Entero Healthcare IPO review (May apply)

Entero Healthcare IPO review (May apply)

• EHSL is one of the largest healthcare product distributor in India.
• It posted fastest scale of revenue growth as expressed by its financial performance.
• After marking losses, it turned the corner for the first half of FY24.
• Based on the annualized FY24 earnings, the issue appears aggressively priced.
• Well-informed/risk taker/cash surplus investors may park funds for the long term rewards.

ABOUT COMPANY:
Entero Healthcare Solutions Ltd. (EHSL) is amongst the top three healthcare products distributors in India in terms of revenue in Financial Year 2022 (Source: CRISIL Report). Further, it also achieved the fastest scale-up of operations among healthcare products distributors in India (between Financial Year 2019 to Financial Year 2022), (Source: CRISIL Report).

The Company was founded in 2018 with the vision to create an organized, Pan-India, technology driven and integrated healthcare products distribution platform that can add value to the entire healthcare ecosystem. The company adds value to the healthcare product manufacturers that work with it by providing them reach and accessibility to pharmacies, hospitals and clinics through EHSL’s integrated and technology driven, Pan-India healthcare products distribution platform.

As of September 30, 2023, its 77 warehouses located across the country, last-mile delivery infrastructure and relationships with pharmacies, hospitals and clinics enables healthcare product manufacturers to make their products available to a wide range of customers. Similarly, the pharmacies, hospitals and clinics that the company services get access to a wide range of healthcare products through EHSL’s distribution infrastructure and healthcare product manufacturer relationships. During the Financial Years 2021, 2022 and 2023, and the six months ended September 30, 2023, EHSL 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 gives access to over 63,900 product stock-keeping units (“SKUs”).

With its nationwide presence of 77 distribution warehouses located across 38 cities in 19 states and union territories, and a customer base of over 73,700 pharmacies and 2,800 hospitals spread across 501 districts, as of September 30, 2023, the company provides vast access to healthcare product manufacturers. As of September 30, 2023, it has 464,112 square feet of warehousing space with temperature monitoring systems and modern storage solutions for optimal storage of healthcare products.

EHSL leverages technology to provide a positive buying experience through its digital solutions such as the Entero Direct B2B application (“Entero Direct”), where customers have real-time visibility of EHSL’s product range, pricing, inventory levels, order status, outstanding balances, promotional offers. Entero Direct can be used for order management 24 hours a day, seven days a week. Through Entero Direct, pharmacies are able to place orders with it, track the status of their orders, make online payments and arrange for returns and claim settlements by means of an integrated ‘single-click’ system. Further, healthcare product manufacturers can use the Entero Direct platform to display their products and run promotional offers to promote their brands. As of September 30, 2023, Entero Direct had over 7,700 active users.

It has grown business through both organic and inorganic means (i.e. through acquisition of distributors). As part of its inorganic growth strategy, it has endeavored to take advantage of the market consolidation opportunities available in the Indian healthcare products distribution market. Accordingly, the company has adopted a Pan-India approach towards acquiring and integrating smaller distributors to expand EHSL’s geographic reach and increase the wallet share from its customers. Since inception in the Financial Year 2018, it has acquired 34 entities in the healthcare products distribution industry. As of September 30, 2023, it had 3181 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo book building route IPO of fresh equity issue worth Rs. 1000 cr. (approx. 7949128 shares at the upper cap) and an Offer for Sale (OFS) of 4769475 shares (worth Rs. 600 cr. at the upper cap). Thus the overall IPO size will be 12718603 shares worth Rs. 1600 cr. The company has announced a price band of Rs. 1195 – Rs. 1258 per share of Rs. 10 each and minimum application to be made is for 11 shares and in multiples thereon, thereafter. The issue already opened for subscription on February 09, 2024, and will close on February 13, 2024. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 29.24% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 142.50 cr. for repayment/prepayment of certain borrowings, Rs. 480 cr. for funding long term working capital, and the rest will be used for inorganic growth/acquisitions and for general corporate purposes (not exceeding 25% of the gross proceeds).

The company has reserved shares worth Rs. 8.00 cr. for the eligible employees and offering them a discount of Rs. 119 per share. From the rest, the company has allocated not less than 75% for QIBs, not more than 15% for HNIs and not more than 10% for retail investors.

The joint Book Running Lead Managers to this issue are ICICI Securities Ltd., DAM Capital Advisors Ltd., Jefferies India Pvt. Ltd., JM Financial Ltd., and SBI Capital Markets Ltd., while Link Intime India Pvt. Ltd. is the registrar of the issue.

Having issued/not accessible) between July 2023 and January 2024. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 12.05, Rs. 12.28, Rs. 249.25, Rs. 238.69, Rs. 240.53, Rs. 245.90, Rs. 245.91, Rs. 245.92, and Rs. 245.94, per share.

Post-IPO, company’s current paid-up equity capital of Rs. 35.54 cr. will stand enhanced to Rs. 43.49 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 5471.34 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, as per restated financials, the company has (on a consolidated basis) posted a total income/net profit/ -(loss) of Rs. 1783.67 cr. / Rs. – (15.35) cr. (FY21), Rs. 2526.55 cr. / Rs. – (29.44) cr. (FY22), Rs. 3305.72 cr. / Rs. – (11.10) cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 11.64 cr. on a total income of Rs. 1898.98 cr. Thus the company has turned the corner for the first half of ongoing fiscal. The steady growth in top line indicates the likely future trends with commensurate improvement in the bottom line (since it has turned the corner as per the first half fiscal data).

For the last three fiscals, the company has reported an average EPS of Rs. – (5.50) and Rs. – (6.10) (post conversion of CCPS), and an average RoNW of – (3.20) %. The issue is priced at a P/BV of 7.54 based on its NAV of Rs. 166.90 as of September 30, 2023, and at a P/BV of 3.60 based on its post-IPO NAV of Rs. 349.39 per share (at the upper cap). And the NAV on the basis of post CCPS conversion data will be Rs. 185.84 as of September 30, 2023, and post-IPO Rs. 381.80 per share (at the upper cap). Accordingly, the P/BV will be 6.77 and 3.30 respectively.

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 235.14. Thus the issue appears aggressively priced.

For the reported periods, it posted PAT margins of – (0.86) % (FY21), – (1.17) % (FY22), – (0.34) % (FY23), 0.61% (H1-FY24), and RoCE margins of 1.88%, 1.49%, 6.05%, 5.17% respectively for the referred periods.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has adopted a dividend policy in August 2023 based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per offer document, the company has shown Medplus Health as their listed peers. It is currently trading at a P/E of 128 (as of February 09, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
The five BRLMs associated with the offer have handled 97 public issues in the last three fiscals, out of which 26 issues closed below the offer price on listing date.

Conclusion / Investment Strategy
The company is one of the leading and fastest growing healthcare product distributor in India. EHSL marked losses for FY21 to FY23 and turned the corner for H1 of FY24. Based on annualized FY24 earnings, the issue appears aggressively priced, discounting all near term positives. Well-informed/risk seeker/cash surplus investors may park funds for the long term reward as it holds prospects going forward.

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