Prabhat Agrawal says that “in five years, Entero has built a massive customer base of 81,500 pharmacies. Almost one out of 10 pharmacies is buying from us. We have 3,500 hospital customers. We are the largest hospital distributor in the company. We are working with 1,900 plus different pharmaceutical and healthcare product companies. It is a very unique and differentiated business model. In the last three years, our average annual growth rate has been 36% and once the IPO proceeds come, we will be even more aggressive in terms of pursuing growth opportunities.”
The company anchor book has been very strong. Already cheers are coming in on that front. But let us just understand the business model. Two parts mainly come in. One is the distribution model and the marketing for the company. How much revenue comes in from each of these segments.
Prabhat Agarwal: Let me start with the first question in the anchor book. We were very excited and very happy to have these kinds of very high-pedigree quality investors reposing faith in us. In terms of our business model, our core business is distribution services. So, we are one of the largest healthcare distributors in this country and this has been achieved in a very short period of time, which is around five years.
The company itself was created in 2018 and today in five years we have a massive customer base of eighty-one-and-a-half thousand pharmacies, so almost one out of 10 pharmacies is buying from us. We have three-and-a-half thousand hospital customers. We are the largest hospital distributor in the company. We are working with 1900 plus different pharmaceutical and healthcare product companies. We think it is a very unique and differentiated business model. In the last three years, our average annual growth rate has been 36% and once the IPO proceeds and we receive that money, we will be even more aggressive in terms of pursuing growth opportunities.
In terms of business mix, 95% is coming from distribution services, but we also provide a lot of value-added services to these companies in terms of providing marketing and promotion services as well but that contributes less than 5% of our business as of now.
If we look at your financials and RHP, we believe that for the first five to six initial years, you were building the business and hence it was kind of loss-making at least till FY23. But in the first half of FY24, you have reported profits. What is the kind of profit trajectory that investors should expect from here on at least from the company?
Prabhat Agrawal: We have been profitable at operating profit at EBITDA level from year two itself. So, last five years, we have been profitable at an EBITDA level. In the first six months of the year, we have turned profitable at the PAT level also and as we had close to 3% EBITDA margin in the first six months of this year and it is at Rs 11.5 crore profit after tax in the first six months of the year. As the business grows and as our scale is growing up, our buying power is going up, various value-added services that we are providing are going up, the operating leverage kicking in from growth and scale of the business, this profitability not only sustained but would also increase going forward.
Given that you are into this wholesale and distribution business, we understand that revenues must be much higher and margins could be on the lower side. Any initiative for margins to expand from here on?
Prabhat Agrawal: There are multiple levers available to expand the margins. Number one is, the scale of business. As we grow our business, our buying power goes up, there is expansion of gross margin possible there, our share of the private level goes up and that gives us a much higher margin to us. The operating leverage goes up because a lot of our upfront investments have been done in terms of setting up the warehouses, manpower, technology that we have created and all these will as the business grows, these costs are not going to grow in the proportion of sales, so definitely the profitability will go up based on as these levers play out.
Let us get in a word from you in terms of the company. It is a growing pan-India distribution model. Currently, it has been able to do around half the penetration that it requires. So, in terms of trajectory, what is the scope there?
Prem Sethi: We have done 34 acquisitions in the last five years and we have already signed 17 more term sheets, which are already signed and we will acquire them very soon as soon as the proceeds are going to come in. Our expansion is going to be now more into tier II, tier III cities as well compared to where in the first initial years we were focussing more on metros and now our focus is going to be more in tier II, tier III cities, expanding our current base and going deeper in the cities that we already present and also trying to get into tier II, tier III cities of the market.
So, is acquisition the only way to go in this industry?
Prem Sethi: The entry strategy could be two ways. One, we could go establish our own setup in any given micro market or two, could be if there is a right partner available in the market which we can go and acquire, there are 60,000 plus distributors in our country on the pharma side which are mom and pop distributors, which are available at the right EV-EBITDA multiples and if we are able to get our mindsets aligned to grow together, then we are more than happy to do acquiring distributors in those micro markets.
Otherwise, we are more than happy to open on our own setups. So, post acquisition also, the right to win is so clearly established on the Entero model, that we have been able to grow these distributors by four or five times in the last three years after we acquired them. So, both ways, so inorganic as well as organic.
Prabhat Agrawal: See, acquisition is not an end in itself. It is a means to an end. Acquisitions help us to penetrate in this country. India is a very fragmented and a very diverse geography. The way business is done in Guwahati is very different from the way business is done in Goa. So, the acquisitions help us to penetrate into newer markets for us, increase our scale, increase our presence and we have used both organic and inorganic to expand our presence in the country.
Could you give us an idea of how to distinguish oneself from one’s peers? I guess MedPlus is one of the peers that you have mentioned in your RHP and I believe you follow an asset light model and MedPlus does not. Is there any other way to distinguish your business?
Prabhat Agrawal: Yes, we are asset light. Our total fixed assets is close to Rs 40 crore for around Rs 4,000 crore of business. We are a B2B player. We are not a B2C player. Our job is to enable these pharmacies who buy from us and there are 900,000 pharmacies in the country. We are supplying almost one-tenth of it. So, our job is to increase our presence in these pharmacies which choose to buy from us and they get a good range of products from us because we have one of the widest range of products available. They get good service. They get a good technology enabled buying experience. So, all these help us to create a very strong moat with our customers.
(You can now subscribe to our ETMarkets WhatsApp channel)