Amidst merger and funding talks, challenges lie ahead for Medlife

After edtech, consolidation in the e-pharmacy space is well underway. Reliance is set to announce the acquisition of Netmeds in an estimated $80-100 million deal and Medlife has been in conversation with Temasek-backed PharmEasy for a potential merger. 

While the deal is yet to be confirmed, Medlife appears to be making capital structure adjustments to ease the process of raising fresh equity or the potential merger. In a loan agreement, Prasid Uno Family Trust, one of the major investors of Medlife, agreed to advance a loan not exceeding Rs 400 crore to Medlife in multiple tranches. The interest rate was set at 10.5% per annum. 

The trust had an option to convert its outstanding loan along with unpaid interest whenever deemed fit. Prasid Uno Family Trust exercised this option to reduce the load from Medlife’s balance sheet and has been allotted optionally convertible preference shares worth Rs 173 crore earlier this month. 

The Bengaluru-based company has also filed a valuation report which includes provisional financials for FY 20. Medlife's financial health as reflected in their projections and regulatory filings doesn’t appear too rosy. The company’s outside liabilities stood at Rs 473.6 crore while total assets were reduced to Rs 316 crore, resulting in the projected net worth of negative Rs 157.7 crore. Moreover, current liabilities outweighed current assets, and net working capital was also negative Rs 97.6 crore during FY20.

As per financial data analyzed by Fintrackr, the recent changes in capital structure and the dearth of working capital suggests that Medlife has two options: either to raise capital from existing investors and rope in fresh backers for a large round or explore M&A deals.

Medlife has been in talks with multiple investors to raise up to $50 million since May, this year. However, nothing has fructified until now. The imminent entry of two heavyweights - Reliance and Amazon - have reduced investors’ appetite in the overall sector. 

Sources assert that the chances of Medlife, PharmEasy and 1mg raising large independent rounds is thin. Hence, consolidations are inevitable. Besides, Medlife and PharmEasy have also been in talks with 1mg.

Responding to Entrackr’s detailed questionnaire, Medlife said that its investments in brand building and technology helped it to cement a leadership position in the e-health sector and acquire over a million new customers in FY20. 

“We experienced growth across our pharma retail, lab diagnostics, e-consultation and private labels. There is still a very large headroom to expand & grow our business and we are exploring capital raising to be able to build on last year's base,” said the company spokesperson.

Medlife’s FY20 unaudited financials 

Medlife also filed an unaudited financial projection for FY20, which clearly shows the challenging financial health of the firm. 

As per the company’s projection, it would post an annualized total revenue of Rs 1,142.4 crore by the end of the fiscal year 2020, a 3.13X increase from Rs 365 crore in FY19. At the end of FY18, total revenue stood at Rs 137.6 crore.

The projection also mentioned that the EBITDA margin will be negative 42% in FY20, which was 103% in FY19 and 111% in FY18. Besides, the total direct costs will be Rs 1,077.7 crore in FY20, while Rs 309.2 crore in FY19 and Rs 123.6 crore in FY18. 

The company is yet to file an audited balance sheet for FY20.

Losses for the company incurred is estimated at Rs 533.1 crore in FY20 in the unaudited financial report as compared to Rs 403.6 crore in FY19 and Rs 164.2 crore in FY18. The company had claimed to hit Rs 100 crore in revenue in September 2019. 

At that time, it also projected to break even, on unit economics basis, by March 2020. 

While the reality about break-even projection can be ascertained only when Medlife files its audited balance sheet, the company has been going through a tough time since the past year. It would be interesting to see whether Medlife would be able to raise fresh funds or consolidate with rivals to fight deep-pocketed Reliance and Amazon.