9/27/2017 Mercury Reader

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Credit Suisse to look for strategic buyers and buyout funds for a controlling
stake in the Hyderabad-based company; promoters expect a valuation of about
Rs 2,700 crore `

The founder and CEO of India's second-largest retail pharmacy chain MedPlus
Health Services Madhukar Gangadi, along with a clutch of private equity
investors in the company, have put it up for sale.

Investment bank Credit Suisse has been appointed to look for strategic buyers
and buyout funds which can acquire a controlling 5174% stake in the
Hyderabad-headquartered chain. With revenues of . 1,200-1,300 crore, investors
and ` promoters are expecting a significant premium of two times sales, valuing
the company at about ` . 2,700 crore, said three persons with direct knowledge
of the matter.

MedPlus was earlier looking to raise fresh capital but now the mandate has
changed to a potential outright sale, one of the persons mentioned above said,
adding domestic players and buyout funds have already been approached.

In 2011, private equity investors Mount Kellett Capital Management, TVS

Capital and India Venture Advisors bought 51% stake in the company for ` . 410
crore ($90 million) from Bahrain-based Arcapita Bank. The remaining stake is
held by promoter Madhukar Gangadi and family. Going by this, the three
private equity investors in the company are expected to make more than three
times their investment made in 2011.

Need for Pan-India Presence

Started in 2006, MedPlus has about 1,250 retail pharmacy outlets in more than
12 states. The company is, however, seen as a predominantly South-India based
company and needs to have a pan-India presence like its rival Apollo. It plans to
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have 10,000 stores by 2020, and hence, is looking at bringing in a strategic or

big global investor with deeper pockets to fund its expansion plans.

Apollo Pharmacy, a subsidiary of Apollo Hospitals Enterprise Ltd, is the market

leader in the retail pharmacy segment, with about 2,171 stores as on June 30
2015, growing at a 37% CAGR. Its FY15 revenues were ` . 1,772 crore and
EBITDA ` . 54 crore.

“Investors want to exit. There will be some primary issuance of equity as well.
After this, the promoter's stake will come down to about 26%,“ another person
aware of the developments said.

Analysts feel even though PE in vestors are expecting two times sales to justify
their returns, valuations of 1-1.5 times sales seem more likely. “Typically , in this
business, the average capex per store is around ` . 25-30 lakh; could be more in
metros. Initially , the average store does around 40-50 lakh annum which in
mature stores exceeds ` .1 crore annum. Historically , most analysts have been
comfortable valuing the Apollo Pharmacy business at around 1.25-1.5 (x)
revenues,“ said Navroz Mahudawala, founder of Candle Partners, a
Mumbaibased boutique investment bank.

“The company management has decided not to respond to queries,“ the

company spokesperson said in an emailed response to queries from ET.
Gangadi too did not want to respond.

Restrictive FDI Laws

Medplus is a multi-brand pharmacy retail company and will attract the existing
restrictive FDI laws.However, experts say most multibrand companies in India
have managed to get FDI dollar PE investments in India through a dual
company structure which is “FDI compliant“. The business is typically split
into 2 entities -a frontend company which signs all the frontend store leases,
has in-store employees and pays lease rentals, and another backend company
which does the main business of sourcing and selling.

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All major costs, including key employee costs, are in the backend company. The
backend company also carries the inventory. Typically, the front-end company
retains a very small mark-up and all accounts are maintained in such a way that
both entities are perceived as independent. Most PEs, or global players, have
invested through this route; a structure blessed by the Big 4 firms.

`Deal Started Again'

“The company has already sought clarification from the government and after
being assured, the deal has started again,“ another person involved in the deal
said.

Helped by the growing healthcare needs and spends in the country, the retail
pharmacy industry has been growing well in the last decade. With increasing
number of organised players entering the market, the mom & pop stores are
facing tough competition.

However, unorganised retail continues to dominate the market with 90%

presence. Some of the new-age players have also started online portals to sell
medicines and that has changed the dynamics of the . 80,000-crore industry.
Organised ` . 80,000retail is just 5% of the total ` crore market in India.

Changing Dynamics

“Organised retail in pharmacy sector is still at a nascent stage. There is a tough

competition from the `Mom & Pop' stores that dominate around 90% of the
market. Moreover, there are now multiple online channels that are changing
the dynamics of the industry,“ said Rana Mehta, executive director -Healthcare
of PricewaterhouseCoopers India.

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