MedPlus Health Services Ltd (MEDPLUS) Q2 FY23 Earnings Concall Transcript

MedPlus Health Services Ltd (NSE:MEDPLUS) Q2 FY23 Earnings Concall dated Nov. 11, 2022

Corporate Participants:

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Prasad Reddy — Investor Relations

Sujit Kumar Mahato — Chief Financial Officer

Chetan Dikshit — Chief Strategy Officer

Analysts:

Aashita Jain — Nuvama Group — Analyst

Aneesh Deora — Nomura — Analyst

Ameya Gawande — Metaverse Equity Fund — Analyst

Prakash Agarwal — Axis Capital — Analyst

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Unidentified Participant — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the MedPlus Health Services Limited Q2 FY ’23 Earnings Conference Call. [Operator Instructions] And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]

I now hand the conference over to Mr. Madhukar Reddy. Thank you, and over to you, sir.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Good afternoon. On behalf of MedPlus Health Services Limited, I extend a very warm welcome to everyone, who has joined us on our call today. I’m Madhukar, and I’m the CEO of MedPlus.

I’ll now request Prasad to make the necessary disclosure statements.

Prasad Reddy — Investor Relations

Thank you, sir. Good afternoon, everyone. Please note that anything which we say that refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risks that the Company faces. A complete statement is included in our investor presentation dated November 11, 2022.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you, Prasad. MedPlus — at MedPlus today, we are over 20,000 colleagues. And as on 30 September, we cater to the healthcare and household needs of neighborhoods in 454 cities across 7 states through 3,328 pharmacy stores. I would like to thank my team for their discipline and hard work that goes into providing a vital service to our customers.

I would now like to introduce our new CFO, Sujit Mahato. Sujit joins us from Dr. Reddy’s, where he worked for 22 years and was reporting to the Group CFO. He has extensive experience across functions like financial reporting, business finance and partnering, taxation and implementing controls and cost saving programs. He has worked in India, Germany and Russia. Sujit is a CA from the 1998 batch. I look forward to Sujit as an addition to our leadership team at MedPlus.

On our last quarter’s performance, our revenue was INR11,206 million. We had a gross margin of INR2,428 million and an operating EBITDA of INR283 million. Over 99% of our revenues came from our pharmacy operations. The pharmacy operating EBITDA was INR336 million, so at a pharmacy segment level, the operating EBITDA was 3%.

With that, I will now continue with the update for Q2. I’ll first cover the update on our network. We’re continuing with our store expansion program. We have added 1,200 — 1,002 med stores in the last 12 months. In Q2 alone, we added 362 stores. This is the highest openings in any quarter in our history. The highest additions were in Karnataka and Tamil Nadu, where we added 86 stores and 78 stores, respectively. MedPlus will continue to push ahead on store openings, while sticking to our cluster-based growth strategy.

In Q2, 56% of our store openings have been in Tier 2 and beyond. We now have 1,387 stores of our 3,328 stores in Tier 2 and beyond. Business wise, these are good markets from a store economic standpoint. MedPlus can expand in these markets because of the maturity of our operations and supply chain capabilities. There are 14 store closures in Q2 versus 20 store closures in Q1. So overall, we had net additions of 348 stores in Q2 versus 232 stores in Q1.

For the last 12 months, net additions have been 1,002 stores. Our store network is split into 33% being less than a year old, 16% being in the second year and 51% being two years and older. To give you a sense of the impact of the rapid store expansion on the use of our network, we ended Q2 with 49% of our stores being in less than two years age bracket. In comparison, for Q2 FY ’22, 34% of our stores were less than two-year old. Even in the sub two-year age bracket, our stores are still in the ramp-up phase.

From a financial standpoint, they are a drag on the operating EBITDA. However, as they mature, we expect these stores to contribute to our profits at MedPlus. We closely track the time to breakeven of new stores and the stores opened between April ’21 and March ’22, 71% of the stores achieved breakeven within six months of our operations. We closed Q2 with 3,328 stores, as I said earlier, with 1.9 million square foot. Last Q2, this was 2,326 stores and 1.4 million square foot overall.

The average size — store size in Q2 was 567 square foot. To give you a sense of spread in store sizes, we now have 2,271 stores less than 600 square foot and 1,057 stores that are greater than 600 square foot. So we have been talking about our store expansion. This quarter, as I said earlier, we opened 348 stores. But I have to tell you that this is also a function sometimes of other outside factors.

A store is opened when all the infrastructure and network guys work and get the store done properly on time, and all the regulatory authorities give us licenses and everything else also in expected time and all. So there could be some variation in this as we go forward or typically so — but the — while we will continue to maintain the rapid growth, we expect that as we go forward, there could be a little bit of variability in the actual number of stores opened per quarter.

Same-store metrics. On our same-store performance, we’ve measured this as stores that have been in operation for 12 months and more as on the last day of the reporting quarter. Revenue from these stores in Q2 was INR9,350 million or 85% of pharmacy revenue. These stores had a store level EBITDA margin in the range of 9.7%. The store level operating ROCE of these stores was 60%. I’ve already hit on the store level EBITDA margin by age, while stores greater than 12 months had a margin of 9.7%, which was 10.4% for stores, which are greater than 24 months and 6.9% for stores in the 13-month to 24-month age bracket.

If we allocated non-store cost, then the operating EBITDA of stores greater than 12 months would be INR433 million with a margin of 4.6%. With our scale, we are better poised to increase share of revenue from private label. Our private label range is intended to provide quality products at affordable reprices. MedPlus has now over 920 curated SKUs across pharmacy and non-pharma sectors. In Q2, 13.9% of our revenue came from our private label, which compares to 12.7% in Q1, 13% in Q4 FY ’22, and 11.9% in Q3 FY ’22. I can point out that Q4 FY ’22 also had the impact from Omicron and hence the slight increase over the previous quarter.

So, overall, the trajectory of increasing share of our private labels in our customers’ basket continues. Within private label, our pharma range has been gaining share. In Q2, 8.9% of sales was from private label pharma. This compares with 8.1% in Q1 and Q4 FY ’22, and 7.3% in Q3 FY ’22. Our increasing presence in Tier 2 and beyond is reflecting in our revenue mix. This quarter, 31% of our pharmacy revenues came from stores in these Tiers. This is up from 28% in Q2 last year.

Omnichannel. We continue to extend our coverage of pin codes from where we take orders online. This complements well with our stores. MedPlus will focus on increasing the coverage of our two-hour delivery offering. Store pick-ups as a share of online orders continue to maintain a high — 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 to acquire customers online, and we’ll continue to maintain our omnichannel as a profitable channel. We feel that the online channel is one other channel, which is as important as the rest of the channels through which we operate. While we recognize that customers will start moving towards this, we feel that acquiring customers paying INR500 [Phonetic] or INR1,000 [Phonetic] per customer acquisition cost is not at all warranted. Hence, we’re constantly been maintaining this level — maintaining our ad spend and making sure that all channels are profitable with us.

Now I’ll request Sujit to cover a few additional points.

Sujit Kumar Mahato — Chief Financial Officer

Thank you, Madhukar. Good afternoon, everyone. I’m Sujit Mahato, and I’m the Chief Financial Officer of MedPlus. While I’m only beginning to settle in, I would like to add by covering some of our capital efficiency metrics. Our net working capital for Q2 was 61 days, the inventory in our warehouse corresponds to 36 days.

As you are aware, because of the sales trajectory of our new stores, their inventory turnover is lower in the first year. In Q2, the inventory level of our first year store stood at 111 days. In comparison, for our stores older than 12 months, the inventory corresponds to 37 days. The store level operating ROCE trend for our stores greater than 12 months stands at 60%. Our operating cash flow for quarter two stands at INR237 million. 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 our regulatory filings. For example, the opticals business has been grouped under others in the presentation, whereas in our regulatory filings, opticals is grouped under retail segment. We hope this will be useful for you.

Back to you, Madhukar.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you, Sujit. As I’ve mentioned earlier in my past calls, we have initiated a test project in Hyderabad, the diagnostic space. The essence of this project is two-fold, one, to have a larger share of our customers’ wallet in the OPD basket, which comprises pharmacy, diagnostics and doctor consultations, two, to do this via membership model.

In spite of the competitive nature of the space, in six months of operation, we have successfully leveraged the network effect of our pharmacy stores, which have acted as a point of sale for our diagnostic plans. Up to 31 of October, we have sold 51,000 plans with 90,000 underlying lives.

I now request Chetan to give you a short update on the project.

Chetan Dikshit — Chief Strategy Officer

Thank you, Madhukar. Good afternoon, everyone. I’m Chetan Dikshit, and I’m the Chief Strategy Officer of MedPlus. I will start with a brief overview of our diagnostic product. We offer to our customers a choice of plans. These could be single adult, couple or family. On purchase of any plan, three benefits are extended. The first being three diagnostic tests at MRP worth the purchase price of the plan. This element of the plan is important to lock in the customer for a year.

The second benefit is flat 75% discount on all diagnostic tests. While our pricing is no doubt attractive, the key feature is that we offer the discount on all diagnostic tests. To deliver the full suite, we have three full-service diagnostic centers in Hyderabad, where a plan participant can walk in and avail the full range of radiology, example, MRI, CT and onwards and the full range of pathology tests. We expect to take the count of these full-service centers from three to five.

In addition, we also have 100 collection centers for pathology that are conveniently spread across the city and are housed within our pharmacy premises. Customers can also avail of home collection. The third benefit for the plan is 50% discount on all in-house doctor consultations. Once the customer has purchased a plan, there is no restriction on visits or tests.

The plan benefits for a period of 12 months after which the customer will have to renew. How are we able to offer a 75% discount? There are four differences in our model versus our typical peer. 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 depend on the referral network for patient walk-ins. As you are aware, the referral model is often a 30% share of the customers’ bill. 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.

Up to 31 October, we have sold 51,000 plans with 90,000 underlying lives. 65% of these plans were sold via our pharmacies. The average realization per plan sold was INR1,292. To give you a sense of run rate of sign-ups, we sold 233 plans per day in August, 264 plans per day in September, and in October, we sold 251 plans per day. We estimate that 80% of plans sold were to existing MedPlus customers.

The average age of a participant is 45 — 44 years and 22% of participants are above the age of 60 years. The availability of the full battery of radiology test for — the full battery of radiology test for plan participants is an important selling point, while 65% of customers have purchased a plan at the pharmacy, 40% have availed their first service at our full-service discount centers. The balance 60% have availed their first service at collection centers and via home collection.

We have found that customers tend to add radiology test to their pathology test when visiting a diagnostic center. And about 70% of the revenue at a full-service diagnostic center is linked to radiology. Of this 33% is standalone advanced radiology test, that is MRI and CT. Based on our limited time of operations, we expect 2.4 visits per plan over a six-month horizon from date of joining.

On profitability, we expect our full-service diagnostic centers to be operating EBITDA breakeven in six months to eight months and collection centers by two months. At the end of first year, we expect the operating EBITDA margin for a full-service diagnostic center to be in the 19% to 23% range and collection centers to be at 20%. That’s our special update on diagnostics.

Handing the call back to Madhukar.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you, Chetan. I would like to add that the diagnostic space is an important adjacency to our pharmacy business. Various estimates spread the size of the diagnostic space to be U.S.$10 billion and growing at 14% per annum. The per capita consumption of diagnostics tests is lower in our country. It is also well known that our — out of pocket share for healthcare in India is very high. So I believe there is a room for a national health service player catering to the composite OPD needs of customers.

However, it is also a competitive space with new entrants and we will invest with caution. This of course — this competitive space is not to be confused with the bunch of new announcements which came out from pharma companies and all, which has been entering into this space. They are primarily in the business of just biochemistry and pathology, while we in sharp contrast actually offer a full-service, radiology and pathology service.

And this — in this case, and in this sector actually the competition is not as high as one would expect from all the reports which are out there in the press. Our allocated capex for the test project in Hyderabad is INR850 million to INR900 million. We will seek to extract the benefits from this project before venturing into our other geographies.

Going forward, what can you expect from MedPlus? We operate in the very attractive pharmacy space and that poised to grow on the back of our store expansion. Our cluster-based network enables profitable omnichannel service. Scale allows a larger share of our private label basket. And our diagnostic product — project has shown that we can use our pharmacy stores to cross-sell other healthcare solutions, and we will explore other avenues that can add incremental sales without increasing costs.

This is the end of my update. I request the host now to open the line for questions.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] We have the first question from the line of Aashita Jain from Nuvama Group. Please go ahead.

Aashita Jain — Nuvama Group — Analyst

Hi, good evening. Congratulations on the very good set of numbers. Just my first question is on growth. So given your expansion plan, you are adding almost 1,000 stores on the base of 3,000 stores, almost 33% addition. So do we believe we can grow much faster than our current run rate or just 20% growth should be the sustainable rate going forward? And also please if you could update us on your store expansion plans for FY ’24 and FY ’25?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

I’m sure we will be able to grow faster than what we are going forward. But right now, because of the nature of — because of the overall competitive intensity in the business itself, I think it would be fair to assume a minimum growth of at least 20%, 22% for the year.

On the expansion plan, I expect that we will basically be at this number for at least a year. And we will be according to the guidance, which we gave earlier in the year at a minimum of 1,000 stores and up to 1,200 stores or slightly more. So that’s the number we’re still looking at.

Aashita Jain — Nuvama Group — Analyst

Sure. Thanks. And my second question is on competition only. I think in the last quarter call, you made a comment on competition eating away some revenue share and you expect it to continue for some time. So how are things now? What are our blended discounts compared to the competitors? How are you — things on ground? Any color on that?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So MedPlus continues to be the number one value priced pharmacy retailer right there on the offline side. But that does not take into account all the online players who have been busy advertising with a promotional discount of 25% for the first three purchases. Almost all the players out there, including our — the largest player out there, have been doing this for the last two quarters.

I haven’t seen the intensity come down. So — but it doesn’t gone up either. So I think we will most likely be slightly more stable going forward. While there is going to be some impact, whenever someone spends a lot of money advertising out there and then offering a much higher than usual discount, I fully expect that none of those things are sustainable for any of these people. And they will end up actually trying to come back to the usual discounts, which are 17% to 18% for most of them. For MedPlus also, the overall discount remains at the same level, which was earlier, roughly around 16.45% [Phonetic] — 16.5%.

Aashita Jain — Nuvama Group — Analyst

Thank you. Very helpful. Just lastly, I think you will — you made some comment in your opening remarks, saying something about diagnostic breakeven of the big centers as well as the collection centers and the profitability. Sorry, I missed that. Can you repeat again on that, sir?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

I’ll let Chetan take the question on the diagnostic front.

Chetan Dikshit — Chief Strategy Officer

Yeah. Aashita, on the full-service diagnostic centers, we are expecting EBITDA — operating EBITDA breakeven at the center level in the six-month to eight-month horizon. The two centers that have already been in existence for six months did so in the six-month window, but we are giving a slightly shoulder room of six months to eight months. The collection centers, we expect them to breakeven within the first two months.

Aashita Jain — Nuvama Group — Analyst

Okay, that’s helpful. Thank you so much. That’s all from my side.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have the next question from the line of Aneesh Deora from Nomura. Please go ahead.

Aneesh Deora — Nomura — Analyst

Yeah. Thanks for the opportunity. Sir, I just wanted some color around how our prescription fill rates are tracking currently and where do you see them going forward?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

We track the prescription fill rates continuously. But I have to tell you that this is not an exact science, because in a store, physical store, when people walk up and ask for a product, they don’t necessarily leave a prescription or they don’t necessarily leave any proof of their asking. So it is as good as the diligence of the store employee who is writing down what is the product asked for and what — and if the product wasn’t available at the store at the time of the customer visit.

So we do — we have a bunch of other proxies to figure out this. We track the key — keystrokes of the employee when he is searching for the product in our point of sale. And based on that, we are able to tell you that depending on the store and depending on the location, it is anywhere between 85% to 90%, 92% fill rate. This is based on the fact that — based on our understanding of the demand through the operation of the point of sale.

Aneesh Deora — Nomura — Analyst

Got it. That’s helpful. And do you see scope for further improvement on this number, just some color there?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

We — obviously, we would like to get slightly better. But we know from our past experience it is extremely expensive in terms of inventory at the store to actually maintain a higher level of fill rate at the store level itself. What we do though is basically offer a much wider range of inventory at the warehouse.

So if a customer were to walk into a store and he were not to get one or two of the products which he has asked for, then our store employees can quickly look up the warehouse, which has got a super set of all the inventory for all the stores out there in that city, typically a store would have around 4,000 SKUs to 5,000 SKUs, whereas the warehouse are anywhere between 25,000 SKUs to 30,000 SKUs.

So most of the times, whatever product is being asked for in that particular city, it could be there in the warehouse. So we are able to offer it on the next day delivery basis to the customer, and this works very well for our customers. Our goal is to make sure that we maintain it at a healthy 90%, 92% kind of fill rate, which avoids the overall expiry problem and all. Because the long tail of this thing is very, very long unfortunately because of the hundreds and thousands of — hundreds of thousands of pharma companies with millions of brands being sold in every city. So while we would like to do slightly better, the intention is not to get to the 100% fill rate at all in the store.

Aneesh Deora — Nomura — Analyst

Got it, sir. That’s helpful. And my second question being around the fact that we have increased our private label contribution to 13.9% in this quarter. But the same has not been reflected in the improvement in operating EBITDA margins. So any color there, like I was expecting some improvement on the operating EBITDA margins, but they’ve remained kind of flattish. So can you throw some light on the fact here?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So the gross margin continues to go up, if you actually look at it. The reason why the overall operating EBITDA margins in the Company have not gone up as much is because of the new stores which are driving down the overall EBITDA. If you look at it, all stores which are more than one year are today now operating with a operating EBITDA margin of INR43.3 crores. But the drag because of the new stores, the stores which are less than 12 months and the stores which are yet to be open, both of these are pulling it down, that’s the reason. But otherwise, the gross margin continues to go up.

Aneesh Deora — Nomura — Analyst

Got it. Got it. That’s all from my end. Thanks.

Operator

Thank you. We have the next question from the line of Ameya Gawande from Metaverse Equity Fund. Please go ahead.

Ameya Gawande — Metaverse Equity Fund — Analyst

Yeah. Good afternoon, sir.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Good afternoon.

Ameya Gawande — Metaverse Equity Fund — Analyst

So my question is with regards to the diagnostic center, what we can expect in — within next three years expansion plans and new openings? Can you just…

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

This is a little early for us to comment on the next three year plan. We started off this whole thing because we think it should be a good adjacency to our pharmacy platform, given the fact that 60% of our sales are the people who are monitoring some kind of a level or something out there, we thought diagnostics would be a good adjacency than we said it up.

Now — but to that, we also added the overall radiology piece, which we think actually works very well, because anyone who goes to a diagnostic center typically has both the radiology needs typically ultrasound, chest X-ray or in lot of cases the Echo or TMT or even MRI and CT, along with the usual things. So hence we thought it is necessary for us to add that.

But in a lot of cases, our thesis is actually proving out to be quite what we expected, but we still will give it some more time. We will go to five centers in Hyderabad, stay at the same collection centers and add some more small satellite radiology centers and all. But as we said in our earlier commentary, we are not going to extend our investment in this beyond the INR85 crores to INR90 crores in Hyderabad, only after we are fully sure, are we going to go ahead and expand to other geographies.

So this is a bit early for me to tell you where we will be in three years, it all depend on how well we actually grow from here. We’re confident that we will make money, but the speed and the amount will determine how fast we go to other places.

Ameya Gawande — Metaverse Equity Fund — Analyst

Okay, sir. And just another question, like don’t you think the pricing in the diagnostic business is a little bit aggressive as compared to…

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

For us, as Chetan said earlier, given the fact that we don’t have referrals that everything is serviced by us, there is no franchisee involved and there is no referral being paid, and the acquisition is through our own stores. And we also have a model in which we are actually taking a subscription fee. I think it is the right number. And given the fact that such large centers have actually become EBITDA-positive within the first six months clearly proves that we are in the right track here.

Ameya Gawande — Metaverse Equity Fund — Analyst

Thank you, sir. Thank you, sir, very much.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Prakash Agarwal from Axis Capital. Please go ahead.

Prakash Agarwal — Axis Capital — Analyst

Yeah, thanks, and good afternoon to all. My question relates to Slide 13, which is operating EBITDA margins…

Operator

Mr. Prakash, can u hear us?

Prakash Agarwal — Axis Capital — Analyst

Yeah. Am I audible?

Operator

Mr. Prakash Agarwal, this is the operator, are you able to hear us?

Prakash Agarwal — Axis Capital — Analyst

I can hear you guys. Am I audible?

Operator

It appears there is no response from this participant. [Operator Instructions] We have the next question from the line of Pathanjali Srinivasan from Mirabilis Investment Trust. Please go ahead.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Sir, the newer stores that we have opened, you’ve mentioned that they breakeven in six months time. But I want to know what — when do they actually start contributing to the P&L? Like the first six months, the amount of money that…

Operator

Mr. Prakash [Phonetic], can you hear us?

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Hello?

Operator

Yes. You may go ahead with your question.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Yeah. So I asked like we have — we said that first six months the stores that we opened breakeven. But when does the cash burnt in the first six months usually get recovered by the store, how much time does it take for that?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Is this question meant for the diagnostics full-service center?

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

No, no, no. I’m asking for the pharmacy business like you — generally, you’ve mentioned that the new stores breakeven about six months, right?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Typically the amount which has lost during the time or ramp up to the breakeven is made up within the first 12 months to 15 months.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Okay, okay. Sir, and with respect to our diagnostics business, do we have a home collection facility or that is still not there, how is it currently?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

We do have a home collection center facility. Customers can go online onto our app and request home collection service. They can also go to our call center and request the same service.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Okay. And do we charge for it or is it included in the subscription plan, how does it work?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

No. Any home collection is charged, that is INR100. As of now, the collection fees is INR100. At the discount rate which we give, it’s highly — I don’t think it is possible for us to give a free service.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Okay, sir.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

What we do though is we have opened 100 collection centers across the city, making it very convenient for people to go out there and give a sample. So for anyone who is not wishing to actually pay that money, you can actually easily access our collection services where it is free. But if you want the service at home, then you pay for it.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Okay, sir. Sir, and at the current pace that we are adding stores, do we have enough cash for us to expand at this space or will we look at raising money?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

It is unlikely that we will be looking at raising money right now because we don’t have any debt at all. We have cash in the bank. And we are accumulating cash too. So raising money is not on the books at least as of now.

Pathanjali Srinivasan — Mirabilis Investment Trust — Analyst

Okay, sir. Thank you, sir.

Operator

Thank you. [Operator Instructions] We have the next question from the line of [Indecipherable] from Credit Suisse. Please go ahead.

Unidentified Participant — — Analyst

Yeah. Thank you for opportunity. So I have a couple of questions. So first is on the store network expansion. So do we aim to maintain this run rate of 1,000 stores to 1,200 stores each year for say FY ’24 as well?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Absolutely, because the opportunity to grow in the seven states is very high. And we continue to actually see that opportunity, and we continue to get our stores to breakeven and to grow to the 10% EBITDA level very quickly. So I see no reason to back off.

Unidentified Participant — — Analyst

Sure. And what is the capex per store that we are incurring today?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So the all-in costs come to around INR30 lakhs, out of which INR6 lakhs to INR7 lakhs — INR7 lakhs to INR8 lakhs goes towards the build out of the store, INR2 lakhs to INR3 lakhs go towards the store rental advance and the balances into inventory. So when I say INR30 lakhs, that also includes the inventory. Otherwise, if you were to strictly look at only the build-out and rental advance, it’s only anywhere between INR9 lakhs to INR10 lakhs.

Unidentified Participant — — Analyst

Okay, understood. And in terms of the store network expansion strategy, so we have been adding more number of stores beyond Tier 2, Tier — in Tier 2 and Tier 3 towns. So will this continue with the strategy that in the states where we are present, we will continue to add more number of stores or are we planning to enter some new states as well and grow our franchisee over there?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So the seven states in which we are there account for roughly around 45% of the overall pharmacy market. They also account for — they’re also very dense and affluent states. We see — we see a lot of opportunity in these states, so we will continue to grow. And whether it is Tier 2 or Tier 3, depends on the current state or current number of stores in each of these states.

For instance, states in which we entered first which are AP and Telangana, here we are there at the district headquarters at Tier 1 level in a significant manner, and we’re going to Tier 2 and Tier 3 at these places, whereas states which we entered towards the latter part in West Bengal and Maharashtra, for instance, we are entering into new districts. So that would be mainly the Tier 2 and less Tier 3 and Tier 4, I would say. So it all depends on our saturation of the Tier 1 cities.

Once that is done, we go down that level, go on that path. And as regards to new states, we’re looking at a couple of states at least to seed this year, which will enable us to actually start growing at some point of time, maybe next year or something like that. So looking at both three states, in fact Kerala, Madhya Pradesh and Chhattisgarh to seed some kind of expansion in their major cities, which will be Cochin, either Bhopal and Indore and Raipur.

Unidentified Participant — — Analyst

Understood. And my next question is on diagnostics. So you mentioned that the sustainable EBITDA margin would be somewhere around 19% to 20% for the full-service diagnostic center and 20% for the collection center. So how soon do we think we can achieve this level of EBITDA margin?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

So we have three full-service centers in operation currently. The third one went online only last month. So it’s early. The other two have been in operation for six months and they have broken even on operating EBITDA.

Unidentified Participant — — Analyst

But the — the EBITDA margin guidance that you had given on say 19% to 20%. So when do we expect to achieve these levels? So is it after one year, two years?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Yes. That’s at the exit of the first 12 months. So 12th month, that’s where we expect the 19% [Phonetic] to 23% [Phonetic] to come in.

Unidentified Participant — — Analyst

19% [Phonetic] to 23% [Phonetic]. Okay, okay, thank you so much for answering questions. Thank you.

Operator

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

Prakash Agarwal — Axis Capital — Analyst

Yeah, hi. Am I audible?

Operator

Yes. We can hear you.

Prakash Agarwal — Axis Capital — Analyst

Okay, hi. Good afternoon to all. First question on Slide 13, just wanted to understand is operating EBITDA margin, the past we were at 5% plus and now it’s 4.3% and 4.6% though we have improved Q-on-Q, and these are again 12-plus months pharmacy stores. So is it all a function of higher discounting by the peers as well as inflation or there is more to it?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

You mean the decrease in the margin from 5.3% to 4.3% and then now to 4.6%, is that what you’re asking, Prakash?

Prakash Agarwal — Axis Capital — Analyst

Yes, sir.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Yeah. No, I would say it is more a function of the number of new stores, which have gotten added into the 12-plus months category, right. We have roughly around 1,000 stores which are less than 12 months, and I think around 500 stores or 600 stores, which are in the 12-plus, 12 months to 24 months. This is what is actually pulling it down, given the fact that our full ramp-up of — to the EBITDA — expected EBITDA actually happens only in 24 months.

So that said, definitely the headwinds, which you’re seeing because of the increased competition in the online space and the increased discounting by the online players has also I would say muted our growth a little bit. We are countering it with increased sales, little bit of increased — this operational thing out there, but more importantly through increase in the private label product out there, and that has been driving our margin. We don’t expect that anyone can sustain at a 25% — 25% discount level. So we expect that to come down as we go forward. And once that comes down, I think we should be able to take off from here to even higher levels.

Prakash Agarwal — Axis Capital — Analyst

Okay. And you said 1,000 plus stores under 12 months, and the number you gave for 12 months to 24 months is?

Chetan Dikshit — Chief Strategy Officer

Prakash, I’ll help you on that. So number of stores in the year one bucket is 1,083, number of stores in the 13 months to 24 months category is 543.

Prakash Agarwal — Axis Capital — Analyst

543 stores. And typically, what is the margin that 12 months to 24 months given that you mentioned on a blended basis about 10%. But I would assume that 12 months to 24 months would be a little lower. Is it in a 5% to 6% range?

Chetan Dikshit — Chief Strategy Officer

Yeah. It’s around 6.9% right now for the stores, which are in that 13 months to 24 months age bracket.

Prakash Agarwal — Axis Capital — Analyst

Okay, fair enough. And secondly, on your omnichannel strategy, I mean the share seems to be coming off a bit. What are we planning to do? Are we still investing or wanting to keep that share up or are we okay with the way things are panning out?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

The way I see it we’d rather spend INR50 crores per month on opening new stores, which will give us people who will keep coming back to our stores, then spend it on advertisement and get new customers. Because if you actually look at it Prakash, the fact of the matter is on purchases beyond the first three, we have the best discounts. We have fill rates available to better than anyone else out there.

Our two-hour fill rate– two-hour availability is actually at — two-hour delivery is around 95% to 98%. So on the service side, we don’t lag. We know that there is a market and people will come here, but we don’t think this is the right way to spend money to acquire customers at this point of time. We believe that as customers get more and more used to the online sites, especially in the demographic in which our customers primarily lie, as these guys get more and more convinced, they will come and we are ready to service them at that point of time. At this point, we don’t foresee spending any extra money in acquiring customer service.

Prakash Agarwal — Axis Capital — Analyst

Okay, fair enough. And secondly, on your expansion plan. So I mean, obviously, you mentioned 45% of the market that you’re going deeper, but have you got plans to move into the remaining 55%, especially up North?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

No, it’s unlikely that we’ll get in anytime soon. But we are looking to seed at least a couple of the neighboring states, on the southern side Kerala and on the central side, we’d probably do Chhattisgarh and Madhya Pradesh. We are looking at opening some stores in the next two quarters or so in Cochin and Bhopal and — Bhopal or Indore and Raipur. Yes. Our plan, as I’ve said distinct [Phonetic] into the North side, it’s not on the cards as of now.

Prakash Agarwal — Axis Capital — Analyst

Okay, okay, understood. And lastly on Mumbai, so last time there was an evaluation like having a express store kind of thing much smaller given the rentals are very high. Is there — what is the thought process? Are we doing that or there is another thought or how do you plan in the Mumbai?

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Yeah, so, Mumbai, as we said last time, we want to open stores which are more in line with the expected revenue and all, or at least we want to open stores whose rents are more in line with our national average. So INR30,000 to INR35,000 is the usual rents we pay for stores which are 300 square foot. In Bombay, we are okay with paying maybe INR10,000 or INR5,000 more, but not much more. So we are opening stores that way and they are working out reasonably well for us. We’re definitely working on better than opening up large stores.

Prakash Agarwal — Axis Capital — Analyst

Okay, okay, lovely. Thank you, and all the best.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you, Prakash.

Operator

Thank you. [Operator Instructions] I would now like to hand it over to the management for closing comments.

Gangadi Madhukar Reddy — Managing Director and Chief Executive Officer

Thank you. I thank all participants in this call for your interest in the MedPlus journey. Our investor relations team can be contacted at ir@medplusindia.com. Thank you.

Operator

[Operator Closing Remarks]