IPO: Innova Captab

Innova Captab, an Indian pharmaceutical company, is coming out with its IPO (initial public offering) on December 21, 2023. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Its three-year average return on equity ( ROE ) and return on capital employed (ROCE) are 26.4 and 24.2 per cent, respectively. Moreover, it generated positive cash flow from operations in each of the last three financial years.
  
• Growth: Its revenue and net profit grew annually by 50 and 40 per cent, respectively, in the last three financial years, driven by higher demand and a recent acquisition.
  
• Valuation : The stock will be priced at a P/E and P/B of 37.7 and 3.7 times, respectively, as compared to its peer's median and average of 36.0 and 6.0 times.
  
• Overview: Higher demand from major pharma players opting to outsource manufacturing and expansion into new markets should favour growth. It recently acquired Sharon Bio-Medicine as part of its inorganic growth strategy. However, the highly fragmented, competitive and regulated nature of the pharma industry can provide significant hurdles.

About Innova Captab

Innova Captab is an Indian pharmaceutical company. It has three revenue verticals:

• Contract development and manufacturing (CDMO) - 73 per cent of FY23 revenue
  
• Domestic branded generics - 18 per cent
  
• International branded generics - 9 per cent

Under CDMO, it manufactures products across key therapeutic areas like cephalosporins, proton pump inhibitors, anticholinergic, etc. Under domestic branded generics, it markets its own brand through an extensive distribution network. Also, in June 2023, it acquired Sharon Bio-medicine, an intermediates, APIs, and finished dosages manufacturer.

Strengths of Innova Captab

• Strong customer base. Prominent pharmaceutical companies like Cipla, Glenmark Pharma, and Mankind Pharma are its clients.
  
• It enters into long-term CDMO agreements (two to five years) with clients, providing revenue visibility and stable cash flows.

Weaknesses of Innova Captab

• Contract manufacturing in India is a highly fragmented and competitive market .
  
• The pharma industry is highly regulated. Failing to meet quality standards can impact operations significantly.
  
• Risk payment defaults. As of Q1 FY24, its trade receivables as a percentage of total assets stood at 28 per cent.

Risk report

Company and business

• Are Innova Captab's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. Its FY23 profit before tax was Rs 92 crore.
• Will Innova Captab be able to scale up its business?
  Yes. Higher demand for contract manufacturing from major pharma players and increasing cases of chronic diseases should help it scale up.
• Does Innova Captab have recognisable brands with client stickiness?
  Yes. It has established long-standing relationships with its top clients. In the CDMO segment, clients associated with the company for more than five years accounted for about 84 per cent of the FY23 revenue.
• Does the company have a credible moat?
  No. It operates in a highly competitive and fragmented market.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Promoters' stake will be 51.7 per cent post IPO.
• Do the top three managers have more than 15 years of combined leadership at Innova Captab?
  No. The combined leadership of the top three managers is less than 15 years.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise. However, a few litigations pertaining to non-compliance with quality standards are still pending.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Innoca Captab free of promoter pledging of its shares?
  Yes. Innova Captab is free of promoter pledging of its shares.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE are 26.4 and 24.2 per cent, respectively. Its FY23 ROE and ROCE are 24.6 and 22.6 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flows in the last three financial years.
• Is the company's net debt-to-equity ratio less than one?
  No. Its net debt to equity stood at 1.0 times as of June 30, 2023.
• Is Innova Captab free from reliance on huge working capital for day-to-day affairs?
  No. The company requires a significant amount of working capital to fund its operations due to high working capital days (110 as of June 30, 2023).
• Can the company run its business without relying on external funding in the next three years?
  No. It is a highly capital-intensive business. Nearly half of the proceeds from the IPO will be used for deleveraging.
• Is Innova Captab free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of equity is 67.0 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 3.7 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  No. The stock is valued at a price-to-earnings ratio of 37.7 times compared to peers' median level of 36.0 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a price-to-book ratio of 3.7 times compared to peers' average level of 6.0 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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