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

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '26 Earnings Conference Call of Entero Healthcare Solutions Limited, hosted by DAM Capital Advisors 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 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. Nitin Agarwal from DAM Capital Advisors. Thank you, and over to you, sir.

Thank you. Hi. Good afternoon, everyone, and a very warm welcome to Entero Healthcare Solutions Limited Q2 and H1 F '26 Earnings Call hosted by DAM Capital Advisor at DAM Capital Advisors. On the call today, we have representing Entero Healthcare Solutions, the management team comprising of Mr. Prabhat Agrawal, Managing Director and CEO; Mr. Balakrishnan Kaushik, Group CFO; and Mr. Akanksha Gupta, Head Investor Relations. I will hand over the call to the management team to make the opening comments, and then we'll open the floor for questions. Please go ahead, sir.

Yes. Hi. Good afternoon, everyone. I hope I'm audible. and thank you for joining our earnings conference call to discuss the performance for Q2 FY '26 and first half of this year. I'm joined by Balakrishnan Kaushik, our Group CFO; and Akanksha Gupta, Head HR; and SGA, our Investor Relations advisers on this call. I hope everyone had an opportunity to go through the financial results and the investor presentation, which are uploaded on the stock exchanges and also on our company's website. I'm pleased to share that we have continued making progress across all financial parameters of delivering healthy growth trajectory, margin expansion and net working capital improvement in the second quarter of the financial year. Let me begin with our top line performance for the quarter. Revenue grew by 20.8% year-on-year and 11.9% quarter-on-quarter to INR 1,571 crores. Adjusted for contracts accounted on net margin basis and on a like-to-like basis, our revenue growth stood at 23.4% year-on-year, while organic growth was 13.4% year-on-year, which is approximately 1.8x the IPM growth rate of 7.3% during the same period. We were also able to navigate the GST transition quite effectively during the September month given the massive product portfolio we carry across 100-plus warehouses. A key development during the quarter was on the acquisition front, particularly in the MedTech segment, where we have significantly expanded our presence. We closed five acquisitions during July to October 2025 period with pro forma -- pro forma revenues based on FY '25 financials of these acquired entities of approximately INR 545 crores. Additionally, as disclosed yesterday to the exchanges, binding agreements and MOUs have been signed for two more MedTech-focused entities, Anand Chemiceutics and Bioaide Technologies, both of which are expected to be completed subject to satisfactory completion of due diligence. So on a full year basis, we are on track to close INR 1,000 crores plus revenue acquisitions through 14 M&A transactions. Around 60% of our M&A is happening in the MedTech segment, which along with the previous acquisitions in this space and organic business will cross over INR 1,000 crores post completion and integration of these businesses. MedTech is a USD 13 billion high-growth segment and synergistic to Entero's existing pharma distribution business. Further, the role of distributor is more value-added in terms of commercial role along with the standard distributor role, and hence, the margin pool available with the distributors are higher. We have estimated a positive impact of 70 to 90 basis points on gross margin and 50 to 75 bps on EBITDA margin on a pro forma basis after all the acquisitions are integrated with us. This is calculated on FY '25 financials of announced acquisitions, which are expected to be closed in second half of the financial year. With these acquisitions, we would be present in a wide range of MedTech segment, including diagnostic consumables and equipment, cardiology and orthopedic medical devices and other devices and consumables. This segment represents an attractive growth opportunity for Entero along with margin enhancement potential. We have also added business in trade generics, which also is higher growth and margin accretive. I reiterate that all these acquisitions were at single-digit enterprise value to EBITDA multiples. These acquisitions will be funded through a mix of internal approvals, available cash balance and addition of some debt. Gross profit for the quarter stood at INR 161 crores, up 32% year-on-year, with margins improving by 29 basis points quarter-on-quarter and 84 basis points year-on-year to 10.2%. This improvement was driven by higher value categories, better procurement efficiency and operational cost optimization. Another key milestone for us was achieving EBITDA margin of 4% in the quarter, which was up by 38 basis points quarter-on-quarter and 69 basis points year-on-year. EBITDA for the quarter was INR 62 crores, representing a growth of 46% year-on-year. There would be significant impetus on our EBITDA margins post completion of new acquisitions, which has been explained through the pro forma presentation in the investor deck. Our profit after tax increased 41% year-on-year to INR 37 crores with PAT margin expanding to 2.3% from 2% in quarter 2 FY '25. A key operational priority for us has been continued optimization of working capital. I'm pleased to share progress on this front. Our net working capital days has improved from about 69 days a year ago and 66 days in quarter 1 to 63 days in quarter 2 FY '26. This progress is a result of ongoing initiatives around credit monitoring, enhanced collection discipline and a company-wide focus on data-driven inventory planning. We are confident of closing FY '26 with working capital days of around 60. This should aid us in delivering strong positive operating cash flow for the year in the range of INR 100 crores plus. We have delivered steady improvement in return ratios. Return on capital employed improved to 13.8% in quarter 2 from 11.5% in quarter 1 and return on equity increased to 11% from 9% in the last quarter. Operationally, our reach and network have continued to expand. In the first half of the year, we cater to over 85,000 retail pharmacies and more than 2,800 hospitals across 490 districts in India, supported by 113 strategically located warehouses and 83,000-plus SKUs sourced from more than 2,800-plus health care manufacturers. Our distribution network is continuously getting stronger with better geographic reach, wider product portfolio and deeper engagement with health care product manufacturers and customers. We are using our proprietary technology to create synergies, integration and efficiency in our network and improving customer experience through better fill rates and lower turnaround times. In summary, as we progress into second half of the year, we are confident of continuing the stronger momentum, making continued improvements in the financials led by both organic initiatives and impact from inorganic strategy. We have clear visibility on growth trajectory, margin expansion and cash flow generation. Our focus remains on increasing wallet share within existing customers, expanding higher-margin product categories and leveraging our nationwide network to become the most comprehensive health care distribution platform in India. The MedTech acquisitions gives us headroom for accelerated growth and margin expansion. We remain on track to achieve our FY '26 guidance. With this, I close my opening remarks and invite people to ask questions.

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

Congratulations to the team and the management on delivering continuous progress on the key metrics we follow. Sir, on the revenue growth front, you mentioned that you maintained the guidance of 30% growth. But so far, because of the revenue growth seems to be softer versus what the annual guidance for us is right now. So do you think in the second half, you can catch up to meet the guidance for the full year?

Ladies and gentlemen, the management line has disconnected. Please wait while I reconnect the management. Ladies and gentlemen, we have the management lines connected. I'm so sorry, the line is again disconnected. Please wait till I rejoin the management. Ladies and gentlemen, we have the management reconnected.

So my question was basically on the guidance part where you mentioned that we maintain our FY '26 guidance which included 30% revenue growth for the year. So far, our first half growth is around 24%. The ask for the second half will be roughly around 35% to deliver on the 30% growth. Given the fact that a lot of one or two large contracts getting into the net basis, do you think with the acquisition and all, we'll be able to achieve the revenue guidance at least? I think on the margin trajectory wise, I think we are on track on trying to check on the revenue front.

Chintan, on the first half of this year, on a like-to-like basis, we were 27.8% growth, okay, and against a guidance of, let's say, 30%, right? So the gap of 2.5% is primarily coming from delay in closing new organic deals, new inorganic deals, right, which we are now trying to catch up in the second half of the year. We have already done the deals announcement and everything. So we are fast tracking the closure process. We leasing deals, and we will be very close to the full year guidance on like-to-like basis.

Got it. And just confirmation and clarification on the OCF part, you mentioned INR 100 crore OCF target for the full year. We are right now negative INR 57-odd crores -- INR 60-odd crores negative in the first half. That implies that for the full year or in the second half, we need to generate almost INR 150 crores, INR 160-odd crores of operating cash, which you believe is doable, right?

Yes, yes, doable. If you look at first half of this year, our negative cash -- generally, typically, the second quarter is the highest in terms of organic growth. And most of the working capital requirement happens in the quarter 2 of the year, right? Even if you look at our last year, last year, our H2 was positive by INR 50 crores, okay? Even though our first half was INR 125 crores negative. So INR 25 crores negative of last year, we are only INR 58 crores negative in the first half, right? So there is already INR 60 crores, INR 70 crores cash flow higher in the first half of the year, right? Second. Second half of the year is always positive, okay? And thirdly, we have an additional benefit because of the GST change, right? So because now the revenues that we will be billing to the customers will be at 5% GST against 12% GST earlier, right? So there will be a 7% benefit in cash flow through lower...

Got it. I think that helps. I'll -- only one question I ask, I'll jump back in queue. On the acquisition, the larger one which we announced yesterday, it was happening at 0.95 sales FY '25, right? Typically, I've seen we are doing materially lower at this 0.8x or less on EV to sales basis. But you mentioned that these are all margin accretive ones and the single-digit EBITDA multiple stands true. So that is what the range -- have we increased a little bit range on acquiring these assets? Or we are still in the ballpark of 5x to 7x or 5x to 8x EBITDA?

Yes, yes, we are in the ballpark only. On EV to EBITDA basis, we are on the ballpark with respect to our historical multiples that we have paid, right? On EV to sales, of course, it will look higher because the margins are much higher in this business. The margins in this business is double digit.

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

Prabhat, what incentives do these MedTech sellers have to kind of sell so cheaply on EV EBITDA? And why they are selling to us at a lower multiple compared to where our own business is? That is the kind of a question I have.

This is the same thing from beginning of the company, right? Even other pharmaceutical distributors are also on the same EV to EBITDA range, right? And the reasons are the same. They need a partner who can take them to a national level. They have kind of exploited most of the opportunities to grow on a stand-alone basis. There are issues on succession. So these are the things which kind of incentivizes or motivates the seller to sell to us. Exactly the same reason that we had in...

Yes, the scale thing, right? Pan-India scale.

Yes.

Yes, yes. Okay. And just to follow on this MedTech, the sales rely on deep sort of clinical trust. So how is Entero ensuring newly acquired teams, ortho, cardio, IVD, et cetera, build the expertise and sort of doctor/physician relationships needed to strengthen customer loyalty?

Yes. So this is not the first MedTech acquisition that we have done. If you recall, last year also, we did an acquisition in Chennai called Peerless Biotech, right, which was primarily in the IVD space and other medical devices. In certain segments, yes, the relationship with the doctors and everything matters a lot. But when we are acquiring, we are acquiring the whole company along with the whole team with the relationships and all that. That's the reason why we are paying a goodwill premium on that, right? So the whole know-how, the knowledge, the relationship the team, everyone comes along with this acquisition.

Yes, yes. And finally, one just bookkeeping question for Bala. What factors explain the rise in trade receivables and also the inventories in the last six months? I mean, with improved return ratios and the reduction in net working capital to 63 now, what specific strategies in inventory management or receivable collections are optimizing this working capital cycle because those are the two key variables for us to get to positive operating cash flow.

Yes. So, Sajal, here, we are running work streams specific to inventory, specific to trade receivables. And there is a renewed focus on improving our cash collection cycle as well as the way we order the inventory. So we have a team put in. We have a task force that is there that is monitoring all the entities on these numbers, what kind of purchases are happening? Are we doing purchases in an optimized manner? Can we do purchases 4x a month instead of 1x or 2x a month. So all these factors are being looked at closely. And the task force is -- there are three or four task force that we have created that is driving this operational efficiency, which is actually yielding these results.

[Operator Instructions] The next question comes from the line of Bhargav from Ambit Asset Management.

Sir, my first question is, is it possible to share the revenue that we do from MedTech given that in the recent acquisitions that we are doing, a large part of revenue is coming in from MedTech. And we said in the PPT that we want to reach close to INR 1,000 crores. So is it possible to share the current revenue we do from MedTech?

So, including all these acquisitions, we will be -- if you look at, I have talked about INR 1,000 crores on MedTech, right? And if you look at my graph, 61% of that INR 1,000 crores is coming from MedTech. So INR 600 crores is what is coming through acquisitions, INR 400 crores, we already have. So INR 400 crores plus acquisition of INR 600 crores will take us above INR 1,000 crores.

And is it fair to say that incrementally, whatever acquisitions that we'll be planning, a large part of that will be in the MedTech space or any other space?

No. So, post this next quarter, we'll be busy in closing these acquisitions. The reason why we -- I think one of the reasons why we have missed a little bit on the revenue growth guidance of this year because we have taken a little more time to evaluate deals, okay? And pharma, we have a good presence now. We want to expand into other synergistic segments. And MedTech is a very good synergistic segment. The growth rate is higher. The role of the distributor is more important in this. The margin profile is far better. So that's the reason we are looking for those segments which are margin accretive as well as high growth. If you look at -- we also acquired a distributor in generic, which again enjoys a higher growth profile and a higher margin profile. So our internal guidance is that we should chase those business segments which can deliver higher growth as well as a higher margin.

Okay. And sir, when we were speaking to a few chemists, they were of the opinion that from 15th of August till maybe 15th of September, they had reduced procurement significantly because of the GST changes which have happened. But despite that, how did we manage to have such a high revenue growth?

So you look at, for example, out of 90 days in a quarter, only 15 days were impacted, right, or less than 15 days. I estimate that probably our revenue growth would have been 1% higher if that GST change would not have happened.

Okay. And did the GST transition also impact cash flow, meaning had the GST transition not happened, would we have been CFO positive in the first half itself?

No, not materially because the impact of GST change would come in the second half of the year because from 22nd September onwards, we started billing customers with lower GST rate, right? So -- most of the receivables sitting on 30th September were with a higher GST rate only, right? But by December, by March, all these receivables will be replaced by new receivables, which will carry a 5% GST rate. So the impact on -- positive impact on cash flow from GST change would happen in H2 of this year.

Okay. So effectively, because of the GST change, the receivable itself will fall by close to about 13%.

They'll fall by 7%. Difference between 12%...

The next question comes from the line of Yashowardhan Agarwal from IIFL Capital Services Limited.

Just a couple of clarifications. Sir, if I look at the Slide #6, it is mentioned that we are on track to meet INR 1,000 crores of revenue from acquisitions. So but sir, it is also mentioned in the same that it depends upon the deals that we are going to close till FY '26. But sir, in the earlier guidance, INR 1,000 crores of revenue should have come from the acquisitions that we did in last year, the INR 290 crores that we have spent. So could you please clarify on that?

Yes. So the deals that we closed last year will anyway come this year, right? I mean the full year impact would anyway come this year, right? This INR 1,000 crores, we are talking about the deals that we are closing this year. The full INR 1,000 crores of these new deals will not appear in our revenues for this year. The full year revenues will appear next year. So, for this year, the revenue growth is driven by three things. One is organic growth. The second is the full year impact of last year deal close and the partial impact of deals closed during the year.

Okay. Got it, sir. So this INR 1,000 crores is incremental from the acquisition that you are going to do in this year. Is that assumption right?

Sorry?

This INR 1,000 crores that you have mentioned in the PPT is going to be driven by the deals that we are going to do in FY '26? Yes and exclusive of the deal that we had done in last year.

Yes, we have done close to INR 1,000 crores.

Got it, sir. And sir, on the similar lines in first half, we had spent around INR 80 crores in acquisition. So what amount would be spending in the second half to achieve this INR 1,000 crores?

Upwards of INR 400 crores.

INR 400 crores. Okay. And sir, how do we intend to finance it?

Yes. So we will -- as we said, we have an operating cash flow generation in H2 of this year. That will come into play. The second is we have an existing cash of close to INR 280 crores on our balance sheet, right? So we'll be using that. And if need be, we will take some additional debt.

Okay. So additional debt will be required for...

Yes. It depends on how much cash flow generation happens in H2 of this year plus the cash that we have available on this balance sheet. If there's some shortfall, we'll raise through debt.

Got it, sir. And sir, in the initial remarks, you said that we are confident of achieving the guidance that we have given of 30% growth. And so that means 35% growth in the second half. So sir, are we confident of achieving that?

No. So you should look at the numbers differently. What we are saying on a like-to-like basis. So like-to-like basis, our growth for H1 was 27%, okay, 27.8%. We changed the revenue recognition method at beginning of this year that impacted our growth by 2%, 3%. So adding back that growth rate on a like-to-like basis is 27.8% for this year. So if you do the math, on the second half of the year, the revenue growth has to be 31% to achieve a 30% overall growth for the year, right? So depending on how close we are able to bring in the revenues of these new acquisitions in the books, we should be close to our guidance.

Got it, sir. And sir, my last question is on the metric revenue. So the acquisitions that we are currently doing in this year, in many of them, we are not acquiring 100% of the stake. So out of the INR 1,000 crores that we are expecting, what share of the revenue would belong to us and the profit on the same?

See revenue, so 100%, we'll consolidate 100% books of these acquired entities, right? So line-by-line consolidation would happen, okay? But our blended ownership on these deals is around 63%.

Okay, sir. So 63%...

Call option to acquire the rest. So we can exercise the call option in future years to acquire the rest of the -- over a period of two to five years.

Okay. We have a call option. And sir, that would be at the similar levels of valuation that we have acquired currently, right?

Yes, yes.

[Operator Instructions] The next question comes from the line of Avnish Burman from Vaikarya.

Prabhat, is there -- can you give us some color on the gross or EBITDA margins of Anand Chemiceutics because I couldn't find any data on the -- from the MCA records.

Yes. So the company is -- it's a combination of two, three companies, some is proprietorship, some is partnership and one is private Limited. So you may not find data on all that. We'll integrate into one entity before we take over, right? But gross margins are mid-single digits -- mid-double digits, sorry, and EBITDA margin saying upwards of 10%.

Okay. And for Bioaide also, when I was looking at the data, at least -- I mean, the data is available till FY '24, where the gross and EBITDA margins were showing at 11% and 1.5%, which is quite uncharacteristic for a medical device distributor. Am I missing something here? Or this is.

Thing is when we diligence the EBITDA, we diligence what will come to us, okay? Sometimes they are -- they draw much higher salaries in the company to reduce the profitability, right? So we add back all those things because we agree a new remuneration and everything payouts with them when we take over. So, again, a double-digit margin acquisition.

Okay. So when you talk about valuation, that is on the adjusted EBITDA, the EBITDA that you would realize after the takeover takes?

Yes, yes. We make all the adjustments, the new rentals for the premises, the new remuneration that we will pay for any other compliance costs we will have to incur because the other guys are not doing in the same way that we want to do. So all these adjustments, we do and calculate the adjusted EBITDA going forward. Based on that, we pay the multiple.

Understood. And one thing on the GST, you said that the receivables will come down. But when you talk about your net working capital and receivable days, you anyways adjust for the GST. So, in terms of receivable days, that number will stay irrespective of whether the GST is at 12% or 20%. Am I right?

The days will not change because of this. Only the absolute value or the cash flow will change.