IPO Size: Rs. 570 cr

• Rs. 320 cr Fresh Issue for debt repayment (Rs. 167 cr) and working capital (Rs. 72 cr)
• Rs. 250 cr Offer For Sale (OFS) by the promoter (67% holding to reduce to 52%) and by an early individual investor (28% to drop to 22%)

Price band: Rs. 426-448 per share

• Rs. 94 cr pre-IPO placement earlier this month, at Rs. 448 per share

Mcap: Rs. 2,564 cr, implying 22% dilution

IPO Date: Thu 21^st Dec to Tue 26^th Dec 2023, Listing: Fri 29^th Dec 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

B2B Pharma Company

Innova Captab offers Contract Development and Manufacturing Operations (CDMO) to larger pharma companies, from its 2 plants in Baddi, Himachal Pradesh, which operate at about 60-65% utilization. While CDMO is typically a high margin business, Innova’s higher material cost keeps gross margin low at 25%, unlike peers Glenmark Life’s 55% and Windlass’ 37% gross margin. This is compensated by higher volumes, with fixed asset turnover ratio of 5+, against 3x for peers. Thus, company’s RoE is healthy at 24.6% in FY23.

Acquisition of Sharon Bio-Medicine

Innova Captab acquired formulation-cum-API (active pharmaceutical ingredients) manufacturer Sharon Bio-Medicine under insolvency, on 30.6.23, and gained 2 plants in Taloja and Dehradun, post infusion of Rs. 195 cr into the business. But, at present, Sharon clocks lower margin over Innova standalone business.

Weakening Financials

Of FY23 proforma revenue of Rs. 1,119 cr (standalone revenue Rs. 926 cr), 60% came from CDMO business, 15% domestic branded generics, 7% international branded generics and 17% from Sharon. At Rs. 680 cr, standalone CDMO revenue declined 1% YoY FY23, while standalone business’ net margin has also contracted from 8.4% in FY21 to 7.3% in FY23. Sharon clocked net margin of just 5% in FY23. Thus, company’s standalone topline growth has been poor, while margins also under pressure.

FY23 proforma net profit stood at Rs. 101 cr, primarily due to one-time writeback of Rs. 54 cr liabilities (pre-tax) of Sharon. Excluding this, proforma net margin is barely 6% and RoE ~20%.

For Q1FY24, proforma revenue was reported at Rs. 280 cr, but proforma net profit has not been disclosed (for reasons best known to the company). Standalone business Q1FY24 revenue and PAT stood at Rs. 233 cr and Rs. 17.6 cr respectively, translating into 7.5% net margin and an EPS of Rs. 3.7.

Company has presented results only till 30.6.23, while IPO is being launched just 10 days prior to 31^st Dec deadline of disclosing June 2023 financials. All this is not comforting for prospective investors.

Future Growth Areas

1. Domestic Branded Generics: Company’s branded generics business has grown rapidly in India, from Rs. 37 cr revenue in FY22 to Rs.42 cr in Q1FY24.
2. Greenfield Jammu Plant: Rs. 355 cr being invested for a new plant in Jammu (GST and other fiscal incentives), for which land has been acquired and order for machinery placed. Since it operates on 5x+ fixed asset turnover ratio and this capex is sizeable (standalone fixed assets Rs. 150 cr, as of 31.3.23), it provides healthy growth visibility, but FY26E onwards.

Expensively Valued in Short Term

Based on Q1FY24 disclosed financials, FY24E EPS is estimated close to Rs.16.5, which leads to a current year PE multiple of 27x. This is significantly higher than PE multiple of 16x for CDMO peers Glenmark Life and Windlass. Infact, Glenmark Life, with Rs. 2,200 cr topline, 22% net margin and 22% RoE, is ruling at a PE multiple of just 16x.

CDMO companies, despite double-digit industry growth projection, have not excited markets, and both Glenmark Life and Windlass are trading below IPO price, even after 2.25 years of listing. Also, it will be imprudent to compare Innova Captab with Torrent Pharma, Ajanta Pharma, Eris Lifesciences, all of these operate on double digit net margins with a different business profile.