IPO Analysis: Entero Healthcare Solutions Ltd

IPO Rating: Avoid

About the Issue:  

Entero Healthcare Solutions Ltd is launching its initial public offering (IPO) for equity shares valued at Rs 10 each. The IPO price range is set between Rs 1,195 and Rs 1,258 per equity share, resulting in a total issue size of Rs 1,600 crore at the upper price band.  

The IPO is scheduled to commence on February 09, 2024, and will conclude on February 13, 2024. The market lot size for the IPO is 11 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 14 lots, equivalent to 154 shares or a total investment of Rs 1,93,732 assuming the upper price band.   

Objects of the Issue  

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company intends to use the net proceeds from the fresh issue for repayment/prepayment, in full or part, of certain borrowings availed of by the company, funding the long-term working capital requirements, pursuing inorganic growth initiatives through acquisitions and general corporate purposes.

Promoter holding  

Prabhat Agrawal, Prem Sethi, and OrbiMed Asia III Mauritius Limited are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 77.11 per cent in the company.   

Company profile  

The company was founded with the vision of establishing an organized, pan-India, technology-driven, and unified platform for distributing healthcare products, aimed at enhancing the entire healthcare ecosystem. According to the CRISIL report, in FY22, the company ranked among the top three healthcare product distributors in India based on revenue for the financial year 2022.

The company has expanded its business through a combination of organic growth and strategic acquisitions. As part of its inorganic growth strategy, it has actively pursued opportunities for market consolidation within the Indian healthcare products distribution sector. Since its establishment, the company has acquired a total of 34 entities operating in the healthcare products distribution industry.

As of September 30, 2023, the company has extended its distribution network to 501 districts across India, leveraging a network of 77 warehouses spread across 19 states and union territories. Additionally, it has cultivated supply partnerships with over 1,900 healthcare product manufacturers, granting access to a vast range of more than 63,900 product SKUs.

Financials  

Despite the company consistently growing its revenue annually, it has struggled to achieve profitability over the past three years. Operating within an intensely competitive landscape and compelled to remain technologically up-to-date, the company has faced substantial costs associated with procuring healthcare products for resale. This expenditure has had a significant impact on its profitability in recent years. While the figures for the H1FY24 were notably positive, concerns about sustainability persist.

Valuation and outlook  

The issue is priced with a P/BV ratio of 7.54 times, calculated using its Net Asset Value (NAV) of Rs 166.90 as of September 30, 2023. When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the fully diluted paid-up equity capital, the resulting PE ratio stands at 213. The valuation appears significantly high in comparison to that of its listed peer.

Despite the promising outlook of the industry, fuelled by India's large population and substantial demand for healthcare products and services, concerns stay regarding the company's financials and future growth potential. Risks associated with acquisitions, the possibility of future negative cash flows, significant levels of borrowing, and persistent high working capital requirements represent potential threats to the company's stability and expansion. Therefore, we recommend investors to avoid this IPO, given its associated risks.