Entero Healthcar

Entero Healthcare Solutions reported strong financial results for Q4 and the full fiscal year 2024. For Q4 FY24, revenue grew 17% year-on-year to INR 1,034 crores, outperforming the Indian pharmaceutical market growth of 6%. EBITDA for the quarter increased by 42% to INR 29 crores, with margins expanding by 49 basis points to 2.8%. The company achieved a positive Profit After Tax (PAT) of INR 21 crores, a significant turnaround from a loss of INR 4 crores in the same quarter last year. For the full FY24, total operating revenue reached INR 3,922 crores, up 19% YoY, against a 7.6% industry growth. Full-year EBITDA surged 75% to INR 112 crores, with PAT turning positive at INR 40 crores compared to a loss of INR 11 crores in FY23.

Management outlined a confident growth strategy for FY25, targeting a 35-40% increase in revenue. This growth is expected to be driven by a 20% organic expansion, significantly higher than the anticipated 8-10% IPM growth, and at least INR 1,000 crores from strategic acquisitions. The company emphasized its ability to gain market share through its unique value proposition, including a wide product range and timely delivery (three to four times a day). Recent acquisitions, such as Avenir Lifecare (80% stake) and three other distributors in Noida, Bijapur, and Ahmedabad, are expected to add over INR 170 crores in annualized revenue and expand the company's presence to 41 cities.

Entero Healthcare achieved a 100 basis point improvement in EBITDA margins in FY24 over FY23, with gross profit margin reaching 9% for the year. This expansion was primarily attributed to procurement efficiencies and a favorable product mix, shifting towards higher-margin products like medical devices and surgical consumables, which carry 1.5x to 2x the gross margin of pharma products. For FY25, management guided for another 100 basis point improvement in EBITDA margins, expecting a mix of continued gross margin expansion and a larger contribution from operating leverage as revenues scale up.

The company detailed its acquisition strategy, focusing on acquiring distributors at reasonable valuations, typically at a mid to high single-digit EV/EBITDA multiple. For an acquisition generating INR 100 in sales and INR 4 in EBITDA, the enterprise value would be around INR 24, including INR 15-16 of working capital and INR 8 of goodwill. Management stated that the payback period for the goodwill component is typically 2-2.5 years, or even less with strong organic growth post-acquisition. The outlay for achieving INR 1,000 crores of inorganic revenue in FY25 is estimated to be INR 250-300 crores in enterprise value, which includes the associated working capital.

Working capital days as of March 31, 2024, stood at 67 days, a slight increase from 64 days last year. Management clarified that this figure includes GST for standardized reporting. They explained that the increase was partly due to the significant scale-up of revenues from Q1 to Q4 and the consolidation of full working capital for acquisitions where only partial year revenues were recognized. Approximately INR 158 crores from the IPO proceeds were utilized post-February 16th until March 31st for purchasing materials and goods, which helped reduce debt and optimize interest costs.

Entero Healthcare's total operating expenses (employee and other expenses) were around INR 240 crores in FY24. Management provided a breakdown, indicating that approximately 0.8% to 1% of total operating expenses are variable, with the remaining 5% being fixed costs. The largest component of fixed costs is manpower. While operating leverage was less visible in FY24 due to partial revenue consolidation from acquisitions, management expressed confidence that it would play out significantly from FY25 onwards. This is expected as inorganic growth directly contributes to leveraging the existing fixed cost base, including corporate and unit-level staff and administrative costs.

The company aims for a substantial increase in its return profile, targeting a sustainable Return on Equity (ROE) of '20% plus' in the next two to three years. This ambition is supported by the improved normalized ROCE, which rose from 6.1% to 10.2% in FY24, and a normalized ROE of 5.8% (from negative last year). Management believes that reaching 200,000-250,000 retail pharmacies would constitute a 'substantial reach' within the country, potentially limiting the need for new geography additions beyond that point. The strategy includes leveraging data and the ability to drive higher growth for manufacturers to secure better gross margins as the company scales.