Entero Healthcare IPO: Is it a healthy investment opportunity?

The initial public offer (IPO) of Entero Healthcare Solutions Ltd, which kicked off today, will close for subscription on Tuesday, February 13. The healthcare products distributor is looking to raise Rs 1,600 crore through its IPO, which consists of a fresh issue of Rs 1,000 crore and an Offer for Sale (OFS) of Rs 600 crore.

Entero IPO Timeline & Details: Everything You Need To Know

• Entero IPO Price: The firm has announced a price band of Rs 1,195 to Rs 1,258 per share for its IPO.
• Entero IPO Subscription Dates: Subscriptions for the IPO started today on Friday, February 09, and will conclude next Tuesday, February 13.
• Entero IPO Size: The firm seeks to raise Rs 1,600 crore from its initial public offer.
• How to Apply for Entero IPO: Prospective investors can bid in lots, with each lot consisting of 11 shares of the company. To apply for the IPO, the minimum investment is set at Rs 13,838 (calculated as 11 x 1258).
• Allotment Timeline: According to the IPO schedule, the Entero IPO share allotment is expected to be finalized on February 14. 
• Entero IPO Listing Date: The public offer is anticipated to debut on BSE and NSE on the 16^th of February, 2024.
• Entero GMP: According to market observers, shares of Entero are trading at a grey market premium of Rs 118 (a premium of 9% over IPO price) as of today.

Entero Anchor Round

Prior to issue opening, on February 08, the firm raised Rs 716 crore from 25 anchor investors. The anchor book saw participation from several marquee investors, including the Capital Group, GIC, TT Emerging Markets Unconstrained Fund, Carmignac Portfolio, Amundi Funds Asia Equity Concentrated, Bajaj Allianz Life Insurance Company, SBI General Insurance, Jupiter India Fund, among others.

About Entero Healthcare Solutions

Entero Healthcare Solutions Ltd operates as a distributor of healthcare products across India, leveraging a technologically advanced platform to deliver distribution services to a wide array of healthcare institutions including pharmacies, hospitals, and clinics nationwide. 

As of September 30, 2023, the firm boasts a substantial customer base, serving more than 73,700 retail clients and 2,800 hospital clients. It has established supply chains with more than 1,900 manufacturers of healthcare products, enabling it to offer an extensive portfolio of more than 63,900 product SKUs. 

Strengths

• Leading Position: In FY22, Entero was among the top three distributors of healthcare products in India by revenue. Additionally, it was the quickest to scale up its operations among its peers in the healthcare products distribution sector in India from FY19 to FY22.
• Remarkable Expansion: The firm demonstrated impressive growth from FY21 to FY23, showcasing a 36% compound annual growth rate (CAGR) in revenue alongside a 72% boost in EBITDA.

Key Concerns

• History of Losses: Entero has experienced financial losses over the past three fiscal years, with negative net profit margins during this period. Without significant revenue growth and cost management, the company may continue to face losses.

• Low Profitability Metric: Despite a gradual improvement in Return on Capital Employed, it remains modest at 6.05% for FY23. Additionally, the Return on Equity has been negative over the last three fiscal years.
• Operational Cash Flow Issues: In the six months leading up to September 2023, Entero saw negative cash flow from operations, extending a pattern observed over the previous three years. Ongoing negative cash flows or severe short-term financial difficulties could severely impact the company's operational effectiveness and growth plans.
• Significant Working Capital Requirements: By September 2023, Entero needed substantial working capital, with Rs 782.65 crore in working capital and a total working capital facility limit of Rs 407.70 crore as of November 2023. Failure to secure adequate funding on time could negatively influence the firm’s financial health, operational outcomes, and profitability.
• Equity Pledge Risks: Entero has secured loans by pledging shares of its subsidiaries. If defaults occur under these financing arrangements, lenders may enforce these pledges, negatively impacting the business, operational results, cash flow, and future prospects.
• Collection Risks: Entero is exposed to credit risk from high trade receivables, amounting to Rs 630.49 crore as of September 2023. Although the company employs measures to mitigate default risks, there is no guarantee that payments will be received promptly. 

Final Verdict: Avoid

Entero has embarked on an aggressive acquisition strategy, purchasing 34 healthcare distribution companies since the beginning of the 2018 fiscal year. However, the success and benefits of these acquisitions remain uncertain, posing a potential risk.

Moreover, the firm’s financial health raises concerns due to its history of losses and a negative Return on Equity, despite experiencing significant revenue growth. The apparent need for substantial working capital and ongoing negative cash flows could indicate looming liquidity problems.

With slim operating margins and negative cash flows, the firm would need to significantly increase its revenue to turn profitable. Considering these issues, it would be prudent for investors to observe the firm’s performance over the next few quarters before deciding to invest.

Unlock a world of financial opportunities with Liquide, the ultimate app for the modern investor. Featuring advanced tools like LiMo, India's pioneering AI co-pilot for stock investing, Liquide empowers you with insights that can guide your financial journey. Stay updated with thorough market analysis, expert recommendations, and real-time information. Download the Liquide App today from the Google Play Store or Apple Appstore and embark on a journey of informed and successful investing. Don't miss out on the powerful features that can shape your financial future.