In an era of intense competition and India’s pharmaceutical and healthcare sector growing at breakneck speed, IIFL Capital suggests a ‘Buy’ for Entero Healthcare. The brokerage provides a target price of INR 1,500, reflecting an upside of 30%.

Enetero Healthcare

Entero Healthcare is one of India’s top three pharmaceutical distribution platforms. It operates in an industry that’s still very much fragmented. Entero plans to grow by bringing smaller companies together and offering unique solutions to meet demand and help manufacturers.

The Indian pharmaceutical distribution market is expected to be around INR 3.3 lakh crore, and it is expected to grow at a CAGR of 10-11%. Yet the top three national distributors: Keimed, PharmEasy and Entero hold just 8-10% of the market. That’s much lower compared to the 90-95% market share of big distributors in developed countries. This difference shows the big growth potential for merging companies in India.

With its distribution network spread across 104 warehouses in 45 cities, Entero is well-placed to seize a significant share of the market. It can deliver products to 492 districts across 20 states, serving over 86,200 retail pharmacies and 3,200 hospitals. Entero distributes over 76,600 SKUs from more than 2,500 healthcare product manufacturers.

IIFL expects that the combined market share of the big national distributors in India to rise to 20-30% by FY28. That growth will largely be driven by consolidation. Entero is capitalizing on that trend through both organic and inorganic growth.

Strategic Acquisitions

Entero’s rapid growth is largely down to its aggressive acquisition strategy. Since its inception in 2018, the company has bought out 45 smaller entities. Of those, over 30 have seen revenue growth of 20-25% in the last two to three years. That kind of growth is expected to continue, and potentially add INR 4,000 crore in cumulative revenue over the next five years.

Impressive Financial Projections Ahead

IIFL Capital expects Entero to see some impressive financial growth. Revenue, EBITDA and profit after tax are all set to grow at 24%, 45% and 46% respectively from FY25 to FY28. Organic growth will drive most of that revenue growth—about 16.5%. Acquisitions will add another 8-8.5%. What’s also noteworthy is the expected improvement in margins. Procurement efficiencies, higher-margin medical devices and value-added services will all contribute to that.

As Entero scales, its operating leverage should kick in. That means it will be able to improve its EBITDA margins and push its pre-tax profits upwards. IIFL also expects a sharp improvement in free cash flow and return on invested capital from FY27 onwards. Management is targeting an EBITDA margin of 5% by Q4FY26 and reducing net working capital from 69 days to 60 days by FY27.

Entero Healthcare Post-IPO Performance

Entero Healthcare launched its IPO on 9 February 2024, with an issue size of INR 1,600 crore. This massive IPO was subscribed 1.5X and delivered losses of 8.62% on listing day. Notably, the IPO soon turned profitable and reached an all-time high of INR 1,549.55 per share, reflecting a 23% return from its allotment price of INR 1,258 per share. Currently, it is trading around INR 1,190 per share, below its IPO allotment price.

Looking Ahead

Entero is well-positioned to redefine pharmaceutical and healthcare product distribution in India. Its integrated technology platforms, robust distribution infrastructure and vast network of pharmacies and hospitals give it a competitive edge. That’s what sets it apart from traditional, local distributors. The company’s growth potential is clear, with revenue forecasts and market share expansion supporting a BUY recommendation.

The stock performance is also a reflection of that optimism. Analysts are predicting a potential 30% upside to the target price of INR 1,500. Entero’s ability to deliver efficient, reliable and timely distribution of healthcare products nationwide makes it a strong contender in a space that’s ripe for consolidation.

Conclusion

IIFL Capital’s analysis of Entero Healthcare suggests that the company is on the cusp of a breakthrough moment. With a strong track record in acquisitions, a differentiated business model, and an expanding market share in a growing market, Entero is well-positioned to capitalize on the fragmented nature of India’s pharmaceutical distribution market. The 30% upside indicated by IIFL reflects a promising future for the company as it continues its rapid ascent in the healthcare distribution sector.

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Disclaimer: The article is for informational purposes only and does not constitute financial or investment advice. Invest wisely.