MedPlus Health Services Ltd (MEDPLUS) Q3 FY23 Earnings Concall Transcript

MedPlus Health Services Ltd (NSE:MEDPLUS) Q3 FY23 Earnings Concall dated Feb. 06, 2023.

Corporate Participants:

Prasad Reddy Battinapatla — Assistant Financial Controller

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Sujit Kumar Mahato — Chief Financial Officer

Chetan Dikshit — Chief Strategy Officer

Analysts:

Aashita Jain — Nuvama Group — Analyst

Avnish Khara — VT Capital — Analyst

Bino Pathiparampil — InCred Capital — Analyst

Prakash Agarwal — Axis Capital — Analyst

Sayantan Maji — Credit Suisse — Analyst

Kunal Randeria — Nuvama — Analyst

Saion Mukherjee — Nomura — Analyst

Utkarsh Maheshwari — Reliance General Insurance — Analyst

Amit Kadam — Canara Robeco Mutual Fund — Analyst

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Presentation:

Operator

Ladies and gentlemen, good evening, and a warm welcome to the MedPlus Health Services Limited Q3 FY ’23 Earnings Conference Call. [Operator Instructions] 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, Prasad.

Prasad Reddy Battinapatla — Assistant Financial Controller

Thank you, Sangvi. Good evening, everyone. On behalf of MedPlus, it’s my utmost pleasure to welcome you all to the MedPlus Q3 earnings conference to discuss the financial results of MedPlus for the third quarter of financial year 2023, which was announced on February 3, 2023. We have with us today the senior management team represented by Mr. Madhukar Reddy Gangadi, CEO and MD; 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 maybe forward looking in nature and may involve risks and uncertainties. Please note the disclaimer mentioning these risks and uncertainties on Slide 1 of the investor presentation shared with all of you earlier. Documents relating to our financial performance have been circulated earlier, and these have also been posted on our corporate website. Please note that we have uploaded the revised presentation to the stock exchanges today, including correction of few typos on Page number 8 and 21.

I would now hand over the call to Mr. Madhukar for his opening comments. Thank you, and over to you, Madhukar.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you, Prasad. Good evening, everyone. At MedPlus today, we are over 21,000 colleagues. I would like to thank my team for their [Technical Issues] and hard work that goes into providing the vital service to our customers. As on December 31, we cater to the health care and household needs of neighbors in 497 cities across seven states through our network of 3,557 pharmacy stores. We have now expanded into 43 [Technical Issues] during the current quarter.

We are continuing with our store expansion program. We have added 1,080 stores in the last 12 months, that’s net stores. In Q3, we opened 246 stores, and the highest additions were in Tamil Nadu and Maharashtra, 65 and 58 respectively. In Q3, 58% of our store openings have been in Tier 2 cities and beyond. We have 1,523 of our 3,557 stores in Tier 2 cities and beyond. These are good markets from a store economics standpoint, and MedPlus continues to expand in these markets because of the maturity of its operations and supply chain capability. There were 17 closures in Q3 versus 14 in Q2. And so, overall, we have had net additions of 229 in Q3 versus 348 [Technical Issues]. For the last 12 months, net additions have been 1,080.

To give you an idea of the way our network [Technical Issues]. 32% of all our stores are less than a year, 17% are between one and two years, and 51% of the stores are two years and older. So, we ended Q3 with 49% of our stores in the less than two years each bracket. In comparison for Q3 FY ’22, 36% of our stores were less than two-year old. All stores in the below two-year age bracket are still in the ramp-up phase and, from a financial point, they are a drag on net operating EBITDA. However, as a nature, we expect these stores to contribute to gross profits.

We closely track the time to [Technical Issues] for a new store. The stores opened between July ’21 and June ’22, 69% of the stores achieved breakeven within six months of operations. To give you a sense of how rapid the ramp-up to breakeven is at the six-month and beyond level, 79% of stores then breakeven in the seventh month. So more than 10% breakeven in just one month after that. At the end of the quarter, our network has now grown to 3,557 stores with 2 million plus square foot compared to 2,477 stores and 1.5 million square foot at the end of December 2021. The average store size is 558 square foot. To give you a sense of spread in store sizes, we have 2,474 stores less than 600 square foot and 1,083 that are greater than 600 square foot.

With our scale, we are now better poised to increase our overall share of revenue from the private label side. And in what [Phonetic] scale does this allows us to add new products for which we did not have the minimum order quantity earlier, and scale also allows us to establish a brand, which makes all the products much more easier for customers to accept. Our private label range is intended to provide quality products at affordable time, that does today has over 900 curated products across pharma and non-pharma. Private label sales at the end of last quarter were 13.8% of our overall revenue. Overall, the trajectory of increasing share of our private labels in our customer projects [Indecipherable] continues. Within private label, our pharma range has also been gaining share. 8.6% of pharmacy revenues is from private label pharma.

Our increasing presence in Tier 2 cities and beyond is reflecting in our revenue mix. Sales from Tier 2 cities and beyond contributes to 33% of our pharmacy revenues this quarter. This is up from 29% in Q3 of last quarter. We continue to extend our range of [Indecipherable] for our online orders. This complements with our critical stores.

MedPlus will continue to focus on increasing the coverage of our two-hour delivery offering. Store pickups as a share of online orders continue to maintain a higher share than home delivery, reflective of the convenience and accessibility of our store network. Our strategy on online remains unchanged. We have not spent heavily to acquire customers online. In fact, in the last quarter, we have spent — we have hardly spent — we have not spent it all, I would say, on acquisition of online customers, and we continue to maintain our omnichannel as a profitable channel.

The way we think of our omnichannel is, when we set up a store and we enter a neighborhood, we are automatically drawing the 100 customers per day kind of footfall. And all of these people are immediately — we let all these customers know that we also have the same service online. And we let the customers according to their convenience choose to either go online, off-line or, in a lot of cases, go between both. We don’t see — and given that we are distributing the products only in that particular neighborhood, for us, every single transaction becomes a profitable transaction. Neither is there cost of acquisition, nor is there extra cost of — extra discounting issue here, not to be spent too much on the delivery side. So for us, while we believe that online is a very critical part of our overall selling process out there, we think that the customers will pick it based on their convenience and there’s actually no need to spend a lot of money to acquire customers, or at least to tempt customers into going online.

So anyway, with that, I will actually let our CFO, Sujit, rest of the work [Phonetic] to give you an update on our numbers.

Sujit Kumar Mahato — Chief Financial Officer

Thank you, Madhukar. Now, on our quarter’s performance, our consolidated revenue was INR11,903 million, growth of 27.5% year-on-year and 6.2% quarter-on-quarter. Our consolidated operating EBITDA stood at INR371 million, representing 3.1%. This is a 1.2% year-on-year and 31% quarter-on-quarter improvement. Around 99% of our revenue is from our pharmacy operations. The pharmacy operating EBITDA was INR406 million, representing 3.5%.

On our store performance, I would like to update on stores older than 12 months. [Technical Issues] from these stores in Q3 was INR9,895 million or 85% of our total pharmacy revenue. These stores had a store level EBITDA margin of 10%. The store level operating ROTE of these stores stood at 60.8%. Award year on the store level EBITDA margin by age, while stores greater than 12 months had a margin of 10%, for stores in the greater than 24-month category, this was 10.6% and for stores in the 13-month to 24-month category are 7.2%. If we allocated long store-related costs, then the operating EBITDA of stores greater than 12 months would be INR490 million, which translates to a margin of 4.9%.

On working capital, our net working capital for quarter three was 63 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 Q3, the inventory level of our first new stores were 109 days. In comparison, for our stores older than 12 months, the inventory was 38 days.

On our segmental data, I would like to add an important note. In Page 17 of our earnings update, we have presented the business segments, which are different from the regulatory files. For example, opticals have been grouped under others in the presentation, whereas in the regulatory filings, opticals is grouped under retail. We hope this information will be useful to you.

Now I request Chetan to update us on the diagnostics business. Over to you, Chetan.

Chetan Dikshit — Chief Strategy Officer

Thanks, Sujit. Good afternoon, everyone. I’m Chetan Dikshit, and I’m the Chief Strategy Officer of MedPlus. We currently have three full service diagnostic centers in Hyderabad, and just over 100 collection centers. Any member can avail the full range of radiology tests, example MRI CT and pathology tests at 75% discount to MRP.

To recap, there are four differences in our model versus our typical tier. Firstly, we do not operate via franchisees, and so there is no revenue sharing. Secondly, our collection centers are housed within our pharmacies, so there are only marginal incremental establishment costs at a consolidated level. Thirdly, our plan is designed such that we do not spend — we do not depend on the referral network for patient walk-ins. Lastly, we expect our centers to achieve scale faster than peers. As an indication, the capacity utilization for our advanced radiology machines in six months of operations is nearly twice that of a typical new center in the marketplace. Up to December 31, we have sold 68,000 plans with 119,000 underlying lives. In October, November and December, we sold 250, 281 and 275 plans per day respectively.

That’s our update on diagnostics. Handing back to Madhukar.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you, Chetan. So, what can you expect from MedPlus going forward? We operate in attractive pharmacy and that’s poised for growth on the back of our store expansion. Our cluster-based network enables profitable omnichannel service, and the scale allows a larger share of our private label basket. Our diagnostic product has proven that we can use our pharmacy stores to cross-sell other healthcare solutions, and we’ll explore other related avenues that can add incremental sales without increasing costs.

With this, I’d like to open up your line for questions.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] First question is from the line of Aashita Jain from Nuvama Group. Please go ahead.

Aashita Jain — Nuvama Group — Analyst

Good evening. First question is on the ramp-up of new stores. About 69% of your stores achieve breakeven within six months versus 75%, 80% seen in the past. It seems like your new stores are taking longer to breakeven. Is it to do more with the opening of new stores in Tier 2, Tier 3 cities or is that the competition in general? What is your take on the current competitive scenario?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

As I said, 69% open in the — or breakeven in six months. No, I don’t think opening them in Tier 2 is actually a cause for slowing down or even [Indecipherable] for whatever, I don’t think there’s any difference out there. When stores in Tier 2, the top-line for them is slightly lower. Typically, their rent and other costs are also much lower, and their share of private label, which means we’re more profitable is Tier 2 is actually higher. So they end up breaking even at the same time. But there is some variation once in a while, 67% to 75% at sometimes goes [Indecipherable]. It is just — this is not something which we’re too concerned about.

And as I said in my call, if you look at the — when we look at the seventh month, the overall breakeven number actually jumps to 79%, so yes. So for us, breakeven is exactly meeting all the operational expense of the store to the last thing. And sometimes there are a few stores which fall short by 500 or over 500. So I won’t stress too much about that actual number.

Aashita Jain — Nuvama Group — Analyst

Sure. This is very helpful. And secondly, on the expansion plan, any new states that you are targeting apart from the one already disclosed on your expansion plans in terms of number of growth for FY ’24 and ’25?

Sujit Kumar Mahato — Chief Financial Officer

Yeah, we are actually going to be looking at Kerala, Chhattisgarh and Madhya Pradesh. We’ll be choosing stores in Indore, Raipur and Cochin actually. This will either happen this quarter, will probably end up opening some stores this quarter or definitely the next quarter after that. But this year, definitely we will be looking at, at least three new states to kind of start operations, take the store count starting with maybe 20 or 30 to 50 or 60 later, and get our feet letting the water out there. And once we are comfortable, then we’ll start expanding. That’s the plan.

Aashita Jain — Nuvama Group — Analyst

And your expansion plans in terms of number of stores remains intact, 1,000 stores for ’24 and ’25?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

More or less, they will — at least 1,000 stores, I would say, yeah, fall in line with our current numbers.

Aashita Jain — Nuvama Group — Analyst

Okay. And just lastly, on your discount, while your blended discounts have remained the same, is there a change is the discounting bucket in any of the regions or the ranges are same — order value?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

More or less the same. We have not seen any big difference in the — about 1,000 or below 1,000 kind of bill size — number of bills. It is at 16 — it is more within 16.5 to 17 kind of percentage, but not a significant increase, I would say. We haven’t changed the discount plan, yeah.

Aashita Jain — Nuvama Group — Analyst

Thank you so much, and congratulations on the good chat.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Avnish Khara from VT Capital. Please go ahead.

Avnish Khara — VT Capital — Analyst

Hello. Am I audible?

Operator

Yes, you are.

Avnish Khara — VT Capital — Analyst

Thank you for taking my question. So if I look at the contribution from lower tier city, over the past six to eight quarters, it’s been slowly inching up. So what I wanted to understand is, what is the — are there any difference in the store economics in the metro cities versus the lower tiers and we’re also going to be — that number is going to continuously be going up? So, I also wanted to gauge what is the cycle of your consumers in lower tiers versus a metro city and what our strategy is for those regions?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

If I understood you right, you’re asking if there’s any particular reason for us to actually go to Tier 2 and Tier 3, right?

Avnish Khara — VT Capital — Analyst

Correct, correct.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

It is just to see, we have been in the seven states, at least in three or four states for quite a while. We’re fully established in AP, Telangana, Karnataka, Tamil Nadu and West Bengal, where we have our main warehouse in the capital cities of these states. And I wouldn’t say we have saturated, but we have had — we have a fairly good presence in each of these cities. Hyderabad, Bangalore and Chennai, we’ve got over 400 stores, and Kolkata we are now nearing 300. So, to sweat the asset out there, which is our warehouse and the supply chain out there, it’s right for us to actually go deeper into Tier 2, Tier 3 and Tier 4, which is what we’re doing. Because once the setting up of the warehouse is fast, once that is amortized then you would want to basically do as much as possible in the state, and that’s the reason why we are going deeper into the Tier 2 and Tier 3.

Another reason is, we started the company when we said that there’s a lot of fake drugs in the market, 30% of all fake drugs in the market are actually fake is what we — what I had read in the WHO report when we actually started the company. We think the value proposition which MedPlus has of providing generic medicines and also providing at great price driven by us, of course, is even more — that value proposition is even more relevant in a small town where there are a lot of small operators, they don’t give as much discounts. And there certainly, I would say, is more prevalence of non-standard or non-quality kind of drugs. So, on both — our main mission of actually doing this, the value proposition resonating with the local public and to making the best use of our asset, I think we are best — we would be best served by putting in as many stores as possible to Tier 2 and Tier 3.

Now, are there economics same? While the top line is slightly lower than a metro city in a small town, given that the rents and staff costs and the private label mix are all available to us in a small town, but EBITDA actually in a small term is much better.

Avnish Khara — VT Capital — Analyst

Right. And also, I just wanted to understand that, is it — from your past experience, do you think that in the lower tier city, it’s more easy to push a private label product because they might be a little lower priced than the branded ones?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Our private label is not necessarily lower priced. It is almost on the same price. No, it is easier mostly because a lot of people do come for OTC kind of drugs, and a lot of the OTC kind of medication is sold. A lot of the medications sell in private label obviously. No, it is not about the price as much as the type of customer who walks into a store in a smaller town.

Avnish Khara — VT Capital — Analyst

Right. And I’ll just squeeze in one last one. So you had amalgamated MHS pharma this quarter. So what exactly happened over there? Could you just throw some light on that?

Chetan Dikshit — Chief Strategy Officer

I’ll explain that. Thank you for asking this question. The amalgamation was part of an older transaction. In FY ’20, the company had disclosed a BT arrangement between MHS. And through a strong sale, the company had acquired the entire business of MHL. It is now only being formally amalgamated. So there is net impact. There is a table in the books of MedPlus of INR17.5 crores to MHS, which will be cut-off against this amalgamation. So, let’s say, at a group level, MedPlus would have INR17.5 crores of extra cash.

Avnish Khara — VT Capital — Analyst

Right. Okay. Thank you so much. That’s it from my side.

Operator

Thank you. The next question is from the line of Bino Pathiparampil from InCred Capital. Please go ahead.

Bino Pathiparampil — InCred Capital — Analyst

Hi. Good afternoon, and congrats on continued good performance. Just a few questions on the diagnostic side. The revenue or the cash that you get by selling this membership, how is it recognized? Is it right away recognized as revenue over a period of year or so?

Chetan Dikshit — Chief Strategy Officer

Hi. This is Chetan. I’ll just take it up. So, here’s what we don’t do. When we sell a plan and the cash comes into our system, we don’t recognize it as revenue. So that’s probably the first part, I would like to say. The second is, the specifics of your question. But how do we — how does it move from the balance sheet into revenue recognition? Well, there are really two buckets to it. There’s the 75% bucket and a 75% bucket — 25% and 75% bucket. The 25% bucket gets recognized on the first instance of use of the plan. The balance 75% of the bucket is then amortized over the course of one year. You see, the membership plan is a one-year plan. Yeah, so it will basically get recognized as a deferred revenue.

Bino Pathiparampil — InCred Capital — Analyst

Got it. Got it. Okay, great. Thank you. Thank you very much.

Operator

Thank you. The next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Prakash Agarwal — Axis Capital — Analyst

Yeah, hi. Good evening. Just one question on the discounting. I don’t know if you’ve already discussed, but how has the discounting been in the last few quarters? Has it improved, the pricing improved or the discount remain very high? I hear that there has been some month-end kind of discount which increases and then it fades away to 20%. But if you could just share some thoughts on the competitive landscape that you are seeing?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Yeah. For us, of course, it’s a standard discount which we operate through the year. If we change it, then we change it for goods out there in that state. As you know, we have a 10% discount for all bills under INR1,000 and 20% above INR1,000. For us, it doesn’t really change much. So, the only way the overall discount can change for us is if a higher portion of people are buying for bill size above INR1,000. And more or less, it remains the same for us across all the states. In some states, of course, in West Bengal, it’s slightly higher, whereas in Telangana, it’s slightly lower, the bill sizes are slight lower.

But on the competition side, we see that competition is — in the game of, I would say, offering a discount which is not really viable, just 25% discount in the initial stage, so which means they can only offer it for a certain amount of time or for a certain number of times. So either we go on saying that okay, we’ll get it to you on the first three bills, or sometimes they come in and do a flash sale where they say, okay, we’ll do it in the first year, second year, third year. It is all very great. Our only problem is, the amount of money required to communicate this kind of message is actually more expensive than the discount itself, and it often gets misused most of the time. So we don’t see much benefit, I would say, of doing that. So, as is more of an everyday low price, we continually make the offer better and better for the customers. But we have been kind of steady at the same number for a while now, Prakash.

Prakash Agarwal — Axis Capital — Analyst

So what I understand is, you’re saying competition still is at 25%. There is not much of a breather there. And despite that, we are growing 25% plus.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

The question is, is the competition still doing 25%? Yes, absolutely. In fact, we sometimes even — I myself get text messages of various competitors saying that they are willing to offer 30% once in a while. So, yeah, I don’t think they’re really let up on that.

Prakash Agarwal — Axis Capital — Analyst

Okay. And some color on the growth outlook and margin outlook because this is the first time where your store addition has been a little softer, which in right spirit, it has also had been improving some EBIT and EBITDA. So, would this strategy be followed? And would it be at the expense of growth? Or what is the right balance you want to follow from the next few quarters and years?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So, Prakash, if you look at our last quarter, it was around 348, this quarter was around 248. So, once in a while, these numbers go up and down. The plan is to grow at the rate of anywhere between 250 to 300 stores per quarter, could go up or down a little bit. A lot of times, this quarter, I think we were affected a little bit by the rate at which the license scheme is because of Dussehra and Diwali that is not coming in time in some states. So, there is a [Indecipherable] inspection, sometimes the inspection itself takes a while, and then the license is issued. So, sometimes it could take a while. That’s the only reason. We are not calibrating that right now. We plan to remain steady between the 1,000 to 1,200 kind of number for the year. So that’s only the plan for next year.

And on the revenue side, I think we can basically say anywhere from 20% to 25% is what we’re thinking will be the our revenue estimate for the next year or over this year.

Prakash Agarwal — Axis Capital — Analyst

Okay. Fair enough. And lastly, in terms of using the cash, is there a thought of buying out some of the smaller chains? Are there actually some in the market? If you could give some color there?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

We come across some chains, but we have never found anyone which is price like honestly, given that we are able to open mostly at the rate of around 100 stores a month. And given that the next largest chain is only around 300 stores, we really don’t see too much benefit of paying a big premium for that. So we have kind of shied away from that, given that our ability to open stores is pretty good.

Prakash Agarwal — Axis Capital — Analyst

Okay. And one more question, if I may, on the diagnostics side. So, earlier thought was to have the pilot and still doing okay, but is there any key takeaway in terms of next six, 12 months plan of adding more pilot projects itself in Hyderabad and how to take it forward?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Okay. So it remains a pilot. It is now going to go beyond Hyderabad. The pilot, of course, was an integrated radiology and a backlog kind of service. So that will always remain only in Hyderabad for now at least. The plan is to open 12 stores — 12 diagnostic centers, four of which will be large ones with MRI and CT and eight could be smaller ones. So that continues. The plan is to actually — so we need to see a certain number of subscriptions in our city before we can take call on opening in other places. But then, of course, that is going to be — I don’t expect us to make the decision this quarter or next quarter on that as of now.

Prakash Agarwal — Axis Capital — Analyst

Okay. And of the large four ones, three are already open or two are already open?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Right now, there are three large centers open. And I think we have at least two smaller ones open out there, currently running.

Prakash Agarwal — Axis Capital — Analyst

Okay. So you have five and your plan is to take it to 10?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Yeah, the plan is 12 overall, four plus eight.

Prakash Agarwal — Axis Capital — Analyst

Okay, great. Thank you, and all the best.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you, Prakash.

Operator

Thank you. The next question is from the line of Sayantan Maji from Credit Suisse. Please go ahead.

Sayantan Maji — Credit Suisse — Analyst

Hi. Yeah, thank you for taking the question. So my first question is on other expenses which has remained flat quarter-on-quarter. And I believe that the key components of other expenses are packing and forwarding charges, then debit card commission charges and electricity charges which are mostly variable in nature. So, what has caused this other expenses run rate to be the same quarter-on-quarter? And do you expect it to increase going ahead?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

No, I don’t see any reason to think that will actually change too much out there. While part of it could be variable, not all of it is variable out there. For us, the moving expenses don’t really change if we add, let’s say, five stores or 10 stores in the same territory and all. The credit card, that is, of course, are a function of the number of bills which were there, not a significant change, it’s a small percentage overall. So I don’t see any difference out there.

Sayantan Maji — Credit Suisse — Analyst

Okay. Okay. And my second question is on the store addition run rate. So we continue to maintain a guidance of 1,000 to 1,200 stores per year. So, while we are entering new states, do you see enough clusters for growth in key states of, say, Andhra Pradesh, Telangana, Tamil Nadu, Karnataka as well where we see sufficient headroom in Tier 2, Tier 3 towns in these states?

Sujit Kumar Mahato — Chief Financial Officer

Yeah. See, in three of our current states, we are very big in the main cities, and Tier 2 and Tier 3 is completely open for us even in those states. In the other states, they’re not even big in the Tier 1. For instance, in West Bengal, except for Kolkata, and even there, we only have slightly under 300 stores compared to the 400-plus stores in Bangalore, Chennai and Hyderabad. I think there is room even for growth in those cities. In almost all of Maharashtra, we are not there at the full potential even for the larger cities, forget about the Tier 2, Tier 3. So, answer to your question, is there enough scope for growth in the seven states? Absolutely. We’re only seeding three new states just to make sure — or not just to make sure, it’s just a logical extension, I would say, of our overall growth. We’re growing in contiguous states, leveraging the warehouses in the states before. We just want to add a few — figure out how the market is to get the supply chain all set up and then grow rapidly after that. So for us, it is not for lack of opportunity in the current states that is going outside.

Sayantan Maji — Credit Suisse — Analyst

Okay. So — and what would be your key focus to succeed in Maharashtra, apart from, say, Mumbai and Pune?

Sujit Kumar Mahato — Chief Financial Officer

For us, we look at it as two different regions. One is the overall Vidarbha region, and then there’s the Marathwada region. And then there is a region around Bombay and all — Bombay and Pune. So, in the Vidarbha region, we are pretty strong in Nagpur. We are now actually extending rapidly into Amravati, Akola and a bunch of other districts around that. And similarly, around Bombay, we have a bunch of new stores coming up. So these two — apart from these two, then there are districts around Pune. Bombay, of course, being a place where we expect that we will go very, very cautiously with slightly smaller stores and all. Yeah, there’s a lot of different areas of growth for us in Maharashtra.

Sayantan Maji — Credit Suisse — Analyst

Got it. And so, what was the average store size, I missed that, for this quarter?

Sujit Kumar Mahato — Chief Financial Officer

558.

Sayantan Maji — Credit Suisse — Analyst

558. And basically, the declining trend is mainly due to smaller stores coming up in Maharashtra?

Sujit Kumar Mahato — Chief Financial Officer

Smaller not just in Maharashtra, but also in the smaller towns. We don’t necessarily need a very large store in a very small town of 50,000 kind of population. A lot of times those locations are also not really available when we go into our Tier 2, Tier 3 kind of locations.

Sayantan Maji — Credit Suisse — Analyst

Okay. Got it. And my last question is on diagnostics. So, Chetan, you mentioned that — size are witnessing a faster scale up in operations compared to peers. So, one, what would be the primary reason for that? And basically a related question is, how much have we spent so far? I remember that you had allocated INR90 crores for this pilot. So how much have we spent? And what would be the spend, say, in the next one or two quarters?

Chetan Dikshit — Chief Strategy Officer

All right. Thanks. So, first, on the — why our utilization rates are more? The prices are incomparable. I mean, especially at the high-end radiology machines like MRI CT, 75% discount when we say that it’s to the comparable diagnostic centers. But if you compare it to the rates for these machines within the hospital, this is even more stark. So, the price is driving the utilization. In all our three centers, we have right up to midnight, and we do have patients coming in even after 9 PM. So, price and hours are two contributors to higher utilization of an machines.

The next question from the upside was on…

Sayantan Maji — Credit Suisse — Analyst

How much have we spent?

Chetan Dikshit — Chief Strategy Officer

Our budgeted allocation for the financial year, April to March, was INR85 crores to INR90 crores, and we are pretty much on that track. I’ll just check with Sujit if he wants to add anything further on the capex side.

Sujit Kumar Mahato — Chief Financial Officer

No, that’s it. Sayantan, we’re fine. I mean, unless you have a more detailed follow-up on this question?

Sayantan Maji — Credit Suisse — Analyst

So this INR85 crores to INR90 crores is only for FY ’23?

Chetan Dikshit — Chief Strategy Officer

Yes. That was our guidance for the financial year.

Sayantan Maji — Credit Suisse — Analyst

Only for FY ’23. So FY ’24 could have an additional spend on top of this?

Chetan Dikshit — Chief Strategy Officer

Yeah. Really, as Madhukar said, what we have is an outlay for the project in Hyderabad. So there really is no material capex that is intended for FY ’24. But within centers, we may — for example, if we have two ultra towns or three ultra towns, we may go to a fourth one. So think about more as regular rather than capex, which is going to fuel new centers or expand the network.

Sayantan Maji — Credit Suisse — Analyst

Okay. Got it. Sure, that clarifies. Okay. Thank you so much for answering questions. I’ll join the queue.

Operator

Thank you. The next question is from the line of Kunal Randeria from Nuvama. Please go ahead.

Kunal Randeria — Nuvama — Analyst

Hi. Good evening. My first question is, in the last maybe year, year-and-a-half, you added 1,000-plus stores. So, I mean, have you — maybe because of the scale and size now, have you started to see some procurement benefits?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

See, for a while now, we’ve been buying directly from the companies. While there is still a small set of companies for whom we end up actually purchasing to distributors and to a very, very small set, and that has been — in those companies, we are approaching directly now and we will end up purchasing halving 10% in the next two quarters or so. I don’t think there’s going to be a significant procurement benefit as far as buying from companies who is not going to be concerned. But that said, the scale is going to help us benefit on the private label purchase this one. And also, getting in new products that were otherwise not available to us because we were not able to meet the minimum order quantity for purchase of that product. So those are all going to come in with scale, more than, I would say, the purchases benefit.

Going forward, as we continue to work closer to — more closely with companies, we expect with sharing of data, and we expect that looking at continuing on the new launches and all, we will be able to get some kind of feel out there. We already do get a significant portion on that. But we expect to benefit as we go forward. But on a direct purchase, I really don’t see too much happening.

Kunal Randeria — Nuvama — Analyst

Right. Okay. So I mean, then would it be fair to understand that, let’s say, maybe double in size in the next three years? Procurement cost for, let’s say, the company remains the same, despite of scale and size [Technical Issues] or does it get better, maybe got a couple of percent more discount because of the size?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So I’m sorry, it is not — the question was not very clear. The audio is not sound very well. So I understand…

Operator

If you’re speaking to your phone, we request you to speak to the handset.

Kunal Randeria — Nuvama — Analyst

Speaking for handset only. I hope this is clearer. So Madhukar, what I wanted to say was asked was, so maybe as you increase your size and scale, will the same company from which you are buying, do they offer slightly higher discounts because of the size?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

No, I don’t think anyone has any reason to offer us more because of that, because to be quite honest, we don’t really influence the overall sales out there, right? It is the doctors who have to write the subscriptions, when companies typically end up spending their marketing money out there. But on the supply chain side, when they actually want to launch a product across the country, let’s say they want to launch it across 4,000 stores in seven states, we will be the person who they will approach. And for that, we will definitely end up getting slightly better margins than the overall thing.

So, in terms of managing the expiries, in terms of managing the supply chain, in terms of making sure that their products are launched across uniformly and all, I think we would be able to do a better job as we are bigger and bigger. And we will definitely be able to get a slight benefit from those companies. That’s one. Second, as you may have noticed from our presentation, today 13.7% of our overall sales is from private label. Now, here we can definitely make — as the scale continues to grow, this is where we continue to benefit from. So while the margins are good right now on these products, I see no reason why they can’t be better as we continue to increase ourselves.

Kunal Randeria — Nuvama — Analyst

Okay. Perfect. My second question, I think one of the comments that you made was some of the discounts given by online clearly unsustainable. So while I take your point, one of the online players have maybe stated the intention of handling around 2,000 pharmacies across India. So, do you believe a discount would worsen from you?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So what is the question? I know one of them is doing 2,000 stores, but — what is the question?

Kunal Randeria — Nuvama — Analyst

The question is, do you believe the discounting could maybe from 16.5%, do you think it could maybe go through 17%, 18%? Or you think this discount level is manageable?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

No, no. For us, I don’t think so. See, today, we are close to 3,700 odd stores as of now, or slightly more, we’re not even — it’s not as if we have taken the whole market, I don’t know how addition of another 2,000 stores is really going to affect the overall market. I don’t real expect with them coming in that, we have to suddenly change. I don’t think that’s going to be the case at all. As it is, I’m pretty sure whatever advantages we have on scale, they will also get the same, but whatever disadvantages or whatever cost there are in running stores, everyone is going to have them. I don’t really see anyone else being able to sustainably build up prices out there. And even if they did for a little while, we’re not too concerned because as far as we are concerned, there are two aspects to it. Every country in the world have at least two or three or four large players like US has got Walgreen, along with Walmart and all doing their own pharmacy and all that sort of stuff. So, there is the equivalent of superstore doing it, and also a large chain of pharmacies. And most of these countries will require more than one. As we have been saying over the last several quarters, it is us Apollo right now. I am pretty sure NetMeds and Tata 1mg and a couple of other guys may come in, at least — there will be at least four players kind of thing, if not for some more superstores also coming in and doing this.

So we fully expect they will come. I don’t think the market was completely upset just because one of the two years entered out there. I don’t think it will push us to do more discounting immediately. For us, given that what you’re looking at in the Indian market is, a shift from unorganized to organized. And given that organized is so small, even if one or two new players are going to enter, there is enough market share for us to gain from that organized side, and that’s what we’ll be focusing on. So as long as we are ahead of the other 85% of the market, which is there in the hands of mom and pop retailers, I don’t see any problem in continuing to actually expand the discount [Phonetic]. So short answer, are we going to expand the discount? I don’t think so.

Kunal Randeria — Nuvama — Analyst

Got it. Got it. And just one last one. You have around INR320 crores of cash lying on your books. You made a negative free cash of INR73 crores in the quarter. So I mean, to fund your expansion, do you think this is enough or maybe need to go for funding at some states?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Sujit, begin off.

Sujit Kumar Mahato — Chief Financial Officer

So, on the cash balance and cash in bank, the store expansion would continue in the same manner, and we would use this cash only for our store expansion, as I explained in the call earlier.

Kunal Randeria — Nuvama — Analyst

[Technical Issue] enough or maybe you will need to raise some more because you’re still investing diagnostics, right?

Sujit Kumar Mahato — Chief Financial Officer

Yeah. As on date, as you are aware, we are debt free. So we have a good headroom to require. So I think as of now, there’s no plan to take up any debt on the balance sheet. But as and when required, we will definitely consider.

Kunal Randeria — Nuvama — Analyst

Got it. Thank you.

Operator

Thank you. The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.

Saion Mukherjee — Nomura — Analyst

Hi. Thanks for taking my question. Sir, on the growth that you report for mature stores, just above 10%, is that something which is sort of in line with your expectation or slower than your expectations? And are there any geographical differences that in certain geographies this is faster than the other geographies or Tier 1 versus smaller cities? Any color you can give on the mature store growth rate?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

No, it is actually in line with what we actually got. We have been slightly lower than what we have thought at the beginning of the year last year. The competitive intensity has been fairly high, okay. But other than that, now it has kind of become stable. For us, we expect to grow at the rate of inflation on the old stores, and we also expect to take some market share from the local mom and pop retailers out there as we continue to play on the value proposition, which we have for our customers, grade prices, grade availability and guarantee. So not, I would say, completely in line with what we are thinking right now.

Is there a significant difference between small and large towns? No, not really. It will be a function of the number of stores we have in that area and the number of stores, and that’s all [Indecipherable]. Maybe a little bit of cannibalization in some of the larger cities where we set up for the first one month or so. For instance, if we have a store in the neighborhood, and we go and open a store which is 500 meters away or 700 meters away, all the people are coming to that store from that catchment, we’ll probably shift to the new store in the first month. But after that, then it kind of settles down. So nothing which is outside of what we expected.

Saion Mukherjee — Nomura — Analyst

Okay. And sir, similar question on the private label. I mean, on an average, numbers are going higher, is again there, something, how should we — and how is the dispersion like? I mean, across your clusters and towns that you operate, this 13.7%, is there a wide variation that you see across regions in India or it is more or less on average?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Smaller towns definitely have slightly more private label penetration out there. So, the nature of kind of customers who walk in and the value proposition of our private label non-pharma products resonates more sometimes with a smaller town guy. So we could possibly have slightly higher ones out there. The range though is most so the stores tend to be between — a little bit this way. Very few stores have less than 8%, 8.5% overall private label. There are some stores which are as high as 20%. But the average falls in the 12% to 14% kind of number.

Saion Mukherjee — Nomura — Analyst

Sir, you — I think, had guided for this number going up 100 basis points every year. So you continue to maintain that?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

On the overall, I don’t really see any problem at all. 100 basis points should be easy. On the pharmacy side, we’ll be able to go ahead and give your guidance maybe in the next quarter or so. On the pharma retail — on the pharma private label, in the whole 13.7% composition of devices, FMCG, non-medical products and medicines.

Saion Mukherjee — Nomura — Analyst

Right. Okay. Okay, sir. Thank you.

Operator

Thank you. The next question is from the line of Utkarsh Maheshwari from Reliance General Insurance. Please go ahead.

Utkarsh Maheshwari — Reliance General Insurance — Analyst

Good evening, sir. Hello?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Yeah. Good evening, yes.

Utkarsh Maheshwari — Reliance General Insurance — Analyst

Yes, sir. Just a housekeeping question. I mean, is there a possibility where you can share the average sales per day for the stores, which are like more than two years in operation which are like less than two years in operation?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Right now, I think we give you as much data as we can. It is a little bit more tougher for us to share everything out there. I think — but yes, I believe we are in line with other retail operators like we’re trying to stick to the pharmas which are currently in prevalence across the Indian retail markets.

Utkarsh Maheshwari — Reliance General Insurance — Analyst

Okay. And just to reconfirm one thing. I mean, as of now, I think the diagnostic is at INR90 crores of which we have planned, right? Nothing beyond that has been thought about, right? Because that was a pilot for the Hyderabad.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Absolutely. No further capex outside of the routine maintenance kind of stuff is planned for in the integrated path and radiology kind of centers in Hyderabad in the pilot as we started it.

Utkarsh Maheshwari — Reliance General Insurance — Analyst

So, I think, is there — I think the run rate of adding the new people has actually gone a little bit slow, I think, because I think we had to plan for 100,000 plus, right, as a plan or something of that sort? And we added something 25,000, 30,000 in the first month itself, and now we have 60, 70-odd. So, is the pressure is slow in this particular thing than new membership additions?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Not really. The addition of our — so we expect it to get all up to at least the majority of our 12 stores up and running. That has taken slightly longer than what we expected, probably be delayed by a month or so. I don’t see a big difference other than that.

Utkarsh Maheshwari — Reliance General Insurance — Analyst

And the number of — I mean, how many — what is the target for us in terms of number of members we look to enroll?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

The first number which we are kind of looking at is 100,000 numbers, then after that we will see depending on the pace of expansion of that number from 100,000, we’ll take a call on whether we plan to go to other states, yes.

Utkarsh Maheshwari — Reliance General Insurance — Analyst

Okay, sir. Thanks.

Operator

Thank you. The next question is from the line of Amt Madam from Canada Robe co Mutual Fund. Please go ahead.

Amit Kadam — Canara Robeco Mutual Fund — Analyst

Yeah, hi. Two questions. Sorry, I joined late. The gross margin, what was commentary that why there was a…

Operator

Sorry to interrupt you, sir. Sir, your voice is really feeble, if you can just speak up a bit?

Amit Kadam — Canara Robeco Mutual Fund — Analyst

I’ll try again. Is this audible now?

Operator

Yes, you may go ahead.

Amit Kadam — Canara Robeco Mutual Fund — Analyst

So, just as the initial commentary on the gross margin, sir. Madhukar sir, what is that particular commentary narrative that why gross margin improved sequentially? Was it lower discount or mix?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Sorry, is the question why is sequentially the number going up to us?

Amit Kadam — Canara Robeco Mutual Fund — Analyst

Yeah. Gross margin improved sequentially, so a reason for it.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

It is a private label mix. We have not really reduced the overall discount. The discount is being maintained. If anything, it has gone up slightly, I would say, by a traction out there, but it is mainly the mix of products. And maybe there’s possibly a slight betterment in the procurement side. But yeah, it is not to do with the reduction of this core.

Amit Kadam — Canara Robeco Mutual Fund — Analyst

Because private label, what I see is was 13.9% in Q2 FY ’23 which is 13.7% this time. So hence, I thought that sequentially that can’t be the reason for that particular 50 basis point of improvement when the mix or the private level is down 20 basis points sequentially.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Yeah. See, private label is also a broad basket of products out there with margins ranging anywhere from 30% to 90%, 95%. So it is not a one-to-one mapping of 1% being excited. It’s a kind of — it depends on exactly what we sold in private label, that’s one. Second, as I said, there would also be a small improvement in the procurement product. And third — and the other thing was that we also had a COVID loss earlier for [Indecipherable] which is no longer there this start. And then, we’ll also basically increase the overall margin slightly.

Amit Kadam — Canara Robeco Mutual Fund — Analyst

But sir, sequentially that won’t be the third one won’t be the reason?

Chetan Dikshit — Chief Strategy Officer

Sequentially like quarter two, quarter three year.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Yeah. See, we took a loss on inventory, which was already there, bought during COVID and not sold. There’s some small inventory that happened in the last quarter. And so, yeah, that could be one difference between Q2 and Q3.

Chetan Dikshit — Chief Strategy Officer

The reason — hi, this is Chetan. I just thought I’ll add to Madhukar’s question. If you look at Slide number 9 of our investor presentation, it gives the gross margin split between the consolidated business and pharmacy. So, in pharmacy, from Q2 to Q3, it’s only been 0.3% increase in gross margin. And that’s in line with the gradual increase in private label that we are seeing. It is only — yeah. I just thought I’ll answer.

Amit Kadam — Canara Robeco Mutual Fund — Analyst

Okay. Because I wanted to just check this aspect of the business also, like one of the participants also did ask, is that this grow in size, does that economic scale or really start benefiting us in terms of better procurement. And it helps helping us in terms of margins in terms of growth.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Sorry, what was the question?

Amit Kadam — Canara Robeco Mutual Fund — Analyst

No, I’ll move to the second question. So I’ll just — on the SSG where you mentioned that it’s 10%. I just wanted to know bifurcation between price and volume. So what would be the inflation part in that SSG?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

It is difficult to give the exact number between price and inflation. Inflation for pharma is typically around 4%. But…

Amit Kadam — Canara Robeco Mutual Fund — Analyst

No. Because this year, Madhukar sir, because WPI had been reached on a higher end where both NLEM and non-NLEM got a good price hike for this particular year. Hence, they were all upward the weight corpus, hence I was just checking specifically for this particular quarter, what was the price and volume mix?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So for us, a little difficult to split between volume and inflation.

Amit Kadam — Canara Robeco Mutual Fund — Analyst

Okay. No problem. Thanks. That’s it.

Operator

Thank you. The next question is from the line of Pathanjali Srinivasan from Mirabilis Investment Trust. Please go ahead.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Hello. Am I audible?

Operator

Yes, you are.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Yeah. So, sir, how do we make customers choose our own brand with respect to private label? And we’ve also mentioned that we are not necessarily a lower price. So how does the customer choose from our brand over a branded pharma?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

See, as you’re well aware, in the Indian pharmaceutical industry, there are hundreds of thousands of marketing companies which are selling the same products. Every single molecule which we sell has got over a few thousand different marketing guys, not [Indecipherable]. The result is this. Despite the best effort on our side to stop the right product in the right store to make the exact demand to that supply. We often find that out of our prescription, which has got products. We find ourselves not having one or two of them. In the past, we would basically say this is a product which I’ve asked for and this product is from a company like Cipla or Ranbaxy or whatever. I don’t have it, and I’ll be able to give you something from Sun Pharma or someone like that. So we will do that, we will just give them a substitute there.

But over a period of time, what we have started doing is basically offering a substitute of the unavailable product with our own product. Customers because they believe us, they are able to achieve this, pick it up and go. And that’s the one place where private label actually comes into play. And that’s why we’re not really looking at doing a price substitution. We’re not saying that take something else from us, it is actually a lesser cost. So basically, just think this is not available. Instead, this is something else is available. That is one, of course.

And second, quite a significant number of people basically come in for pure generics. They basically come in asking for a headache or a cough or cold kind of medication with the OTC products. And there, if the customer has not asked for, let’s say, Crocin or Calpol, or let’s get the Paracetamol from our company. In either case, do we basically use price to sell more of our pharmas.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

So what would be the mix difference in our private level between chronic and OTC?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Chronic and this one would be 50-50 as of now.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Yeah. And sir, did you mention some sales growth guidance during the call from 30%, 35% or something for next year?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

What are you saying?

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Do you give any sales guidance on this call? Like I couldn’t hear you properly sometime during the call, for the next…

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Our overall sales for the next year could be anywhere from 20% to 25% over the current year sales.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

20% to 25%, okay. And sir, what is the store mix tier-wise?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Tier-wise?

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Yes.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Okay. Once again, [Indecipherable] in the presentation.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

FX is there. I wanted the store mix tier-wise.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So, I think 32% of our stores are Tier 2 and Tier 3, rest are in networks in Tier 1.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

32% are in Tier 2, Tier 3 and rest was in micro.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So if you’re asking about the location of the stores, right?

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Yes, that’s right. That’s right.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So, non-metro would be 44% versus metro 56%.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Okay, sir. Thank you, sir. That’s it.

Operator

Thank you. Ladies and gentlemen, due to time constraint, that was the last question for today. I now hand the conference over to the management for closing comments.

Prasad Reddy Battinapatla — Assistant Financial Controller

Thank you, ladies and gentlemen. I thank all participants on this call for their interest in the MedPlus journey. Our Investor Relations team can be contacted at ir.medplusindia.com. Thank you.

Operator

[Operator Closing Remarks]