Entero Healthcare Solutions Limited (ENTERO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q1 FY '26 Earnings Conference Call of Entero Healthcare Solutions Limited, hosted by Monarch Networth Capital Limited. [Operator Instructions] Please note that this conference is being recorded. Please note this conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Rahul Dani from Monarch Networth Capital. Thank you, and over to you.

Thank you. Good evening, everyone, and a very warm welcome to Entero Healthcare Solutions Q1 FY '2026 Earnings Call. On the call today, we have with us Mr. Prabhat Agrawal, Managing Director and CEO; and we have Mr. Balakrishnan Kaushik, Group CFO. I will hand over the call to the management for the opening remarks and then we'll move to Q&A. Thank you, and over to you, sir.

Thank you. Good evening, everyone, and thank you for joining our earnings conference call to discuss the operational and financial performance for Q1 FY '26. My name is Prabhat and, on this call, I'm joined by Mr. Balakrishnan Kaushik, Group CFO; and SGA, our Investor Relations advisers. I hope everyone had an opportunity to go through the financial results and investor presentation, which has been uploaded on the stock exchange and also on our company's website. We have started the new financial year on a strong note with Q1 revenues growing 28% year-on-year as against the IPM growth of 9% to INR 1,404 crores. On a like-to-like basis, the revenue growth is 31%. 3% growth is adjusted after change in revenue recognition for a certain contract on a net margin basis. More importantly, this growth is broad-based, supported both by organic expansion, contributing 15% on a like-to-like basis, where we continue to deliver around 1.6x the market growth rate and the rest through M&A executed in last financial year. We have already announced more than INR 400 crores of acquisitions in the last quarter -- in the last conference call, some of which have already closed in the current quarter and the balance also will be closed in the quarter 2 itself. At the same time, there are more deals in pipeline, which will be announced once the transaction documents are signed. Acquisitions will remain an important lever for growth, but our approach will continue to be disciplined and value accretive. Gross profit came in at INR 140 crores, up 40% year-on-year with our gross margins improving by 83 basis points to 9.9% versus last year and 17 basis points versus last quarter. This improvement has been driven by higher value-added services, margin accretive categories and procurement efficiencies. EBITDA for the quarter was INR 50 crores, representing a growth of 66% year-on-year, with margins improving by 82 basis points versus last year to 3.6%. Profit after tax increased 47% year-on-year to INR 30 crores. In spite of higher gross margins versus last quarter, the EBITDA margins declined from 3.7% to 3.6% versus last quarter as the operating leverage impact was not felt in this quarter due to annual salary and wage increases being implemented at the beginning of the year. Our revenue base increased by 5% versus last quarter, while operating costs increased by 9% over last quarter. Now the fixed manpower costs have been fully baked in the quarterly operating cost numbers. And as the revenue growth catches up in the rest of the year, the positive impact of operating leverage will start playing out. Even the IPM revenue grows significantly from quarter 2 onwards and after the rainy season. This is in line with our historical quarterly performance and even our full year guidance of 4% plus EBITDA margins has factored this in the projections. Equally important is our continued focus on cash flows. We have moderated our net working capital from about 71 days about a year ago to around 66 days in last couple of quarters. We have initiated multiple initiatives to further optimize both inventory and receivables through ERP-driven controls and data science-based techniques, and we are targeting another 10% reduction in working capital days by end of this financial year. Our network and reach have strengthened further. We now serve over 71,000 retail pharmacies and more than 2,500 hospitals across 469 districts in India, supported by 102 warehouses strategically located across the country. Our product portfolio has expanded to over 74,700 SKUs sourced from more than 2,600 health care product manufacturers. This scale is not just about numbers. It is about reach, vast product portfolio, service reliability and quality, which helps us to continuously gain confidence and wallet share from our customers. More and more customers, including even organized retailers, find our value proposition compelling and unique. At the same time, as we penetrate larger parts of India with significant share in micro markets, we become significantly more attractive for any health care product manufacturer to collaborate or partner with us, both for demand fulfillment and demand generation activities. Our strategic playbook centered on discipline in organic growth, organic scale-up in underserved markets and deepening partnerships with health care brands continues to deliver and bring us closer to our long-term vision of building India's most comprehensive, efficient and digitally integrated health care distribution platform. We are executing on 3 clear growth pillars. First, organic expansion. deepening penetration in our existing markets, winning a larger wallet share from existing customers and expanding our product range, especially into higher-margin categories like medical devices, diagnostics, surgical consumables, trade generics and specialty pharma. Second, discipline in organic growth. We are very selective with acquisitions now. We only acquire where there is a strong strategic fit, whether it's a new geography, a differentiated product segment or a capability that strengthens our value proposition. Third, operational excellence. This means better procurement, technology-driven efficient warehousing and delivery infrastructure and optimized operating cost and working capital management. It is worth reiterating that the Indian pharma distribution market is still highly fragmented with organized players accounting for less than 10% of the market. Our pan-India technology-led and category-neutral platform is difficult to replicate. This positions us uniquely to capture outsized share gains as the market consolidates. Looking ahead, we are on track to deliver 30% revenue growth in FY '26, including both organic and inorganic growth, surpassing 4% full year EBITDA margins and generating positive operating cash flows. Margin expansion will be driven by richer product mix, procurement gains, value-added services and operating leverage from scale. We are targeting to achieve the working capital target of 60 days by end of this financial year. In summary, quarter 1 FY '26 has been a strong start to the year. We will continue to deliver on the vast consolidation opportunity in an extremely fragmented health care supply chain through organic expansion as well as disciplined M&A. We continue to add customers, enhance product portfolio through collaboration with health care brands, diversify into new product categories such as medical devices, diagnostics, trade generics, et cetera, to become a one-stop solution for our customers. With this, I close my opening remarks and invite people to ask questions.

[Operator Instructions] The first question is from the line of Chintan Sheth from Girik Capital.

Congrats on the improvement in gross margins and EBITDA margins. A couple of questions on the growth part. You did mention that 31% is a like-to-like growth with 3% is related to revenue recognition impact. But if I look at organic growth of 15% and adjust and calculate the inorganic contribution for the quarter, it seems sequentially declining. Last quarter, I think you mentioned around INR 200 crores to INR 225 crores was the contribution from the inorganic revenue. What would be that number? And if the number has lowered down, why entire...

Yes, Bala will respond to the breakup into organic and inorganic.

Yes, so Chintan, this is Bala here. So if you look at the growth, the INR 225 crores that you mentioned for last quarter, that number was about INR 218 crores. And this quarter, that's about INR 230 crores. So there is a growth. When you look at organic, inorganic for entities that were acquired during the quarter 1 of FY '25, the portion that was there in the reported numbers will move into organic. So if you look at like-to-like, it's about INR 230 crores versus INR 218 crores of last year. So there is growth on those numbers as well.

Okay. Got it. And in terms of acquisition pipeline, if you can -- we're still keeping track on the INR 800 crores to INR 1,000-odd crores of revenue acquisition for the year? Or any change on that number, if you want to highlight?

Yes. So if you look at the guidance that we gave on this year's of revenue rate of growth of 30%, that includes both organic and inorganic part, right? So on the inorganic part, we had assumed around INR 500 crores of recognized revenue in our books, so which is what we are on track. We have already done INR 400 crores in quarter 1, we announced, which will be start reflecting from quarter 2 onwards. And there are further 4 acquisitions in pipeline that will be completed.

The next question is from the line of Bhargav from Ambit Asset Management.

Sir, in your press release, you mentioned that earlier, the guidance was to do acquisition by August, but that has been pushed over to November. So if you can share some reasons for the same? That's my first question.

We have pushed to November -- so all these acquisitions that we have announced in previous conference call, that will be completed during this quarter. Two of them we have already completed. One of them, we are just waiting for drug license to conclude.

Okay. So what you were hinting at is that in the second quarter, a couple of acquisitions will be announced?

Not announced, completed. The ones that we announced previously.

Yes. So your revenue recognition will start happening.

Yes, yes. From quarter 2, yes.

Okay. And what would be the size of them in terms of revenue from the second quarter?

It depends on the day when we are able to close. As I told you, a couple of them, we have already closed, right? So some of them, the revenue is flowing from July beginning. One of them is going to flow from July end. One of them, we are just -- everything is complete. We are just waiting for the new drug license in the new company. The drug license site is down for 10 days now. So we are not able to close that transaction. The moment drug license -- the site is open within 3, 4 days, we should start -- we should close the transaction and the revenue will start flowing in. So it's difficult to accurately predict. Some of this we are dependent on external factors. But what I can tell you that all 4 transactions will be definitely closed. Two of them have already closed, balance 2 will also be closed.

Okay. Secondly, sir, is it fair to say that 1Q is seasonally the weakest quarter for us? And if we have done 66 days of working capital in 1Q, it is fair to say that the working capital from here on only should improve given that the revenue growth in terms of absolute also will be higher in the subsequent quarter?

Yes. Because typically, if you look at even the pharma industry, how the revenues are split into 4 quarters, you will see that quarter 2 is generally 8% to 10% higher than quarter 1. Quarter 2 is the strongest quarter in the pharma industry, right, because of the rainy season, because of the spread of infectious diseases. So typically, and historically, also even in our numbers, you will see that quarter 2 is generally 10%, 12% higher than quarter 1. So on a high quarter numbers, your NWC in days goes down because the NWC doesn't increase in the same proportion. So you are right. These numbers will improve in quarters to come.

And lastly, sir, Amazon India has significantly expanded its reach in selling medicines. So now they are servicing in almost all of their serviceable pin codes. So do we benefit out of this? And how big can this business become? And related to that, Zepto has also launched pharmacy in August in 4 major metros. So if you can combine both of these in the same answer, that would be very helpful.

See, quick commerce foray into pharma or health care, I'm not too sure about how this is going to scale up and how this is going to impact because there are a lot of challenges in quick commerce, especially on the pharma category. And the challenges are basically 3. Number one is the range because if the quick commerce value proposition is delivery in 10 minutes only, then there are a few medicines that they can deliver in 10 minutes. But if their value proposition is going to be fulfilling the prescription, then they won't be able to do that because the pharma -- the number of SKUs is just humungous, right? So there are so many brands, even we are carrying 75,000 SKUs. The whole market is carrying more than 150,000 SKUs, right? So if your value proposition is going to be fulfilling the prescription and there are 4, 5 drugs written in the prescription, it will be very difficult for them to fulfill all 4, 5. Even the large organized, e-pharmacies are not able to do it, right? So that will be #1 challenge. Number two challenge will be on AOV. So how to drive AOV on this because in 10 minutes, as I said, that whole range will not be available with you. So your AOV could be much, much lower. On a lower AOV, you will burn a lot of money, okay, because your delivery costs and other costs will be a very high proportion of your sales. Third is the prescription because the prescription, if you don't have a prescription, then you have to generate prescription through doctor calling, that adds a lot of cost to the system. So on a lower AOV, prescription generation is required, then that will eat up a lot of margins. Thirdly, fourthly, in terms of if you want to go -- because of this prescription addition, your 10-minute thing may not work out. So it will take much longer time for you to supply the medicine. And -- but you won't be able to combine pharma delivery with other delivery because if you want to combine both, pharma will take more time because of prescription and because of that, the other things will also get delayed. So typically, what is happening is they are delivering pharma separately and other SKUs separately from the same basket, which adds significant additional cost because on the same order, you will have 2 deliveries. So because of all these challenges, I'm not too sure how much pharma will be profitable for quick comm companies. But they are experimenting, let's see how it works out.

And Amazon?

Amazon has a better opportunity than other people because Amazon is not on quick commerce. Amazon is trying to fulfill the whole prescription range, right, which is you don't find anywhere, you find on Amazon. So the value proposition of Amazon is selection, not the speed.

Yes. So are we participating in that opportunity?

Yes, we supply to organized retailers. Yes.

The next question is from the line of Ishmohit Arora from SOIC Research.

I had a question that for the full financial year, do we maintain that we'll grow our top line by 30% because sequentially, our growth has been lower for the last 3 quarters in a row now.

Sorry, what?

For the full financial year, do we maintain our 30% plus top line growth guidance because sequentially for the last 3 quarters, our growth has been a bit slower.

So see, if you look at last whole financial year FY '25, our growth rate was more than 30%, right? So when we said that similar growth rate will continue in this year. Even on a like-to-like basis, our growth rate was 31%.

Right. Because I think beginning from the -- I think, this quarter, our base is pretty elevated when it comes to basically top line comparison versus last year?

Yes. So the base of quarter 2 is higher, and that always has been. If you look at many years for last few years, always quarter 2 is much higher than quarter 1. So of course, our quarter 2 numbers have to be significantly better than quarter 1 to even deliver that kind of a growth over a quarter 2 base.

Right, right. And sir, second question was that I think in first half of this financial year or for the full financial year, I think, last con call, you alluded to that in H2, you have seen positive cash flows. Do we expect a similar trend to continue? As H1, we'll have positive cash flows or for the full financial year, you'll will maintain that we'll see positive cash flows?

We expect that on a full year basis, we will be positive cash flow. And similarly for EBITDA margin also, we have said that on a full year basis, we will be 4% plus.

The next question is from the line of Sudarshan Padmanabhan from ASK Wealth Advisors.

Sir, my question is, if I want to understand a little bit more on the operations, say, in the last few quarters. And even if I look at the fourth quarter versus the first quarter, the number of district covered had basically come down from 500 to 469. And similarly, the number of retailers, the number of SKUs as well as the number of manufacturers. So I mean, anything that you can add in this? Or are we primarily looking to basically scale down and focus more on operational excellence?

Just one second, I'm just trying to pull out the earlier quarters' this thing. Just give me a moment. So if you look at sequentially also, if you look at quarter, my quarter 4 at 69,000 customers, quarter 1 at 71,000 customers, right? So it has not gone down.

Okay. Okay. So I mean, I was referring to the SKUs and the number of district covered, et cetera. That's the Page #6 of the...

Yes. So if you look at -- in quarter-to-quarter -- I mean, comparing exactly with the same quarter last year for district covered in FY '26 was 469. Last year, it was 448.

So there is a seasonality is what you're saying. I mean, even in this data that you're providing, I mean, on a quarter-on-quarter?

I'm not able to understand how you're figuring out seasonality, which data point are you looking at?

So I'm looking at the data point where the number of SKUs handled in FY '25 is basically 80,600. The number of retailers is 95,300, and when I'm coming to the first quarter, it shows the retail has...

See that you're looking -- you're comparing with -- full year with a quarter, okay? If you look at just quarterly numbers because sometimes what happens is that, that same retailer may not have billed in every quarter, so it will get captured in the full year, but it may not get captured in that particular quarter in which we have not billed him, right? So you look at quarter-to-quarter, so if I look at last year, quarter 1 FY '25, we had 60,000 customers. In quarter 1 of this year, we have 71,000 customers. That's a more like-to-like comparison.

Sure. And with respect to understanding the cost, I think, one, clearly on a year-on-year basis, when I see there has been a stark improvement in the gross margin. And for the reason that you had explained that there has been a salary hike. But is it fair to understand going forward, you're talking about over 30% growth. The rate of change of the salary cost would incrementally start coming down. And incrementally, that will start flowing to your EBITDA, so that is probably something that we should expect from the next 3 quarters?

Yes. It's a simple math. For example, we had an operating cost of something like INR 89 crores in this quarter, right? So all the salary increases have already been baked in quarter 1, okay? And my growth is close to 10%, 11% -- sorry, 9% operating cost, right? My revenue growth target is 30% for the full year, right? But on a quarter-on-quarter basis, my revenue growth is only 5%. So this 5% will expand to 30%. But my entire cost increase has already been baked in quarter 1.

Sure. And if I just go through that, probably you will exit your fourth quarter, if I just extrapolate this by about anywhere between 4% to 4.5%, which is where for the full year, you will basically end up, but...

Yes. I mean, next 3 quarters has to be between that.

Sure. And with respect to the acquisition, I think as you had talked earlier that there is going to be part growth from your acquisition and partly from your existing business. Just to understand from a longer-term perspective, as the base catches up, what is your thought process with respect to the rate of change of acquisition that has been very healthy till now?

So rate of acquisition will go down in future. In next 2, 3 years, the rate of acquisition will go down because we will not need so many. I mean we would have penetrated a good part of India. We would have expanded into various product segments. So the need -- the inorganic need will go down, right? So today, the inorganic is contributing almost 15%, 16% on our growth, right? So in future, this 15%, 16% growth will taper down. The organic growth would continue.

Perfect. But the cash flows will be more robust, right? Because in that case, your acquisition, the CapEx that goes into it, that will not be required. So to that extent, your cash generation ability will increase substantially.

Yes. The idea is that we should be cash flow positive on the operating cash flow. So whatever operating cash flows we generate, that would give us the ability to acquire more in future. As of now, we are using the IPO funds to do that.

Perfect, sir. And I mean, just one final question before I join back. What would be the OCF, say, in the last -- second half of last year and first quarter of this year? Just some color on that.

It was positive. Last 6 months was good positive. But as I told you, we are working on multiple projects on working capital reduction. And I believe among all the levers, that's the lower-hanging lever for us because we can -- at this scale, we can definitely optimize much more on working capital. Today 66 days, and earlier we had given a target of getting 10% reduction or 60 days in 2 years. Now we are saying that by end of this financial year, we should be able to reach there.

The next question is from the line of Sajal Kapoor from Antifragile Thinking.

First question is, has Entero's approach to integrating acquisitions fundamentally evolved between, let's say, 2018, '19 versus last 12 months?

Yes. Definitely, we have been learning from our experience over the last 4, 5 years.

Would you be able to share 1 or 2 examples of that learning, please?

No. Now earlier, we were taking a much slower approach in integrating. Now we are taking a more aggressive approach in integrating. So from maybe we changed the ERP systems or technology systems from day 1; earlier, we were waiting a much longer time to change those things because we wanted the existing sellers to -- we didn't want to disrupt the business so much, and we wanted a slower integration. Now we are much ahead in that. Our selection criteria has changed quite a bit now versus earlier. Now we are not looking at very small-scale acquisitions. We are looking at the targets from multiple angles as compared to how we used to look at it in the first 2 years of our existence. And that's why you would see that most of the acquisitions that we have done over the last 12 months have all been margin accretive.

Yes, sure. And just to follow up, I mean, how do you motivate your team and maintain a productive company culture amid this rapid organic and inorganic expansion?

This team has been around for a long time. Most of the senior members of this team have been around for the last 6 years. They know we have grown together as a team. They have various kind of reward mechanisms in place, including ESOPs and all that. So this is an exciting business. Where would you find so many businesses where we grow like 30% year-on-year with 10 acquisitions in a year being done. So it's a great learning experience also for a lot of people.

Sure, it is. Yes. And lastly, what is the investment road map for your proprietary technology platform over the, let's say, next 1 to 3 years?

We have already built a lot of technology. To be honest, we have -- we are one of the few companies that have developed our own ERP systems. It can be customized, it can be integrated with Facebook, can be integrated with WhatsApp, it can be integrated with any other social media platform. So all these -- we have built our own apps, customer-facing apps. We are also working on a health tech platform where we should be able to integrate directly with the retailer systems. So all these tech investments have been made in the past. We don't see much significant investments in tech going forward. It's already in place. It just needs to be utilized more or capitalized more.

So that means that as we start monetizing the tech -- so investments have been made, it's all upfront pain that we have already endured. So the benefits should start flowing in incrementally as we go into this fiscal, later half of this fiscal and maybe next one?

Yes. For example, if I'm saying that I'm targeting 10% reduction in working capital days, tech will play a very strong role in that. Without that tech, we wouldn't have been able to do it or we won't be able to do it.

The next question is from the line of Akshat Mehta from Seven Rivers Holding.

Sir, one question on the revenue part itself, sir. You said that around INR 230 crores of acquisition is what is included in the current quarter. How should we then look at the 15 -- that implies that around 7% growth is the organic. So how should we look at that and the 15% number? I mean, if you can just help me make sense of the revenue growth figures?

So I think, Bala, you give the details. We said INR 180 crores is included inorganic, right?

So Akshat, so the way it is -- so there were certain acquisitions that were done in Q1 FY '25. And certain revenue numbers were reported out of it into our financials of Q1 FY '25. And some of it, which is the pre-acquisition revenue, whatever was that value goes into the inorganic. And whatever is excess over what we have already reported in the previous year goes into organic. So you will have to look at those numbers in an overall basis. If you try to split between what went into the organic, inorganic, that's probably why you are getting a different number in your calculation.

Just to confirm, you mean to say that some part of the acquisition revenue that has come in this quarter 1, some part of that was also there in quarter 1 FY '25.

Exactly. Exactly. Yes.

Okay. Secondly, I wanted to ask if we exclude the amount of annual increment that was given to the employees this quarter, what would be the basis point impact on our margins from 3.6%?

It would have been 20 basis points.

20 basis points.

Yes.

And the acquisition that we've done last year in FY '25, around INR 500 crores that we booked, what kind of growth that we'll see on these acquisitions in this year?

Similar rate, what you are talking about, 15% plus.

15% plus for the year. Thirdly, sir, if you can help us understand this tax rate for this quarter was quite low at 17%. How should we look at this for the full year as well?

So Akshat, tax rate for the full year will also be in the similar range because we are taking some tax efficiency measures, which is actually helping us improve our the tax. So the annual numbers will also be somewhat in the similar range of 17%, 18%.