Jefferies Bullish On Entero Healthcare; Sees 50% Potential Upside

Global brokerage Jefferies started coverage on Entero Healthcare Solutions Ltd. with Buy rating and a base case target price of 1,510 rupees per share, a 50% potential upside from the current levels.

“Entero is a fast-growing healthcare products distributor operating in a large and fragmented market,” Jefferies said in an investor note. “Its wide reach and product offering, coupled with a strong technology platform, should lead to 20% organic revenue CAGR for FY24-FY26E.”

Key highlights from the brokerage’s view on Entero are:

Large & Fragmented Market

• Entero, founded in 2018, is one of India’s largest and fastest growing healthcare products distribution platforms.

• The market is highly fragmented with 65,000 distributors and the top-three large/national distributors like Keimed, Aknamed/Ascent and Entero having only around 8%-10% market share.

Well-Placed For Organic Growth

• Entero has created a network of over 80,000 retailers (one in ten retailer buys from Entero) and 3,400 hospitals in a short span due to its wide reach and product offering.

• The company’s ancillary businesses comprising marketing services to pharma firms and private label products supplements the distribution business.

• Entero ensures high fill rates for its customers through the strong technology platform and gains a bigger share of the retailer wallet.

• Like in the previous years, Entero is well-positioned to achieve a 20% organic growth, which is 2x industry growth of 10%-11%.

Gain From Industry Consolidation

• Fund raised from IPO also makes Entero well-positioned to capitalize from the industry consolidation.

• With IPO cash, Entero should be able to capitalize on various acquisition opportunities and clock non-linear growth in next two-to-three years.

Revenue & Profit Outlook

• Entero is likely to witness a 44% revenue CAGR to 80 billion rupees over FY24-FY26.

• Scale benefit and improved product mix should drive 40 basis points gross margin expansion to 9.4%.

• Operating leverage benefit should improve EBITDA margins to 4.8% by FY26 from 2.9% in FY24.

• With scale of economies and mix improvement, EBITDA should expand by about 200 basis points in the next two years.

• Entero’s adjusted net profit (adjusted for one-time IPO fees) should grow around 8x to 2.6 billion rupees, while its return on capital employed should near 17% by FY26.

Jefferies said in the absence of any direct competitor, it benchmarks Entero to MedPlus Health Services Ltd., its most comparable peer in the business-to-consumer (B2C) pharma retail channel.

“We value Entero at 25x FY26E EPS, which is at a 40% discount to Medplus’ FY26 PE consensus valuations due to B2B nature of Entero versus B2C for Medplus,” Equity Analyst Alok Dalal and Equity Associate Dhawal Khut said in the note.

The brokerage said it has a target price of 2,012 rupees on Entero, based on its upside scenario assumptions. On the downside, it set the target price at 925 rupees. The stock closed at 1,000 rupees on the NSE in Mumbai trading today.

Jefferies noted that delays in achieving scale benefit leading to slower-than-expected margin expansion, inability to integrate acquisitions smoothly and overpaying for acquisitions are key risks.

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