IPO Size: Rs. 1,600 cr 

• Fresh Issue Rs. 1,000 cr for (i) working capital Rs. 480 cr, (ii) debt repayment (Rs. 142 cr of Rs. 488 cr gross debt) (iii) balance for acquisitions (target for which not identified) and general corporate purposes  
• Offer for sale (OFS) of Rs. 600 cr: 80% by corporate promoter PE OrbiMed (57% stake to reduce to 38%) and 17% OFS is by individual promoters (20% to reduce to 14%)

Price band: Rs. 1,195-1,258 per share

• 75% reserved for institutions as loss through in FY21-23, only 10% for retail  

M cap: Rs. 5,471 cr, implying 29% dilution

IPO Date: Fri 9^th Feb to Tue 13^th Feb 2024, Listing Fri 16^th Feb 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Healthcare Products Distributor

Entero Healthcare is a 7 year old B2B distributor of pharma products, of 1,900 manufacturers, to 80,000 retailers and 3,500 hospital customers, through 77 warehouses across 38 Indian cities. While it is among top 3 distributors based on revenue, slim gross margin of just 8% led to net loss for all 3 past fiscals i.e. from FY21 to FY23. This is despite these years being among the best for healthcare industry, due to the covid pandemic.  

Wafer Thin Margin

FY23 revenue stood at Rs. 3,300 cr with net loss of Rs. 11 cr. H1FY24 revenue was at  Rs. 1,896 cr, with net profit of Rs. 12 cr, leading to a paltry 0.6% net margin, as company turned profitable on the bottomline for first time in H1FY24. But the good news ends here:

1. Company services Rs. 488 cr gross debt at almost 13% annual rate of interest
2. Business is working capital heavy, with 2 months of outstanding debtors and 1.2 months of inventory
3. Due to 34 local distributors acquired in last 5 years, it has Rs. 168 cr goodwill on books, which run a risk of impairment, as net fixed assets are just  at Rs. 42 cr.
4. All this leads to just 10% RoCE and 3% RoE, on H1FY24 annualised basis.

Peer Comparison

Peer Medplus, undertaking B2C operations at 21-22% gross and 1-2% net margin, reported positive net profit for all fiscals since FY19. Despite growth in quarterly revenue and operating profit, Medplus share price has slipped 20% in 2 years since IPO in Dec 2021, highlighting PE contraction for pharma distribution industry, post covid.

Unexplainable Valuation

On a ballpark basis, in FY23, Entero acquired 3 companies (Saurashtra Medisolutions, SVS Lifesciences and S S Pharma Trades) for an aggregate consideration Rs. 24.6 cr. These 3 companies reported combined revenue of Rs. 83 cr in FY23, implying an average revenue multiple of 0.3x for the acquisition. Now, Entero IPO is seeking a revenue multiple of 1.6x on historic basis, which can not be explained by any means!

Even if very aggressive growth is projected for Entero over the next 3 years, resulting in a PAT of say Rs. 90 cr for FY26E, m cap of Rs.5,471 cr leads to two-year forward PE multiple of 61x, which is extremely aggressive for mid-single digit RoE. We are unable to justify a m cap of Rs. 5,471 cr, even if all positives are baked in.