Why Entero Healthcare is a must-have for investors in their portfolio?

Published on Saturday, February 10, 2024 by Jyoti Maru

The IPO of Entero Healthcare Solutions Ltd. (Entero) opened on Friday 9th February but not many have really understood this unique Company or its valuation or what a wonderful investment opportunity it presents. A lot has already been written but the following highlights certain points, which have not been understood.

In the anchor book announced on Thursday 8th February, marquee international anchor investors have come in. Entero raised ₹ 716 crore from 25 anchor investors at the upper price band of ₹ 1,258 per equity share and 45% of the total public issue size has already been subscribed to.

Capital Group and GIC, which have always been selective, invested in Entero as anchors. This is the first time in the last two years that Capital Group and GIC have invested in an IPO-bound company as anchor investors or any deal. These informed marque investors have studied global peers of Entero and are aware of the potential and opportunity that Entero presents in its unique niche way. 

For those enticed by the 'growth' story, Entero is a rare instance of a 5-year-old start-up that has posted operating profits for all its years since inception. It has posted consistent growth and profitability - 36.21% revenue CAGR from FY21-23; 37.66% gross profit CAGR from FY21-23; and 27.02% adjusted EBITDA CAGR from FY21-23. 

Interestingly, Entero is available at a valuation (MCap) of just 1.5-to1.6 times the revenue of FY23 while recently listed Unicorns had sought 5-to-6 times multiple of revenue.

Entero had an adjusted net debt of around Rs. 358 crore while Fresh Issue proceeds from the IPO will be used for repayment/prepayment, in full or part, of certain borrowings availed of by the Company -Rs. 142.5 crore; and funding of long-term working capital requirements of the Company and its Subsidiaries during Fiscals 2025 and 2026, Rs. 480 crore. This will reduce the interest cost and enhance profitability.

If adjusted profits were to be taken into consideration (after removing the interest cost) then the valuation appears cheaper than what it seems at first glance. The extra expenses were incurred in creating infrastructure for future growth. And IPO valuations are always based on future growth and profitability basis which showcases that Entero is poised to grow on both parameters.

Compared to Medplus, Entero has the same level of profitability (on an adjusted estimated PAT basis for FY24 for both companies) but is available at a 30-40% discount to Medplus's valuation. Entero is an organised Wholesale, which is scalable, profitable and has high returns; while Medplus is organised Retail. And as Medplus opens more retail outlets, its profitability and margins will fluctuate. Entero's margins will grow steadily and eventually rise above those of Medplus in the next few years as investments and expenses have been front-loaded.

Entero has a unique first-mover advantage and newcomers may face many entry barriers. Several new players including offshoots of conglomerates have tried to enter this business but have failed and scaled down their operations. Entero is still going strong and has seen the fastest scale-up of operations among healthcare product distributors in India. During the Financial Years 2021, 2022 and 2023, and the six months ended September 30, 2023, it 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. Further, as of September 30, 2023, it has supply relationships with over 1,900 healthcare product manufacturers that give it access to over 63,900 product stock-keeping units ("SKUs"). 

As highlighted by the Subscribe recommendations of brokerage firms BP Wealth and Ventura Securities, this is the right time/stage to invest inEntero as it is on the cusp of growth and profitability including its track record of 34 successful acquisitions. Entero Healthcare actively seeks strategic acquisitions to fuel its growth and solidify its position in the Indian healthcare distribution market. This "pan-India" approach focuses on acquiring smaller distributors, expanding geographic reach, and deepening customer relationships. Since its inception in 2018, Entero has acquired entities, demonstrating its expertise in identifying and integrating acquisition targets. This success stems from a well-defined strategy: Targeted acquisitions: A dedicated team identifies potential acquisitions in key markets.

Entero's anchor book saw participation from a wide variety of marquee international investors, including TT Emerging Markets Unconstrained Fund, Premji, Carmignac Portfolio, Amundi Funds New Silk Road, Amundi Funds Asia Equity Concentrated, Bajaj Allianz Life Insurance Company Ltd., SBI General Insurance Limited, Jupiter India Fund, The Jupiter Global Fund-Jupiter India Select, Smallcap World Fund, Inc, Government Of Singapore, Monetary Authority Of Singapore, Pioneer Investment Fund Scheme II, Mirae Asset India Sector Leader Equity Fund, Mirae Asset India Blue Chip Equity Master Investment Trust, CLSA Global Markets Pte. LTD-ODI, Allianz Global Investors Fund-Allianz Asian Multi Income Plus, Private Client Emerging Markets Portfolio, NVIT Emerging Markets Fund, Barclays Multi-Manager Fund Plc, Magna Umbrella Fund PLC - Magna EM Income And Growth Fund, Universal Sompo General Insurance Company Limited, Societe Generale - ODI, Morgan Stanley Asia (Singapore) Pte. - ODI, Goldman Sachs (Singapore) Pte. - ODI and Copthall Mauritius Investment Limited - Odi Account in addition to Capital Group and GIC.

The Entero Direct application provides a single-interface platform to pharmacies, hospitals and clinics with visibility in real-time of products, inventory, pricing and promotional offers, and their credit status. Pharmacies can place orders directly, track the status of their orders, make online payments and arrange for returns and claim settlements. Further, healthcare product manufacturers can use the platform to display their products and run promotional offers to increase visibility and promote their brands. Entero also runs loyalty programmes on the Entero Direct platform to increase our wallet share from pharmacies and improve pharmacy retention. Through Entero Direct, healthcare product manufacturers are also able to customize offers to boost customer engagement and increase market reach with AI-based analytics. Further, through Entero Direct, our sales force is also able to plan their customer visits, access live inventory levels, view running offers, promotions and other relevant customer information before assisting customers to place an order. As of September 30, 2023, Entero Direct had over 7,700 active users, with sales on Entero Direct aggregating to ₹2,571.88 million for the six months ended September 30, 2023.