Innova Captab opened at the bourses today with an apprehensive two per cent premium at the open. The stock later found its footing and has gained 22 per cent by mid-day and is locked in the upper circuit. Compared to the IPO price of ₹448 (higher band), the stock is now trading at ₹547 per share. We earlier recommended investors subscribe to the issue and now recommend that investors can continue to hold on to the stock.

Innova Captab is a CDMO operator (60 per cent of FY23 revenues) that contract manufactures generic formulations and supplies to domestic pharmaceutical companies.

Firstly on valuations, the stock has obviously gained. Compared to 25 times FY23 earnings at the time of IPO (proforma basis which includes a recent acquisition) the stock now trades at 30 times trailing earnings. This does push the stock to the higher end of peer valuations (Windlas at 22 times trailing) and also the broader pharmaceutical industry which trades at 25-30 times trailing earnings. But by factoring in expansion at Jammu, reduction in debt, and considering the strong domestic footing of Innova, we expect stock price to track higher earnings growth despite elevated valuations currently.

The Jammu expansion at ₹350 crore should nearly double the current capacity in two-three years along with adding complex portfolio to the current product mix, penems and dry powder inhalations. The company has a net debt to EBITDA of 2.9 times as on Jun-23, which can come down to 1.5 times with repayment from fresh issue proceeds, further providing comfort to valuations. Innova had acquired Sharon in Q1FY24, but the valuation factors in the same and benefits from synergy will take time to materialize as the target was under IBC.

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