Ladies and gentlemen, good day and welcome to the Q1 FY 2027 earnings conference call of Entero Healthcare Solutions Limited, hosted by Monarch Networth Capital Limited. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. 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 the date of this call. These statements are not the guarantee of future performance and involve risks and uncertainties that are difficult to predict.
I now hand the conference over to Mr. Rahul Dani of Monarch Networth Capital Limited. Thank you, and over to you, sir.
Yeah. Thank you, Julius. Good afternoon, everyone, and a warm welcome to Entero Healthcare Solutions Q1 FY 2027 call. On the call today, we have representing Entero Healthcare Solution, the management team comprising of Mr. Prabhat Agrawal, Managing Director and CEO, and Dr. Balakrishnan Kaushik, Group CFO. We also have SGA, the IR partners. I will hand the call to the management for the opening remarks, 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 2027. My name is Prabhat, and I'm joined by Bala Kaushik, Group CFO, and SGA, our investor relations advisors 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 website. We have started FY 2027 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 2027 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 reported basis and 19.6% on a like-for-like basis, comfortably ahead of the underlying pharmaceutical market 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 2027.
As also spoken in our last earnings call that we have completed a significant volume of M&A over the preceding two 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 three levers: scale-led procurement economies, 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 2027 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 crore 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 the past few quarters. Return ratios showed significant improvement in this quarter. ROCE nearly doubled year- on- year from 11.5%- 21.1%, and ROE moved from 9%- 20.4%. Both figures are also comfortably ahead of our full year FY 2026 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 2027 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 two-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 2027 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 2027, 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 product market remains 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 product 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.
Thank you. We'll now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking your question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. Thank you. The first question is from the line of Bharat T. Shah from BCS Capital Ideas Private Limited. Please go ahead.
Hi, Prabhat. I think the first quarter is a reflection of the strategic outline that you've been painting out over a period of time. Delighted to see a more clear specification of that. A couple of questions. First, if our inorganic activity is going to be a little muted as strategically decided as you are trying, and the focus will be on consolidating the operations which are existing. Over the next three to five years, if we assume that no more acquisitions are made, and let us say IPM growth is about 7%-9%, what kind of growth rate of Entero we can assume?
Thank you. 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. 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. Coming back to your question, in near term, we believe that we should be able to grow at excess of 20%.
Near term meaning three to four years?
Three to four years. Yes.
Okay. If you assume no acquisition, then still this kind of growth you visualize?
Yes. This is our internal target for us to deliver.
Okay. I was delighted to see improvement in return on capital employed and return on equity. Still a long way to go. Supposing, continuing with the same question, if we make no more acquisition, theoretically speaking, and we grow at 20% over, let's say, next three to four 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%-30%.
25%-30%. Okay.
Yeah.
Margin improvement, I suppose is happening due to MedTech business growth. Is that assumption correct?
It's a combination of all the reasons that I outlined in my speech. But yeah, MedTech was an important contribution.
And the last thing, while you have many times outlined clear strengths as a distribution house and your own moats in the picture. But I still am curious to understand more inside 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.
So, 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 in Entero that can help us to grow faster than the industry, right? Because that's the whole basis for forming this company. I will repeat again for everyone's benefit that we have a unique value proposition, and that helps us to outpace the market growth rate. The unique value proposition that we have both for our customers and for the principal companies that we work for. For the customers, our unique value proposition is the range, 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 again and again. Because the alternate for us is to buy from fragmented distributor base, which means you will have to work with lot many distributors to assemble that product range. 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 two-way moat. 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 two-way network that we have created that gives us the right to win.
Oh, 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?
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 one or two 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 a purpose. It's not an end in itself. It's a means to an end, right? 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.
But again, as I said, we keep our ears and eyes open to acquisition opportunities, and we do when we think it adds something to our network.
Sure. Well, thank you, Prabhat, and I hope many of the future value points hopefully Entero will achieve. Thank you and all the best.
Thank you.
Thank you. A reminder to all participants, please restrict yourself to two questions. The next question is from the line of Arnav Sakhuja from Ambit Capital. Please go ahead.
Hi. Thank you for taking my questions. 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?
Most of these subsidiaries have been funded through intercompany deposits or intercompany loans. Once they start making money, we pull back those intercompany loans. That gives us cash flow in the parent company to acquire more businesses.
Got it. Just a clarification on one thing that you mentioned in your opening statement about the non-majority buyout of these subsidiaries. I mean, I noticed that this line was there in the PPT, but it was not there in any previous PPT. Is there any kind of new development or, this line, this buyout option has always been there, but it's just been added for classification 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?
Yeah.
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.
On an average, what would be the defined time horizon for each of these acquisitions?
It could be anywhere between two to five years.
Two to five years. Okay. Okay, so once again, with the strong set of results, and thanks for taking my questions.
Thank you.
Thank you. The next question is from the line of Akshat Mehta from Seven Rivers Holding. Please go ahead.
Hello, sir. Am I audible?
Yes, sir.
Sir, first question that I had is regarding the margin, sir. If you can help us understand sequentially from quarter four to quarter one, the 50 basis points margin improvement. What are the key factors that have led to that improvement on a ballpark, whether it is the MedTech acquisition that we did in Q4 or some operational efficiencies or mix product mix change. Since you have already achieved the 5% number in Q1, can we look at further improvement out in the later quarters or not? That is my first question.
Right. Quarter four to quarter one anyway, we were close to 5% and because if you remember, we had given a clarification also that there were certain one-off items in quarter four that kind of brought down our margin. These one-off items, if you remove it, we were already close to 5%. Okay.
Okay.
And of course, going on from here, our aspiration target is to improve margins more from here.
Okay. Secondly, sir, also I want to understand since you are not doing any major acquisitions this quarter, how should we look at two 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?
For employee expenses, most of the impact comes in quarter one only because that is where the increment cycle goes on, effective from April 1st. So, you should not expect any major increase on employee expenses from here on. And interest cost, Bala, why don't you-
Yeah.
Respond to that.
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. We had taken the disbursement somewhere end of January, early February in Q4, and you see the full impact for the quarter. We have taken about INR 200 crores of debt for the acquisition. It is primarily because of that.
How should we look at for the rest of the year? Will it go down on quarter-on-quarter basis?
This will be broadly in the same range. We do not expect it to significantly go down, but it will be broadly in the same range. We do not 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 Negen. Please go ahead.
Hello. I just had one question. It was regarding what is the pipeline for FY 2027 for acquisitions that you are going to do?
Yeah, this question I have already clarified before that we are not looking for any major acquisition in FY 2027. We have the pipeline, but we do not see doing big acquisitions during this year.
Okay. Thank you.
Thank you. The next question is from the line of [uncertain] . Please go ahead.
Hi. Thank you. Thank you, team, for the opportunity and congrats for the good set of numbers. I think we started the quarter with a very strong print. A couple of questions. One is on the other expenses. If I look at, sequentially, Q4 had a high impact because of the one-off. INR 50 crore, INR 60 crore was there, including INR 11.5 crore of one-off item. This quarter, we have reported similar trend. It is a clean other OpEx, and this is what we should expect going forward?
The entire INR 11 crore that we said did not go into other expenses. Part of it also went in gross margins. The one that we had disclosed before, the one-off items on certain closure of business and all that. All that did not go fully in the other expenses. Only part of it went into other expenses.
Okay. This INR 55 crore is run rate wise likely to be sustainable at this level?
Yes.
As a percentage. If I look at sequentially, the inorganic piece, which is around last quarter, we reported almost [uncertain]. Growth has contributed almost 26% towards 4Q revenue growth. This quarter, that number is around 20.4%. It translates into. There is a difference of almost, I would say, INR 70- odd crore.
Yes.
INR 60- odd crore. Why should this new acquisition revenue largely translate into comparable items in the current quarter, ideally? You called out last quarter that the supply to diagnostic PPP contract was sitting in high base in 4Q. That can be one of the reason, 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 postponement of billing in last quarter itself because of the government budgets getting closed down.
Correct.
So part of Q1 revenues were pulled into Q4 revenue of last year.
Got it. Okay, I'll join back in queue. Thank you.
Thank you. The next question is from the line of Alok Dalal from Jefferies. Please go ahead.
Yes, hi. Good afternoon. 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-1, 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 two quarters because it used to be 7%-9% earlier. Now it has moved to double digits and primarily driven by volume growth. Which was earlier muted or even negative, now it has turned positive. So, I would say all round, 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?
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. 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?
Yeah, IPM growth rate.
I can't forecast what IPM growth rate could look in next few quarters. But what I can say, we are confident about the growth rate that we are projecting.
Okay.
In fact, we have built our organic forecast on a lower industry growth rate only.
Okay. All right. And despite that, you've achieved 19% on like -for- like.
Yes.
Which is a very healthy number.
Actually, to be honest, this number was 22%, because we consciously cut down 2.5% of growth.
Yeah, correct. You mentioned that before. Okay. Prabhat, second question is on working capital. With significant improvement in the first quarter itself versus last year, is there a renewed guidance for working capital days for FY 2027?
No. We will stay with our guidance. I am not revising any guidance numbers based on quarter one performance. Maybe, let us complete one more quarter, then we might speak about what could be the rest of the year guidance for second half.
Got it. Okay. Last one is on, you mentioned about revenue growth [crosstalk].
Sorry for interrupting, Alok sir. Please rejoin the queue for more questions. Thank you.
Alok, maybe you can connect with us separately.
Thank you. The next question is from Vansh Solanki, from RSPN Ventures. Please go ahead.
Yeah. Hi, Prabhat. Good morning. Good noon, actually. My question is on the depreciation. At the last call, management told that the depreciation increased due to the acquisition in the Anand Chemiceutics. Due to the business model where they are supplying machines to the customers. But on a quarter-on-quarter basis, the depreciation is decreased. What will be the range in the going forward?
Vansh, here there were certain machines in last quarter. We had taken depreciation because we wanted to accelerate and depreciate those machines, given the kind of revenue those specific machines were giving. Going forward, what number you are seeing now is what you will see broadly as depreciation going forward. What you are seeing in Q1 is what you will see going forward, subject to any new major CapEx.
Okay. The second question is on the income tax end. Have we any deferred tax asset balance with the company? If I assume that going forward, maybe in FY 2027 and/or 2028, we will normalize the effective tax rate to 25%. Is that the company's tax?
Currently we do have deferred tax assets that are there. The guidance for FY 2027 we've given at 22.5%. Guidance for FY 2028 and beyond, we will come to it when we are closer to close of FY 2027.
Thank you. Sorry for interrupting, Mr. Vansh. Please rejoin the queue for more questions. The next question is from the line of Simran Thakkar from Beas Capital. Please go ahead.
Thank you for taking my question. There was this one deal that we did with a BTA, with Vishal via Sai Pharma. Could you just please let us know what's the deal about, the consideration to size, and its revenue and margin profile, and how would it contribute to the top line and margin ahead? Also, whether it's in diagnostic space, cardio, ortho, surgical consumables, please.
That's a pretty small deal compared to the size of operations that we have today. It's an acquisition that we have done in the state of Andhra Pradesh to build on the surgical consumable business profile. It will be integrated with one of our business in AP and it will help them to diversify into surgical consumable space, which is typically a higher margin business than pure pharma.
Right. Any revenue margin profile that you could just mention and also the consideration and size?
Revenue, it's not a meaningful, large, not even contributing any significant number to our overall size of business.
Understood. Okay. Thank you.
Thank you. The next question is from the line of Akhil Parekh from 360 ONE Capital. Please go ahead.
Yeah, thanks for the opportunity and many congratulations on strong execution. So, my first question on the market share, if you can throw some color on where does the market share stand?
Sorry to interrupt, sir. Please use your answer. Sir, you are not audible, sir.
Yeah, is it better?
There is still a disturbance a bit.
Just one second. Hello.
Sorry, sir, your voice is not audible. Please rejoin the queue for more questions. The next question is from the line of Kumar Saurabh from Scientific Investing. Please go ahead.
Hi, Prabhat. Congrats on the great set of numbers. My question is around, I believe we have reached to a level where for the incremental 20%+ growth, whatever is the incremental working capital required. If I remember your guidance, we want to convert 50% of EBITDA into OCF, which gives us somewhere around INR 200 crores. So, my sense is we are at a point where because of our margin improvement, we should be able to take care of the incremental working capital through our internal accruals. If we are able to do that, it means we will be able to convert more percentage of EBITDA to PBT. Already we have done great. I think two years back we were 33% PBT to EBITDA. Now we are around 60%.
Do you see next two to three years possibility, first, that we will not need incremental debt if we are not going for more acquisitions? Secondly, possibility to reduce this debt over a period of time if we are not going for incremental acquisition. How do you see going forward in the long term? Do you see again, we come back to acquisition mode, or you will be more interested in paying the debt and improving your PBT to EBITDA ratio, which will ultimately again give us operating leverage on the profitability side versus sales growth rate?
Yeah. First of all, let me clarify when I say OCF. When I say OCF is after accounting for changes in working capital, right? So when I say 50% of EBITDA getting converted to OCF means EBITDA minus working capital changes. Whatever is the remaining is supposed to be 50% of EBITDA. Okay. Just because we are OCF positive means we have enough internal accrual to fund your working capital changes. Okay. Now, if we are saying that in this year, we will have 50% left after accounting for working capital changes, that money could be used for acquisition, could be used for paying off debt, it can be used for buying off minorities. There are multiple uses of that extra cash flow that we have. We need to see and compare which gives us the most incremental improvement in EPS. Accordingly, we will deploy that money.
So, either then we will go for paying off debt or we will go for acquisition, which should help us to increase our sales growth rate. So, both ways it should boost up our PAT, right?
Yes, of course. I mean, the money will not be kept idle, or we are not proposing to declare dividend or anything like that. So that money will be reinvested in the business, and it will be reinvested in ways which can create the maximum shareholder value.
Got it. And my second and last question is on the IPM growth slide. And one gentleman also asked this question, and you have been in this industry for a long time. One question is, can you provide, educate us anything on the cyclicity of this industry? Because the IPM growth fluctuates 7%-14%, and last time in 2023, it didn't sustain from 16% came down. So, if you can educate us on cyclicity and usually how is the volume versus value. In the long run how the contribution has been.
If you look at cyclicality in a year, typically the quarter two is where the maximum contribution in IPM happens. If you take four quarters, that is 25% each in every quarter. The quarter two is typically the higher. The quarter one is like 20%, 23% of total sales, and then the volume and everything picks up in quarter two, typically in pharma industry. If you are asking for my view on long-term trend on the growth rate, we were in that cycle of 10%-12%, then we went down to 7%-9%. We have again come back to 10%-12% growth rate in IPM, right? As Alok had asked me before, what is my view or what is my forecast, and I said, "I am unable to give a forecast on this, really, because I am not able to isolate any specific factor that has led to this.
Sorry for interrupting, Mr. Kumar. Please rejoin the queue for more questions. The next question is from the line of Deepak Ajmera from IGE India. Please go ahead.
Yes, hi. Thank you for the opportunity and congratulations on the good set of numbers. Perfect happening on this side. I want to ask, what has been our source of, let us say, excess growth over IPM? Is it therapeutic areas or something else?
It is primarily increase in wallet share from the customers or growth in number of customers, because and that increase in wallet share is primarily coming from our USP, which is better fill rate, better product availability, better range that we are offering to our customers, and more collaborations we are able to forge with companies.
Okay. Secondly, the participation of generic drugs has been consistently increasing in our overall pharma market. In that environment, how are we so certain about margin maintenance or expansion?
Sorry. I lost you on the first part of your sentence. Can you repeat, please?
Yeah. My question is, the participation of generic drugs are consistently increasing in our overall pharma sales market. Into that particular environment, as other companies are struggling to maintain or expand margins like Divi India, how are we so certain of margin expansion and maintenance?
The generic drug, India is primarily divided into, let's say, four categories of drugs. One is patented drugs, the second is branded generic, the third is trade generic, and fourth is only generic. We are participating in the first three segments, which is patented drugs and branded generic and trade generic. We are not so much participating in the pure generic. But 98%, 99% of Indian pharma industry is basically consisting of the first three segments only. And we are represented in all these three. So, if the trade generic is growing, we are also enjoying that growth rate.
Sorry for interrupting, Mr. Deepak. Please rejoin the queue for more questions. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Thanks for taking the question, Prabhat. Congratulations on hitting the 5% EBITDA margin mark. My question was, we have now had the MedTech acquisition with us for some time now. So in your experience, what kind of value-creating opportunities do you see in these MedTech transactions as you sort of integrate them versus the prior transactions, prior acquisitions of the pharma distributors? Do you see more opportunities for synergies, more opportunities for value creation in these businesses in MedTech versus the traditional pharma businesses, and what kind of opportunities do we see from here on?
Both these segments create opportunities for us or present opportunities for us. In the case of MedTech, you can forge a lot of pan-India or national-level collaborations. Those opportunities are far more available in MedTech as compared to pharma. In MedTech, you can play a commercial role also, where you are also responsible for end-to-end demand generation and fulfillment. Those kind of opportunities are plenty in this. The MedTech distribution is limited to very few players. You have much larger number of distributors in pharma than you have in MedTech. So there, the collaboration with the companies could be more meaningful. It could be more value-added. It could be more comprehensive. That is what I see going forward.
In this business, hypothetically assume we do not take any more acquisitions in MedTech, what is the kind of growth that one can achieve in this business over a three, five year period?
20%, we can definitely target those kind of growth rates in MedTech because MedTech opportunities are also large because there is not enough competition in MedTech as compared to pharma. Pharma, there are a lot many distributors because the role of distributor is demand fulfillment, which is related to warehousing, logistics and all that. In MedTech, you are playing a meaningful role in creation of demand for that product. So, in such kind of scenario, your opportunities are more.
Right. I was trying to just push the point whether it is possible for us to grow much beyond 20% on the current platform that you have created without doing more acquisitions or that is purely unrealistic.
I think it is a safe assumption to build in our model, 20%. If we do better than that, of course, everyone would be keen to do that. But from modeling perspective, from taking a reasonable forecast on which everyone is confident, you should build 20%.
Okay. Thank you so much.
Thank you. The next question is from the line of Sidharth Negandhi from CWC. Please go ahead.
Hey, congrats on a very good performance, and thanks for taking my questions. I am assuming most of the low-margin business that was shut down was hospital supplies, given that that customer base has reduced year-on-year, even after the acquisitions. On that, are you seeing any more low-margin businesses that you believe you can go out of that can further unlock net working capital reduction? That is question one. Question two is, broadly, if I look at the pharma customer base or the overall customer base, that is 1,000 new customers added year-on-year even after the acquisitions that were made. So, I am assuming a lot more of the growth has come from higher wallet share versus adding more distribution. Are you seeing that continuing to be the case, or do you see opportunity for further distribution expansion with your current set of relationships?
The third question was on the call options that you mentioned. Will the exercise of these call options require you to raise capital at the holdco level, or are there buyback arrangements, which means the subsidiary can buy back equity at their level from the minority owners whom you bought it from? Those are my three questions.
You have asked three questions. The question number one was basically the businesses that we let go of because of low margin. It did not primarily come from hospital. It came primarily from third-party distribution business. There are opportunities for further taking out some business. Our first priority is to improve the margins on those business before we take a decision to let them go. We will first try to improve, renegotiate our terms if we can get better. If not, then we will decide if we want to let it go. Number two, you asked about growth going forward. It is more number of customers or more wallet share. Always the contribution in growth from wallet share is always higher than the contribution in growth from new customers.
Because new customers, when they join, they do not allocate much high wallet share to start off the business because they want to experience the service levels and other things with us before they increase the wallet share. But once you are there with them for some quarters, then there is a significant opportunity to increase the wallet share with them. Your third question was around the buyout on minority interest. We will evaluate what is the best way to acquire minority interest, whether to fund from parent company or to fund from subsidiary. We have all the options available. The contract does not define how we have to fund those acquisition of minority. It only defines the valuation multiples that we have to pay and the time period.
Thank you. Sorry for interrupting, Sidharth sir. Please rejoin the queue for more question. The next question is from the line of Binoy Jariwala from Upadhya Investment. Please go ahead.
Yes, sir. Thank you for the opportunity. Just one bookkeeping question. If you could help me with the gross debt number, the net debt number, and OCF for this quarter.
We are not getting our balance sheet reviewed or balance sheet audited by auditors on a quarter-to-quarter basis. It is done twice in a year, which is in September and March. We will disclose those numbers during that time.
Sir, and the OCF?
Same. OCF is basically a function of balance sheet. Again, you will get those numbers in September. One more general point I wanted to make to the general investor base at large is that we should not be looking at OCF on a quarter-to-quarter basis. We should be looking at an annual basis because, and that is how I have given the guidance, that on an annual basis, we will convert 50% of our EBITDA to OCF. The reason being, there is some bit of seasonality in the pharma business. Q2 is typically higher business for the entire industry as a whole. You prepare for that in terms of inventory and getting ready for the high season. Still, every quarter we give working capital numbers because that is an important parameter for everyone to see that the working capital numbers are not getting worsened off.
Sure. Appreciate it. Thanks. That is all.
Thank you. The next question is from the line of Alok Dalal from Jefferies Please go ahead.
Yes. Thanks for the follow-up. Prabhat, you mentioned three years organic growth, 20% is achievable. Would it also imply that your EBITDA margin should be around 6% that time?
When I said 20%, I said 20% total growth in business and without any meaningful acquisitions. Some small acquisitions might happen in that 20%. Of course, as we grow 20%, our cost base itself is not going to grow at 20%. You will gain something from operating leverage and at the same time, the margin expansion at the gross margin also would happen because of the scale that we are getting, the procurement benefits that we get as we grow, right? Of course, at a 20% growth rate over the next three, four years, there should be a good expansion on EBITDA margins also.
Yeah, because from 5%, the ask rate is only 30 basis points, every year, which I believe should be achievable. 6% not at all ask.
Why should we limit to 6% only?
No, no. 6%, let's say, is easily achievable, is what I'm trying to say.
Yes, yes. Our internal aspiration and target would be more than 6%, for sure.
Understood. All right. Thank you, Prabhat.
Thank you.
Thank you. The next question is from the line of Rashmi Gohil from Arihant Capital. Please go ahead.
I would like to ask a question about MedTech revenue run rate. Can you please confirm the quarterly trajectory, which is needed to hit greater than INR 1,000 crores FY 2027 MedTech revenue so it can be modeled as a distinct segment with its own growth and margin profile?
Yeah. We are comfortably above INR 1,000 crores for this full year.
What percentage of full-year growth is expected from organic acquisitions versus acquisition, given zero inorganic contribution in quarter one of FY 2027?
The full-year guidance that we gave for this year for growth is 23%, and that included 11% or 12% from calendarization of last year's acquisition. The rest was organic.
My next question is related to EBITDA margin input rate target for FY 2027. Is 5% the floor or should the model build in further sequential expansion through the end of the last quarter of FY 2027?
We are always targeting higher margins quarter- on- quarter. But for the full year guidance business, we still maintain 5%. As I told before that after quarter two, I might come out with a different number if I see that based on the first half performance, I see that second half performance could be better than our guidance.
Thank you. The next question is from the line of Nikhil from Kizuna Wealth. Please go ahead.
Yeah. Hi, sir. Thank you for giving me the opportunity. Sir, I just have one question. We have a non-controlling interest call option on all the acquisitions that we made. Are we going to acquire the rest of the stake this year, and how are we going to fund that?
No, we can't acquire all of it in this year itself. There's a defined timeline in the agreement, right? All of that is not falling due in this year.
Okay, sir. We can expect the rest of the stake acquired in the next year or the year after that, FY 2028.
Two to five years. Two to five years is a normal timeline that we give.
Okay, sir. Thank you, sir. That is my question.
Thank you. The next question is from the line of Karan Gupta from Asit C. Mehta. Please go ahead.
Yeah, hi. Am I audible?
Yes, sir, you are. Please go ahead, sir.
Two questions. One on the margin side. The gross margin expansion of close to 150 basis points. If you segregate from the segment-wise Core Pharma and MedTech, if you can share the numbers in terms of percentage, that is good. You can also share the directional margin side of MedTech and Core Pharma, because the 11.4% gross margin expansion, which we can build in the model, the major contribution is coming from the MedTech or the Core Pharma? That is something I need to understand.
As I told you, to be honest, the gross margin profile is not so much related to a product category. It is more related to the role you are playing in that business. Wherever you are playing a demand generation role compared to only demand fulfillment role, your opportunity to expand gross margins is much higher. Even in pharma, if you are doing a marketing contract like we are doing for certain companies, there the gross margin profiles are much higher. It is more related to the role that you are playing as compared to product category. It just happens that in MedTech, we are playing that role much more as compared to pharma. Pharma demand, majority of our business is under demand fulfillment, while in MedTech, a large part of our business is demand generation.
The margin increment on gross margin is happening on both pharma as well as MedTech. On pharma, it is primarily driven by scale, driven procurement efficiencies, and on MedTech it is getting more business opportunities and more collaborations with companies for demand generation.
Okay. Fair enough. Second one on the wallet share. Some channels check suggest that for the IPM, for the Core Pharma segment, their distributors or the pharma retailers, they maintain close to 5%-10% of supplier diversification for individual suppliers. Is that correct? Or we are increasing our wallet share of the individual pockets. 10% kind of supplier diversification is correct thing or we can see other picture also?
Your data point, I am not able to understand. When you say 10% supplier diversification means what?
Medicines or Core Pharma things. I can diversify 10%, 10% on each. Right. Just to diversify my supplier base. Are we increasing our wallet share in the same way to do, let us say, marketing role for the companies or giving more platform-based services to the distributors or the retailers so that we can increase our wallet share. What is our, I can say, the blended wallet share should be saying?
See, wallet share is a direct reflection of the value proposition that you give to the retailers. If your value proposition is higher to a retailer, he will allocate more share of his business to you, right? That has been our target internally to increase our value proposition every year. So that is why we are adding more companies, we are adding more warehouses, we are adding better experience for him to buy, and that is how we are targeting higher wallet share year-on-year.
Thank you. Sorry for interrupting, Mr. Karan, sir. Please rejoin the queue for the more questions. The next question is on the line of Akshat Mehta from Seven Rivers Holding. Please go ahead.
Hi, sir. Just wanted to understand a small point, sir. Why has the minority interest come down on absolute basis quarter-on-quarter?
I think last quarter was what, INR 16 crores or something like that, and this quarter is INR 14 crores, right?
Yeah, INR 17 crores and INR 14 crores.
Yeah, INR 17 crores and INR 14 crores. It depends on how much profit they have made, sir. It is a simple formula of. As I told you, in quarter four, we had a significant prepayment of revenue on one of our subsidiaries, which led to a higher profit share attributable to them.
Okay. Thank you, sir.
Thank you. Ladies and gentlemen, due to time constraint, we take this as the last question for today. I would now like to hand the conference over to the management for the closing comment. Thank you, and over to you, sir.
Thank you everyone for joining this call, and thank you for your faith, confidence in our company. If any question that has remained unanswered during this call, please feel free to reach out to our investor relations team. Thank you once again. Thank you. Have a good day. Bye.
Thank you. Thank you, sir. On behalf of Monarch Networth Capital Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.