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

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 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 expectation 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 Limited. Thank you, and over to you, sir.

Yes. Thank you, Julius. Good afternoon, everyone, and a warm welcome to Entero Healthcare Solutions Q1 FY '27 call. On the call today, we have representing Entero Healthcare Solutions, the management team comprising of Mr. Prabhat Agrawal, Managing Director and CEO; and Balakrishnan Kaushik, Group CFO. We also have SGA, the IR partners. I will hand the call to the management for the opening comments, and then we'll move to Q&A. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. Thank you for joining our earnings conference call to discuss the performance of Q1 FY '27. My name is Prabhat, and I'm joined by Bala Kaushik, Group CFO; and SGA, our Investor Relations advisers, on the call. I hope everyone had an opportunity to go through the financial results and investor presentation, which are uploaded on the stock exchanges as well as on our company's website. We have started FY '27 on a very strong footing. Consolidated revenue grew 38.2% year-on-year to INR 1,940 crores. And on a like-for-like basis, which adjusts for the impact of revenue recognized on a net margin basis and the divestment of a subsidiary in the base period, growth was even stronger at 40% year-on-year. This top line performance was accompanied by continued and meaningful margin improvement with EBITDA margin reaching 5% for the quarter. We are pleased to have delivered our full year FY '27 EBITDA margin guidance in the very first quarter of the year. Now coming to the composition of this revenue growth. Organic revenue growth for the quarter was 17.8% on a reported basis and 19.6% on a like-for-like basis, comfortably ahead of the underlying pharmaceutical market's growth of 13.8%. Inorganic growth was at 20.4%, and the entirety of this growth came from the calendarization of acquisitions completed in last year. There were no new acquisitions during Q1 FY '27. As also spoken in our last earnings call that we have completed a significant volume of M&A over the preceding 2 years, and our stated priority for this year is to consolidate, integrate and organically build upon the platform we have already created. We remain open to compelling opportunities should they arise, especially in the last quarter of this financial year. Also in our last earnings call, we had communicated about certain low-margin businesses that we were consciously exiting to release working capital for deployment into higher return opportunities. That process continued during this quarter and has impacted our reported growth by around 2.5%. Gross margin expanded 147 basis points year-on-year to 11.4% and EBITDA margin expanded 143 basis points to 5%, while EBITDA growing 94% year-on-year, nearly 2.5x our revenue growth rate. This margin expansion was driven by 3 levers: scale-led procurement economy; a growing share of revenue from MedTech business, where we play a full commercial role rather than pure fulfillment role; and the deliberate exit from certain low-margin accounts. Having achieved a 5% EBITDA margin in the first quarter itself means we are already tracking well at our full year FY '27 guidance, and our focus for the upcoming quarters will be on sustaining and where possible, building further on this margin base. Profit after tax for the quarter was INR 52 crores, up 72% year-on-year with a PAT margin of 2.7%. Profit after tax attributable to owners was INR 38 crores, up 37% year-on-year. I would like to provide some clarification in reference to the non-controlling interest, which stood at INR 14 crores for the quarter or approximately 27% of profit before minority interest. As many of you are aware, our acquisition structure in few acquisitions involved a majority buyout, but not a full 100% stake. We have a pre-agreed contractually defined call options subject to certain conditions to acquire the residual minority stake over a defined time horizon, exercisable at a valuation multiple consistent with the multiple paid at the time of original acquisition. A non-wholly owned subsidiary that outperforms will show a larger minority interest, and this is a function of that business doing well, not of value leaking out to third parties. We always retain full operational and cash flow control over every one of these entities, and minority share of profit is always reinvested in the business and not paid out. The minority interest could be bought out by the company as per the contractually agreed call option terms over a period of time. Net working capital days improved to 61 days from 66 days a year ago, continuing the structural efficiency gains from the initiatives we have been taking since past few quarters. Return ratios showed significant improvement in this quarter. ROCE nearly doubled year-on-year from 11.5% to 21.1%, and ROE moved from 9% to 20.4%. Both figures are also comfortably ahead of our full year FY '26 numbers, which shows the improvement in returns is structural. This is the clearest evidence that our growth is combined with capital efficiency. Our MedTech segment will continue to be the most important structural lever in our medium-term margin story. MedTech revenue is on track to cross INR 1,000 crores in FY '27 on an organic basis and continues to carry higher gross and EBITDA margins than our core pharmaceutical distribution business. Our focus for the year is on deepening these existing relationships and building organic capability in this segment. Operationally, our platform continues to scale. We now serve over 72,000 retail customers and more than 2,300 hospital customers, distribute over 83,400 SKUs and maintain relationships with more than 3,000 healthcare product manufacturers, supported by 138 warehouses across 475 districts in 19 states. This scale and the 2-way network effect it creates between our supplier base and our customer base remains, in our view, the core and extremely difficult to replicate moat that anchors this business. We remain firmly committed to our stated FY '27 guidance of consolidated revenue growth of approximately 23% year-on-year, excluding any contribution from new acquisitions, alongside an EBITDA margin of 5% and EBITDA to operating cash flow conversion of 50%. Beyond FY '27, we believe Entero has built a differentiated, scalable and resilient healthcare distribution platform that is well positioned to compound over the long term. The Indian healthcare products market remain large, fragmented and is expected to continue growing at a healthy double-digit pace, creating significant opportunity for industry consolidation and market share gains. Our pan-India distribution network, expanding MedTech portfolio, technology enabled supply chain and disciplined capital allocation provides a strong foundation for sustainable growth. We are confident that the platform we have built today positions Entero to become India's leading integrated healthcare products distribution company over the next decade, thereby creating sustainable long-term value for our shareholders. With this, I close my opening remarks and invite people to ask questions. Thank you.

[Operator Instructions] The first question is from the line of Bharat C. Shah from BCS Capital Ideas Private Limited.

I think the first quarter is a reflection of the strategic outline that you have been painting out over a period of time. So delighted to see more clear certification of that. A couple of questions. First, if our inorganic activity is going to be a little muted, strategically decided as you outlined, and the focus will be on consolidating the operations, which are existing, over next 3 to 5 years, if we assume that no more acquisitions are made, what kind of -- and let us say, IPM growth is about, say, 7% to 9%, what kind of growth rate of Entero we can assume?

Thank you. So the industry structure in which we operate and the right to win that we have in a very fragmented industry structure, I believe, gives us an opportunity to grow at an excess of 20% over medium term, both organically and inorganically combined. As of now, our focus is mainly on organic because we believe that we have created enough moat, enough platform opportunities, relationships, customer base that can help us to grow organically very well in the near term. So this year, our focus primarily has been on organic. At the same time, we continue to look for inorganic opportunities that can add value to our network. So coming back to your question, in near term, we believe that we should be able to grow at an excess of 20%.

Near term meaning 3 to 4 years?

3 years, yes, yes.

Okay. And if we assume no acquisition, then still this kind of growth you visualize?

Yes. This is our internal target for us to deliver.

Okay. And I was delighted to see improvement in return on capital employed and return on equity, still a long way to go. But supposing continuing with the same question, if we make no more acquisition, theoretically speaking, and we grow it 20% over, let's say, next 3 to 4 years, at the end of the third or fourth year, what kind of return on capital employed would you think would be possible?

Anywhere in the range of 25% to 30%.

25% to 30%, okay. And margin improvement, I suppose has happened due to MedTech business growth. Is that assumption correct?

It's a combination of all the reasons that I outlined in my speech. But yes, MedTech was an important contribution.

And the last thing, while you have many times outlined clear strengths is a distribution house and your own moats in the picture. But both, I still am curious to understand more ringside view as to what makes us improve our market share or in other words, grow much faster than the IPM is doing. If you can explain that a little bit in more deeper insights, that will be helpful.

And this is a question that we have been addressing for many years now. In fact, this is a question that we asked ourselves when we started this company that what is it Entero that can help us to grow faster than the industry, right? Because that's the whole basis for forming this company. And I'll repeat again for everyone's benefit that we have a unique value proposition. And that helps us to outpace the market growth rate. And the unique value proposition that we have for our -- both for our customers and for the principal companies that we work for. For the customers, our unique value proposition is the range, the kind -- the number of products that we carry. We are working with more than 3,000 companies in India whose products we are distributing. So for the customers, it's like one-stop shop. They can get such a wide product range from one distributor, which makes them come back to again again and again because the alternate for us is to buy from fragmented distributor base, which means you will have to work with a lot many distributors to assemble that product range, right? So the product availability, the fill rate that we can provide, the service levels that we provide through our tech is what creates a very strong unique value proposition for our customers. For the principal companies, we provide them an all-India access and all India reach, right? By working with us, they get access to such a huge geography of India. They get access to such a large customer base. So it's like a 2-way mode. We have so many companies because we have so many customers, and we have so many customers because we have so many companies. So it's like a 2-way network that we have created that gives us the right to win.

Clearly, you have explained it many times on the similar lines. If you permit me, just one last thing, if I can raise that. Your relatively less emphasis on inorganic activity going ahead unless something meaningful and attractive comes by is more because you think the acquisition opportunity per se you think are going to be less and less compared to the past? Or it is a reflection of internal strategy of growing the business from within?

So there's no dearth of opportunities to inorganically acquire. There are enough distributors in India who are willing to transact, okay? And there are many sellers where there are not many buyers. The buyers are basically limited to 1 or 2 organized players like us, but there are a lot of inorganized -- unorganized distribution companies that are willing to sell, right? So it's not the dearth of opportunities. It's basically our own internal strategy to focus on building what we have already created. Acquisition basically serves the purpose. It's not an end in itself. It's a means to an end, right? So unless -- the initial years, we did more focus on acquisition because we wanted to build a network. Now we have substantially built a network. There are a lot of organic opportunities can be created over this network, right? So -- but again, as I said, we keep our ears and eyes open to acquisition opportunities, and we'll do when we think it adds something to our network.

I hope many of the future value points, hopefully, Entero would achieve.

[Operator Instructions] The next question is from the line of Arnav Sakhuja from AMBIT Capital.

So my first question is that, now that our subsidiaries have started making cash flows, what is the mechanism of bringing the cash flow back to the parent company to further fund acquisitions?

So most of these subsidiaries have been funded through intercompany deposits or intercompany loans. So once we start making money, we pull back those intercompany loans. That gives us cash flow in the parent company to acquire more businesses.

Got it. And so just a clarification on one thing that you mentioned in your opening statement about the non-majority buyout of these subsidiaries. So I mean I noticed that this line was there in the PPT, but it was not there in your PPTs. So is there any kind of new development, or this line is -- this buyout option has always been there, but it has been added for clarification purposes?

No, it was always there. See, when we acquire majority stake in any company, we also create the path to acquire the rest, because at the end of the day, there's nobody else who can acquire that balance stake from that distributor, right? So whenever we are doing any transaction where we are not buying 100%, we have already a defined path, method, formula, valuation, everything agreed in the beginning itself. There's no single agreement that we have signed with any M&A opportunity where we have not defined that.

And on an average, what would be the defined time horizon for each of these acquisitions?

It could be anywhere between 2 to 5 years.

2 to 5 years. Okay. Congrats again for the strong set of results.

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

Am I audible?

Yes, sir.

First question that I had is regarding the margin, sir. If you can help us understand sequentially from quarter 4 to quarter 1, the 50 bps margin improvement, what are the key factors that have led to that improvement on a ballpark, whether it's the MedTech acquisition that we did in Q4 or some operational efficiencies or mix product mix change? And since you've already achieved a 5% number in Q1, can we look at further improvement out in the later quarters or not? That's my first question.

So quarter 4 to quarter 1, anyway, we were close to 5%. And because we -- if you remember, we had given a clarification also that there were certain one-off items in quarter 4 that kind of brought down our margins. So these one-off items, if you remove it, we were already close to 5%, okay? And of course, going on from here, our aspiration target is to improve margins more from here.

Okay. Secondly, sir, I also want to understand, since we're not doing any major acquisitions this quarter, how should we look at 2 kinds of expenses? One is the operational expenses, employee costs and other expenses? And how should we look at the interest cost for the rest of the year?

So for employee expenses, most of the impact comes in quarter 1 only because that's where the increment cycle goes on effective from 1st of April. So you should not expect any major increase on employee expenses from here on. And interest cost, Bala, why don't you respond to that?

Yes. So on interest cost, we had taken a debt for acquisition. The last acquisition that we did, we had taken a debt. And the increase in interest cost that we are seeing between Q4 to Q1 is primarily because of the full quarter impact of the interest. So we had taken the disbursement somewhere end of January, early February in Q4, and you see the full impact for the quarter. And we also -- we have taken about INR 200 crores of debt for the year. So it's primarily because of that.

So how should we look at for the rest of the year? Will it go down on a quarter-on-quarter basis?

This will be broadly in the same range. We don't expect it to significantly go down, but it will be broadly in the same range. We don't see it going up as well.

Sorry for interrupting, Mr. Akshat sir. Please rejoin the queue for more questions. The next question is from the line of [ Khushi ] from [ Nagel ].

I just had one question. It was regarding, what is the pipeline for FY '27 for acquisitions that you're going to do?

Yes. This question, I've already clarified before that we are not looking for any major acquisition in FY '27. We have the pipeline, but we don't see doing big acquisitions during this year.

The next question is from the line of Chintan from Girik Capital.

Congrats for the good set of numbers. I think we started with -- started off this quarter with a very strong print. A couple of questions. One is on, sir, other OpEx, if I look at. So sequentially, Q4 had a higher impact because of the one-off, right, INR 56 crores was there, including INR 11.5 crores of one-off item. This quarter, we have reported similar print. Is there any -- it's a clean other OpEx, and this is what we should expect going forward?

So entire INR 11 crores that we said did not go into other expenses. Part of it also went in gross margins, right? And the one that we had disclosed before that the one-off items on certain closure of business and all that. So all that did not go fully in the other expenses. Only part of it went into other expenses.

Okay. So this INR 55 crores is run rate wise likely to be sustainable at this level or...

Yes

As a percentage level?

Yes.

Okay, okay. And if I look at sequentially, the inorganic piece, which is around -- last quarter, we reported almost INR 340 crores or growth contributed almost 26% towards 4Q revenue, revenue growth. This quarter, that number is around 20.4%. So it translates into -- there is a difference of almost, I would say, INR 70-odd crores, INR 60-odd crores. Why it's being showed? This new acquisition revenue should largely translate into calendarization in the current quarter, right, ideally? So is there -- you called out last quarter that the supply to diagnostic PPP contract was sitting in high base in 4Q. That is -- that can be one of the reasons, or any other thing you want to call out?

No, that's the main reason. In the last call also, I said there were certain government projects that we're doing, and there were a preponement of billing in last quarter itself because of the government budgets getting closed down, right? So part of Q1 revenues were pulled into Q4 revenue of last year.

The next question is from the line of Alok Dalal from Jefferies.

Prabhat, congratulations on a very good quarter. Just a couple of questions. One is, Prabhat, of late, we've seen an improvement in IPM. Apart from GLP, is there anything else which is driving this change?

No, we are also very happily seeing that kind of higher growth in IPM for last 2 quarters because it used to be like 7% to 9% earlier, now it has moved to double digit and primarily driven by volume growth, right, which was earlier muted or even negative, now it has turned positive. So I would say all around across therapy areas, we are seeing higher growth than before.

Okay. But is it any specific region or any specific thing that you've come across which is leading to this sudden shift in IPM growth?

So we are not able to decipher the exact reason of why there is a meaningful change in the growth rate, even though we are experiencing that growth, but we are not able to isolate any specific reason or factor for that.

Okay. And Prabhat, do you think this is a sustainable growth number or after a couple of quarters, again, it may start reverting to the mean?

You mean to say IPM growth rate?

Yes, IPM growth rate.

I can't forecast what IPM growth rate could look in next few quarters, right? But what I can say, we are confident about the growth rate that we are projecting. In fact, we had built our organic forecast on a lower industry growth rate only.

Okay. All right. And despite that, you've achieved 19% on like-to-like, which is a very healthy number.

Actually, to be honest, this number was 22% because we consciously cut down 2.5% of growth.

Yes, correct, yes. You mentioned that before. Okay. And Prabhat, second question is on working capital. So with significant improvement in the first quarter itself versus last year, is there a renewed guidance for working capital days for FY '27?

No, we will stay with our guidance. I'm not revising any guidance numbers based on quarter 1 performance. Maybe let's complete one more quarter, then we might speak about what could be the rest of the year guidance for second half.

Okay. And last one is on your -- you mentioned about revenue growth.

Sorry for interrupting, Alok sir. Please rejoin the queue for questions.

Alok, anyway, you can connect with us separately.

The next question is from the line of Vansh Solanki from RSPN Ventures.

So my question is on depreciation. At the last call, management told that the depreciation increased due to the acquisition in the Anand Chemical -- Anand. So like there is -- due to the business model, what they are supplying to -- machines to the customers. But on a quarter-on-quarter basis, the depreciation is decreased. So like what will be the range in the going forward?

So Vansh, here, there were certain machines in last quarter where we had taken depreciation because we wanted to accelerated -- depreciate those machines given the kind of revenue those specific machines were giving. So going forward, what number you're seeing now is what you will see broadly as depreciation going forward. What you're seeing in Q1 is what you will see going forward, subject to any new major CapEx.

Okay. And the second question is on the income tax line. So have we any deferred tax asset balance with the company? And like, if I assume that going forward, maybe in FY '27 and FY '28, there will be normalized effective tax rate to 25%. Is that -- the assumption is correct?

So currently, we do have deferred tax assets that are there. The guidance for FY '27, we've given at 22.5%. Guidance for FY '28 and beyond, we will come to it when we are closer to close of FY '27.

Sorry for interrupting, Mr. Vansh sir. Please rejoin the queue for questions. The next question is from the line of Simran Thakkar from Beas Capital.

There was just one deal that we did with a BTA, with Vishal via Sai Pharma. So could you just please let us know what's the deal about, the considerations, the size and its revenue and margin profile? And how would it contribute to the top line and margins ahead? And also whether it's in diagnostic space, cardio, also surgical consumables space?

So that's a pretty small deal compared to the size of operations that we have today, right? It's an acquisition that we have done in the state of Andhra Pradesh to build on the surgical consumable business profile. So it will be integrated with one of our businesses in AP, and it will help them to diversify into surgical consumable space, which is typically a higher-margin business than pure pharma.