Entero Healthcare Solutions

Major distributor of healthcare products in India

Expanding presence rapidly through acquisitions

Incorporated in 2018, Entero Healthcare Solutions is a distributor of healthcare products in India. The company‘s technology-driven platform provides healthcare product distribution services to pharmacies, hospitals, and clinics throughout India.

The company is among the top three healthcare products distributors in India in terms of revenue in Financial Year 2022. Further, it achieved the fastest scale-up of operations among healthcare products distributors in India between Financial Year 2019 to Financial Year 2022.

The company add value to the healthcare product manufacturers working with it by providing them reach and accessibility to pharmacies, hospitals, and clinics through its integrated and technology driven, pan-India healthcare products distribution platform.

Similarly, the pharmacies, hospitals, and clinics serviced by the company get access to a wide range of healthcare products through its distribution infrastructure and healthcare product manufacturer relationships. During the Financial Years 2021, 2022 and 2023, and the six months ended September 30, 2023, the company catered to over 39,500, 64,200, 81,400 and 73,700 retail customers, respectively, and over 1,600, 2,500, 3,400 and 2,800 hospital customers, respectively.

As of September 30, 2023, the company had supply relationships with over 1,900 healthcare product manufacturers, giving it access to over 63,900 product stock-keeping units (SKUs). Its average sales per month per customer was Rs 37,532.

Benefits of large and national distributors to pharmaceutical and healthcare product manufacturers and marketers include (i) better customer and geographical reach for engagement in a fragmented retail space through a large and tech-enabled channel partner, and (ii) efficient inventory management, leading to lower prescription bounce rates. As of September 30, 2023, the company had 77 warehouses located across 38 cities in 19 states and union territories.

The company made continuous investments towards enhancing its technology platform. For the Financial Years 2021, 2022 and 2023, and the six months ended September 30, 2023, investments towards enhancing its technology platform amounted to Rs 6.45 crore, Rs 10.76 crore, Rs 9.59 crore and Rs 3.76 crore, respectively.

As part of its inorganic growth strategy, the company endeavored to take advantage of the market consolidation opportunities available in the Indian healthcare products distribution market. Accordingly, it has adopted a pan-India approach towards acquiring and integrating smaller distributors to expand its geographic reach and increase the wallet share from customers. Since inception in Fiscal Year 2018, the company acquired 34 entities in the healthcare products distribution industry.

The company intends to grow its sales through existing distribution network, taking advantage of the low penetration and strengthen its market position by (i) increasing customer base, (ii) expanding geographic reach through a “hub and spoke” model, and (iii) increasing wallet share from existing pharmacies and hospitals by offering larger product portfolios.

The company also intends to expand its product adjacencies to cover a wider range of healthcare product categories that are synergistic additions to its current business.

The company’s Subsidiaries contributed 93.45% and 94.85% to total revenue for the six months ended 30 September 2023 and Fiscal Year 2023, respectively.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 1000 crore and an offer for sale of 4,769,475 equity shares, aggregating up to Rs 600 crore by the existing shareholders.

The price band for the IPO is Rs 1195 to Rs 1258 per equity share of face value Rs 10 each.

Objectives for the fresh issue include Rs 142.5 crore for repayment and prepayment of certain borrowings, Rs 480 crore for funding of long-term working capital requirements. The remaining amount is to be used for Pursuing inorganic growth initiatives and general corporate purposes.

The promoters of the company are Prabhat Agrawal, Prem Sethi, and OrbiMed Asia III Mauritius. The promoters and promoter group hold an aggregate of 27,406,428 equity shares, or 77.11%, of the pre-offer issued and paid-up equity share capital. The post-IPO shareholding for the same is expected to be around 52.44%.

The issue, through the book-building process, will open on 9 February 2024 and will close on 13 Feb 2024.

Strengths

The company is one of India’s largest and fastest growing healthcare products distribution platforms. The company has been expanding its presence rapidly, whether it is via acquisitions or organically.

The company provides a diverse spectrum of healthcare products, including pharmaceutical products, nutraceuticals, medical devices, surgical consumables, over-the-counter medicines, and vaccines, which enables it to become a one-stop shop for its customer’s healthcare product needs.

The Indian healthcare market is highly fragmented making it tedious for pharmaceutical manufacturers to deal with multiple distributors. The company is expected to benefit from market consolidation.

The company’s scale of operations allows it to procure products at competitive prices and have a wide product range with adequate inventory levels.

The company has built its proprietary technology platform that allows ease of business for its B2B customers.The direct B2B application (Entero Direct) allows customers to have real-time visibility of product range, pricing, inventory levels, order status, outstanding balances, and promotional offers. As of September 30, 2023, Entero Direct had over 7,700 active users. Sales on Entero Direct aggregated to Rs 257.18 crore in the six months ended September 30, 2023.

The company offers both demand generation and demand fulfilment solutions to healthcare product manufacturers by promoting and creating awareness of their product brands to healthcare professionals, doctors, and channels such as pharmacies, hospitals (both private and government), clinics and customers through e-commerce marketplaces.

The company’s operations are led by an experienced management team, comprising professionals with experience in the healthcare and pharmaceutical industries.

Weaknesses

The company consistently reported losses in the past three financial years, due to a write-off of its scaled-down ancillary business, and the need to maintain a huge inventory.

The company recently has been on an acquisition spree. The result of these acquisitions as well as the synergies built from them remain uncertain and, hence, a risk. Since inception in FY1208, the company acquired 34 entities in the healthcare products distribution industry.

The company experienced negative cash flows from operations in FY2021, FY2022, FY2023 and six months ended September 2023, primarily due to increases in trade receivables and inventories.

The company operates in a business that requires huge working capital investments. Its inability to maintain an optimal level of working capital or financing required may adversely impact profitability. As of September 30, 2023, its working capital was Rs 782.65 crore.

The company has pledged 100% shares in certain of its subsidiaries.Pledging of shares can lead to the company losing rights to its subsidiaries if it fails to pay back its loans.

There have been delays in filing of certain e-forms in compliance with the Companies Act, 2013. Further, the company has made certain errors in its form filings in the past, in relation to capital structure and amendments to the memorandum of association. Consequently, the company may be subject to regulatory actions and penalties for such delays and errors.

The company needs to ensure optimal inventory levels and is exposed to inventory risk because of rapid changes in product life cycles. Failure to maintain optimal inventory levels could increase operating costs, which could have an adverse effect on its business.

There are outstanding legal proceedings including criminal proceedings involving the company, its subsidiaries, directors, and promoters. These proceedings are pending at different levels of adjudication before various judicial authorities, from which further liability may arise.

The company’s profit margins may decrease if trade discounts given by suppliers decrease in the future, which may adversely affect its business.

Valuation

In H1 FY2024, consolidated pro forma sales were up by 27.11% to Rs 2013.38 crore as compared to restated H1 FY2023 sales. The OPM increased by 140 bps to 2.98%, which led to 139.87% increase in operating profit to Rs 60.04 crore. Other income increased 42.45% to Rs 3.52 crore, while interest cost rose 45.47% to Rs 33.50 crore and depreciation increased 2.83% to Rs 11.96 crore. PBT stood at Rs 18.10 crore as compared to a loss of Rs 7.15 crore. Tax expenses in H1 FY2024 were Rs 3.29 crore as compared to tax expense of Rs 3.7 crore in H1 FY2023. Minority interest in H1 FY2024 was Rs 0.64 crore as compared to 0.30 crore in H1 FY2023. Net profit stood at Rs 14.17 crore as compared to a loss of Rs 11.15 crore.

In FY2023, consolidated pro forma sales were up by 40% to Rs 3531.04 crore as compared to restated FY2022 sales. The OPM increased by 114 bps to 2.11%, which led to a 204.89% increase in operating profit to Rs 74.50 crore. Other income increased 23.53% to Rs 5.54 crore, while interest cost rose 79.71% to Rs 52.08 crore and depreciation increased 23.45% to Rs 24.39 crore. PBT stood at Rs 3.57 crore as compared to a loss of Rs 19.81 crore. Tax expenses for FY2023 were Rs 9.22 crore as compared to tax expense of Rs 9.63 crore in FY2022. Net loss stood at Rs 6.84 crore as compared to a loss of Rs 29.92 crore.

The TTM EPS on post-issue equity works out to Rs 4.2. At the upper price band of Rs 1258, the P/E works out to 296.

As of 7 February 2024, its listed peers such as Medplus Health Services traded at TTM P/E of 137 and Apollo Hospitals Enterprise traded at TTM P/E of 127. For FY23, Entero Healthcare OPM and ROE stood at 2.11% and negative 1.86%, respectively, as compared to 5.83% and 0.48% for Medplus Health Services and 12.34% and 13.21% for Apollo Hospitals Enterprise.