Why Jefferies sees 50% upside in a healthcare distributor that listed at a discount

According to the analysts, Entero is in a good position to gain from industry consolidation.

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A healthcare product distributor that listed at a discount of 2.3 percent on February 16, 2024, and has fallen 10 percent since, has a 50 percent upside, according to Jefferies.

The brokerage, initiating coverage on the stock with a buy recommendation, said that the company Entero Healthcare Solutions is well placed to deliver an organic revenue growth that is 2x the industry's pace over FY24-26E.

It also estimated that the company's revenue can grow at a CAGR of 44 percent and its PAT to increase 8x over the same period, as economies of scale kick in. They have set the price target at Rs 1,510.

The share was closed at Rs 1,000 today (April 10).

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The analysts brought to fore the company's distribution muscle built over a short span and its other advantages.

They wrote, " In a short span, Entero has created a network of ~80,000+ retailers (one in ten retailer buys from Entero) and 3,400 hospitals due to its wide reach and product offering. Its ancillary businesses comprising marketing services to pharma firms and private label products supplements the distribution business."

They added, "Through its strong technology platform, Entero ensures high fill rates for its customers and gains a bigger share of the retailer wallet. Like in the previous years, Entero is well positioned to achieve 20% organic growth which is 2x industry growth of 10-11%."

Entero, founded in 2018, operates in a highly fragmented market. There are 65,000 distributors operating in this space and the top three distributors--Keimad, Aknamed/Ascent and Enter0--have only 8-10 percent of the market share, said the report.

According to the analysts, Entero is in a good position to gain from industry consolidation.

They wrote, "Access to capital, better resource management, scale advantage and superior technology are key advantages for large/national players over local distributors, and it is common for such players to grow by consolidating smaller distributors. Synergy benefits with existing business has the potential to accelerate growth prospects for such players significantly. Fund raise from IPO makes Entero well-positioned to capitalize from industry consolidation."

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The analysts have benchmarked it to Medplus, and have value Entero at 25x FY26E EPS, which is at a 40 percent discount to Medplus’ FY26 PE consensus valuations "due to B2B nature of Entero vs B2C for Medplus".

They listed key risks to their outlook as delays in achieving scale benefit leading to slower-than-expected margin expansion, inability to integrate acquisitions smoothly and overpaying for acquisitions.