Innova Captab IPO review (Apply)

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Review By Dilip Davda on December 18, 2023

•    ICL is an integrated pharmaceutical company specializing in branded generic products for the domestic and international markets. 
•    The company has recently acquired Sharon Bio to mark synergic expansion. 
•    For the last three fiscals, it marked growth in its top and bottom lines. 
•    Based on FY24 annualized earnings, the issue appears fully priced. 
•    Investors may park funds for the medium to long-term rewards considering bright prospects ahead post undergoing expansions.

ABOUT COMPANY:
Innova Captab Ltd. (ICL) is an integrated pharmaceutical company in India with a presence across the pharmaceuticals value chain including research and development, manufacturing, drug distribution and marketing and exports. Its business includes (i) a contract development and manufacturing organization ("CDMO") business providing manufacturing services to Indian pharmaceutical companies, (ii) a domestic branded generics business and (iii) an international branded generics business. 

In Fiscal 2022, among Indian formulation CDMO players considered in the CRISIL Report, ICL recorded the third highest operating revenue, the second highest operating profit margin, the third highest net profit margin and the second highest return on capital employed. (Source: CRISIL Report, October 2023). In Fiscal 2023 and in the three months ended June 30, 2023, it had 182 and 133 CDMO customers, respectively. In Fiscal 2023 and in the three months ended June 30, 2023, the company manufactured a diverse generics product portfolio of over 600 products and market them under its own brands in the Indian market through a developed network of approximately 5,000 distributors and Stockists and over 150,000 retail pharmacies. In addition, during Fiscal 2023 and the three months ended June 30, 2023, it exported branded generic products to 20 and 16 countries, respectively. 

The foundation of the Company is its in-house research and development ("R&D"). Its R&D operations helps it in attracting and retaining CDMO customers and grow its branded generic portfolio. It has a dedicated R&D laboratory and pilot equipment located at its manufacturing facility in Baddi, Himachal Pradesh, which is recognized by Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India ("DSIR"). In addition, the company is looking to establish a new R&D center in Panchkula, Haryana. Its manufacturing is undertaken at two manufacturing facilities in Baddi, Himachal Pradesh along with a new facility it is planning in Jammu. 

ICL's facilities has good manufacturing practices ("GMP") certifications from the Health and Family Welfare Department, Himachal Pradesh, in conformity with the format recommended by the World Health Organization (the "WHO"), and the certificate of GMP compliance from Food, Medicine and Health Care Administration and Control Authority, Ethiopia.

ICL's CDMO services and products include commercial large-scale manufacturing of generic products. It also enters into loan license agreements with customers. Its comprehensive CDMO formulation capabilities allow company to offer its customers multiple dosage forms, including oral solids, oral liquids, dry syrups and injectable, as well as more complex delivery forms such as modified and sustained release forms and tablets in capsules. The company also has added products using new technologies like Nano technology. Its CDMO product portfolio spans across both acute and chronic therapeutic areas. 

The company manufacture products across some of the key therapeutic areas identified by CRISIL Research, including cephalosporin, proton pump inhibitors, anticholinergic and heparin NSAIDs, analgesics and antipyretic, anticold and antiallergic, antiemetic, antidiabetic, antispasmodic, antifibrinolytic, cardiovascular, antioxidant and vitamins, antihyperuricemia and antigout, fluroquinolone and macrolide, nootropics and neurotronic/neurotrophic, antiulcerative, antimalarial anxiolytic, anticonvulsant and antipsychotic, bladder and prostate disorders, antifungal, anthelmintic and antiviral anticholinergic and anti-asthmatic and bronchodilator and erectile dysfunction. (Source: CRISIL Report, October 2023).

In its CDMO business, it has developed relationships across the Indian pharmaceutical industry. Some of its key customers include Cipla Limited, Glenmark Pharmaceuticals Limited, Wockhardt Limited, Corona Remedies Private Limited, Emcure Pharmaceuticals Limited, Lupin Limited, Intas Pharmaceuticals Limited, Leeford Healthcare Limited, Medley Pharmaceuticals Limited, Cachet Pharmaceuticals Limited, Eris Healthcare Private Limited, Indoco Remedies Limited, J. B. Chemicals and Pharmaceuticals Limited, Oaknet Healthcare Private Limited, Zuventus Healthcare Limited, Ajanta Pharma Limited, Mankind Pharma Limited and Smart Laboratories Private Limited.

Its branded generics business consists of the development, manufacture and distribution of generic formulation products, which are marketed and distributed in India under its own brand names through online and offline channels. ICL's branded generic products are generic medicines for which the patents have expired, that are sold directly to its distributors, Stockists and retailers. It has developed a diversified branded generics product portfolio including tablets, capsules, dry syrups, dry powder injection, ointments and liquid orals.

The company sells its domestic branded generic products through Pan-Indian network of distributors, Stockists and pharmacies. Its generic drug products are also available online through various e-commerce pharmacy sites. The company also has an international branded generic product business focused on exports to emerging and semi-regulated international markets. It is expanding international branded generics business to regulated markets like the United Kingdom, and Canada. 
As of October 331, 2023, it had over 1560 employees on its payroll (excluding Sharon).

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden combo book building route IPO of Rs. 570.00 cr. (12723207shares at the upper cap) consisting Rs. 320 cr. fresh equity shares (7142850 shares at the upper cap), and an Offer for Sale of 5580357 equity shares (worth Rs. 250.00 cr. at the upper cap). It has announced a price band of Rs. 426 - Rs. 448 per share of Rs. 10 each. The issue opens for subscription on December 21, 2023, and will close on December 26, 2023. The minimum application to be made is of 33 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 22.23% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, it will utilize Rs. 144.40 cr. for repayment/prepayment of certain borrowings, Rs. 23.60 cr. for investment in subsidiary UML, Rs. 72.00 cr. for working capital, and the rest for general corporate purposes. The company pruned its IPO size by Rs. 80.00 cr. following a pre-IPO placement of equity shares at a price of Rs. 448 in December 2023. 

The company has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

The joint Book Running Lead Managers (BRLMs) for this issue are ICICI Securities Ltd., and JM Financial Ltd. while KFin Technologies Ltd. is the registrar of the issue. 

Having issued initial equity shares at par value, the company issued further equity shares at a fixed price of Rs. 448 in December 2023 (on the basis of Rs. 10 FV).  It has also issued bonus shares in the ratio of 3 for 1 in April 2022.The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 2.36, Rs. 2.50, and Rs. 15.20 per share. 

Post-IPO, its current paid-up equity capital of Rs. 50.08 cr. (50082072 shares) will stand enhanced to Rs. 57.23 cr. (57224922 shares). Based on the upper cap of IPO price band, the company is looking for a market cap of 2563.68 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 412.03 cr. / Rs. 34.50 cr. (FY21), Rs. 803.41 cr. / Rs. 63.95 cr. (FY22), and Rs. 935.58 cr. / Rs. 67.95 cr. (FY23). For Q1 of FY24 ended on June 30, 2023, it earned a net profit of Rs. 17.59 cr. on a total income of Rs. 234.37 cr. 

For the last three fiscals, the company reported an average EPS of Rs. 12.72, and an average RoNW of 26.48%. The issue is priced at a P/BV of 7.31 based on its NAV of Rs. 61.31 as of June 30, 2023, and at a P/BV of 3.62 based on its post-IPO NAV of Rs. 123.64 per share (at upper cap). 

If we attribute annualized FY24 earnings to post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 36.42. Thus the issue appears fully priced, but considering bright prospects ahead, it's a worthy bet. 

For the reported periods, the company posted a PAT margins of 8.40% (FY21), 7.99% (FY22), 7.34% (FY23), 7.54% (Q1-FY24), and RoCE margins of 26.54%, 23.46%, 22.61%, 3.75% respectively. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. It has adopted a dividend policy in April 2022, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer document, the company has shown Torrent Pharma, Laurus Lab, Ajanta Pharma, J B Chemicals, Natco Pharma, Eris Lifescience, Indoco Remedies, Suven Pharma, and Windlas Biotech as their listed peers. They are trading at a P/E of 64.23, 57.53, 35.87, 45.91, 13.13, 28.56, 32.26, 40.75, and 17.96 (as of December 18, 2023). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The two BRLMs associated with the offer have handled 72 public issues in the past three fiscals, out of which 19 issues closed below the IPO price on listing date. 

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