At the higher end of the price band (INR 796), the company is valued at ~44x EV / EBITDA and ~3.1x EV / Sales for FY 21 (lack of local listed players makes it difficult to peg against)
• It’s all about scale, with new store additions, introduction of private label products, improved portfolio mix towards FMCG products and strong control over working capital / inventory management key to strong future operating performance

Keep a track? (Way too many to keep a track right?! We agree)

What else caught our eye? 👀

Some not so good news about Omicron

• The Omicron variant of the Covid-19 virus will spread rapidly in India, according to a forecast by Juliet Pulliam, director of the South African DSI-NSF Centre for Excellence in Epidemiological Modelling and Analysis.
• The virus is infecting people who had a prior infection at a much higher rate than previous variants seen.
• She also added that it would be wise to prepare for a worst-case scenario in terms of hospital planning.

Adani takes over Indian travel

• Adani Enterprises paid ₹1,103 crore to AAI for taking over airport assets at Ahmedabad, Mangaluru and Lucknow
• Under the National Monetisation Pipeline (NMP), 25 airports have been put for asset monetization over the years 2022 to 2025
• The Adani Group had forayed into the airport’s sector in 2019.

Jhunjhunwala may take off first

• Rakesh Jhunjhunwala’s newest airline Akasa may get its air operator’s permit (AOP) as early as April.
• They will be following an ultra-low-cost model, and has placed an order for 72 Boeing 737 Max Planes
• However, Jet Airways might not get its AOP in the coming six months

Book Building Process

The process of deciding the issue price for an IPO based on the prices bid by investors. The issue price will be closer to the upper end of the price band if investors have shown strong interest in the IPO and bid high. Otherwise, it will be closer to the lower end of the band.