Innovassynth investments limited - Hidden Gem?

Stock Opportunities Untested - but worth a good look
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CMP 102
Marketcap 280cr

Overview of Innovassynth Investments Ltd
Business Model:

Innovassynth Investments Ltd serves as a holding company, deriving its income primarily through dividends from its stake in Innovassynth Technologies Ltd.
It has no direct operational products or services.
Stake and Operations of Innovassynth Technologies:

Innovassynth Technologies operates in R&D, CDMO, and specialty chemicals.
The company runs a 70-acre facility in Khopoli, Maharashtra.
Financial Performance for Innovassynth Technologies
Revenue:
FY 2022: ₹200 crore
FY 2023: ₹185 crore

In FY 2022, Innovassynth Investments Ltd received approximately ₹15 lakh in dividend income from Innovassynth Technologies.

Leadership and Management
CEO: Hardik Joshipura, an industry veteran with prior experience at Merck, was appointed two years ago to lead Innovassynth Technologies.
The Rajan Raheja Group oversees the operations after acquiring the company from the original promoters, the Ghai family.

The plan, as per the announcement, is to implement a reverse merger, absorbing Innovassynth Technologies into the listed Innovassynth Investments Ltd. Post-merger, the promoters, the Rajan Raheja Group, are expected to own approximately 72% of the consolidated entity.

Details of the Merger/Reverse Merger

Current employee strength of 600 in Innovassynth Technologies with Facility in Khopili and recently in Pune

Interestingly, Rakesh Jhunjhunwala initially held a stake in the firm back in 2010. This stake was later transferred to Utpal Sheth, his right-hand man and the current CEO of RARE Enterprises, Jhunjhunwala’s investment firm. Utpal Sheth is also the founder of Trust Mutual Fund and owns approximately 12% of the stake under the name of Chanakya Services Ltd.

The primary promoters, the Rajan Raheja Group, are also associated with other prominent companies, including Exide Industries, Supreme Petrochem, EIH Associated Hotels, and Sonata Software.

From a technical perspective, the counter has shown significant volume growth and price movement over the past six months.

Regarding the merger and its post-merger valuation, it is anticipated that the consolidated entity will generate approximately ₹200 crore in revenue, as stated in the IRCA report.
As per the listed entity they have already applied for NOC to BSE and next step will be NCLT which might take around 12 month

Clearly the management has improved its outlook to the company and focus on business which is under Innovassynth Technologies but how would it translated to Innovassynth Investment and merger/post merger

The future outlook also hinges on the management’s vision(promotors), which clearly reflects their ability to handle multiple priorities effectively. The group has consistently demonstrated strong performance across its portfolio companies.

Open to further discussion and perspectives.

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Could you get a detailed business model analysis as well?

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  • Nucleosides Manufacturing: Engages in research, development, and large-scale production of nucleosides, reagents, and drug intermediates for export to pharmaceutical and biotech industries globally.
  • Specialty Chemical Export: Produces and exports organometallic complexes, aromatics, heteroaromatics, aliphatics, cyclic compounds, polycyclic alkanes, alkenes, and arenes.
  • CDMO (Contract Development and Manufacturing Organization): Operates a business model similar to Vimta Labs, Suven, and Neuland, offering customized development and manufacturing solutions to the pharmaceutical and biotechnology sectors.

Key Risk Factors:

  1. The merger itself is a risk, as the listed firm is a holding entity, and while some of the holding value is reflected in the merger announcement, its completion is uncertain. The process is underway, with approvals from shareholders and listed on the BSE website. However, final outcomes remain uncertain until completion.

  2. Despite a business size of ₹180-200 crore, Innovassynth Technology needs to deliver consistent profit growth and maintain profitability to stay in the green.

  3. Over the past 2-3 years, growth has stagnated, attributed by management to global conditions. However, the management must identify and execute strategies to scale exports and drive growth.

Key Positives for Innovassynth Technology’s Business:

  1. Strong backing by the Raheja Group, which has a track record of wealth creation through firms like Exide, Sonata Software, and Supreme Petro.

  2. Opportunities from the US Biosecure Act and the China+1 strategy could help scale exports to the US market.

  3. Land assets and facilities nearly match the market capitalization of the parent company. Additionally, financial liquidity from promoters ensures that debt is not a concern if required.

  4. Utpal Sheth holds nearly a 12% stake, adding credibility to the firm.

  5. Over the past 2-3 years, there has been increased focus from management, including strategic hires, indicating a commitment to growth.

Disclosure: Holding postion and open to ideas

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@pratikjain1310 - kindly share your future expectation

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Company’ is in expansion mode wirh 20 crore capex as mentioned in ICRA report .

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What will be total shares available after the reverse merger?
Expected EBIDTA and market cap?
Exepected numbers only
@23_Investments @vikasbargale

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One of the main thesis for this counter is that the opportunity of CDMO player and tailwind perceived due to Biosecure Act, which would have made this counter buzzing one in the near term, if this doesn’t PAN out, besides the merger itself is gonna happen anywhere between 3-6 quarters, at this current juncture, at the CMP levels the risk and reward is not favourable with lot of uncertainty,

Few excerpts from ICRA report

Moderate scale of operations in competitive CRAMS sector with large and established players exerting pricing pressure –
CRAMS is like bulk commodity (Divi’s lab makes CRAMS too), so here scale matters, and getting a new customer must come at the lower profitability.
Exposed to customer concentration risk – 50-60% of revenue from the single customer
Profitability exposed to volatility in raw material prices and forex rates – key raw materials are petroleum derivatives and inspite crude oil has been at the band of $60/barrel for some time now(which is at the lower end of pricing)

Only good thing going as of now for this counter is that Raheja Group and RARE is backing, but he has been holding since 2010, however, they can withdraw or even stop the merger.

My thoughts:
This merger would provide them with capital for expansion on the flipside they are not going via IPO route so I read this situation as they wanna ease into CDMO tailwind going into the market as soon as possible, CRAMS has a margin of 15-25%, let’s take lower side of the margin since the company doesn’t have any pricing power
Revenue of 180 crore (would yield 25-30EBIT, with no major debt most of them will flow to bottom line)

This company had PAT margin of 10% in Fy21-22, 12.3, 21.9 crores PAT in Fy21-22, However they had losses in subsequent FY23, FY24, the reason stated was below

Its operating margins contracted in the past two fiscals due to one-time expenses/fees paid to a leading consultancy firm as a part of ITIL’s strategic initiative to widen its customer base, higher employee expenses on the back of addition to its staff base to support business growth and R&D activities and some impact on production in FY2024 due to partial utilisation of facilities for development of new products.

However Not sure how they had spent 40-45 crores, on the above-mentioned activity, this is both a good thing and bad thing, usually towards IPO companies usually jack up the last two fiscal operational metrics, in this case it was opposite of that.

so we can take FY-21,22 as a base metric going by which, company is available at PE of 15-20, but on the other hand they aren’t able to scale the revenue for past 4 years that only means they are constrained by capacity, which means increase in revenue comes after making doing greenfield capex, I presume which is yet to be started, because their revenue has been stagnated around 160-200 cr mark for last 3 fiscal years.

Usually if they already have Land in their hand for expansion , it would take 2 years minimum for it to contribute on the topline, if they yet to purchase land it may take further, not sure about the brownfield expansion and how much incremental capacity they can add, my guess is they can’t rampup the production based on revenue stagnation for almost 3-3.5 years

Source:

TLDR: A few months back at the levels was 1/3 of current valuation (100cr Mcap) was a definitely good deal for company of 18-20cr PAT, Now I think all the good things has been factored in already scope for rerating is less from CMP, since revenue may be stagnated for another few years with current capacity constraint - unless I get new information regarding new capacity addition or if someone from our community do scuttlebutt in their plant at 70-acre facility in Khopoli, Maharashtra and figures out the utilization levels, I prefer to wait and watch

Requesting our community members who is closer to the plant location to take a look and get a rough idea of capacity utilisation levels

Disclosure: Tracking

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Well summarized and researched.

Here are a few points that might be helpful:

  • Hiring in Pune: They claim to have around 100+ scientists and R&D professionals. However, based on LinkedIn, this appears to be approximately 50–60 people in Pune, including mid-to-senior management, scientists, and R&D executives. This observation is purely based on LinkedIn research.
  • Recruitment: Over the past 2–3 years, they have hired several individuals at VP, AVP, and GM levels, many of whom are ex-Biocon, Microlab, Hikal, and Jubilant employees.
  • Promoters: The promoter Raheja and RARE holding are positive aspects, as you mentioned. However, it remains to be seen how the non-promoter key management hires execute and demonstrate the ability to scale, given the lack of growth and negative margins over the last three years.
  • Status:Invested: The views expressed could be biased.
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Big time
Investment on above

And a big fees paid to BCG consultancy

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Thanks for the new data points,

They have hired, spent may be invested in new talent s and RD, which is a good sign for a company of this size.
Especially they have done at the cost of their PAT which shows they are doing this to capture the oppertunity available due to china plus one.

However whether this R&D for new product or for existing process improvements,

I presume the former, because at their scale process improvements doesn’t make sense to make a meaningful contribution

This is a industry with long gestation period, with lot of approvals both from government and customers
It may quite literally take 2-3 years.

So without having a new data points of how they are gonna increase the revenue, even if they increase the PAT via margin expansion ( may be 30 crore from earlier 18-20cr).

If any company is not a high growth company or scope of high growth, market doesn’t assign higher PE, so long term PE of CDMO manufacturers stand around 25-30,

Based on that, and given uncertainty regarding merger timeline with capacity expansion delay due to stringent approvals, this may very well consolidate or go through price correction untill we get a confirmation on revenue increase either via capacity expansion or existing improved capacity utilisation.

At CMP, it poses the threats above mentioned,

Once again i emphasize, if someone can visit and figure out their plant capacity utilisation, that would be interesting

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Hi Please if you can provide source of this information

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This is for Fy21, 22

https://www.icra.in/Rating/GetRationalReportFilePdf?id=128478

and for Fy-23, 24 refer to the document I shared few posts above

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  • Biosecure Act not being approved is a non event in the pharma world. API costs form a miniscule of expense for an Innovator Company ie 1% to 2% of the cost . While US has let Chinese CDMO become a giant due to their scale and efficiencies , innovators have realized the supply chain cannot be dependent on 1 country . They need to spread their basket out and that is what is happening with Indian CDMO companies. Biosecure was merely a catalyst but Biosecure or not , India is going to eat into the pie from China .

  • CDMO sector has long gestation periods and the seeds are sown over the years. You cannot go from Drug Discovery to Phase 3 trials within a year or two . It needs long gestation periods which may or may not result in a success ie Commercial Production . However , till the time you learn from the previous failed molecule and built on it , the chances of succeeding exceeds . And getting a successful innovator drug can be a huge game changing event like can be seen in the case of Nueland these days .

-PAT is not an appropriate figure to look into accessing CDMO companies. Assessing their molecules and the existing phase in the Clinical Trials is essential as more molecules are in the Phase 3 trials the more the chances of success . The research scientists are another indicator but may not give a true picture ( As AI / computational biochemistry ) is getting day by day at predicting the chances of success . The EV/ EBIDTA or EV/ Sales should be a proper play to look at a company like Innovasynth which is currently trading probably at 1 or 1.5x . So when the success event occurs markets would not take time to rerate it.

-Bet in such companies can be taken on the basis of the management and the years will let us know if they can perform to the expectation however the margin of safety at this level is surely there. Whether it can fall to 60 or below , yes it can but till the time the reverse merger is not called off there is no need to sell in distress.

-Always invest in CDMO as a basket and avoid putting all eggs in a single basket. There are plenty of opportunities out there so if you miss out on one dont regret but do not also overpay for the hype which is being generated

Disclosure : Invested from lower levels and views may be biased

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Sure Sumit

image
image1129×301 51.6 KB

Link to the Annual report from which the screenshot is shared

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Well put, this convey better than what I intended to convey

However I don’t agree with the below point totally, as for the reason stated by the above point

Exhibiting performance can be showcased either via increasing the commercial production or winning new order

As long as their capacity is constrained (I personally suspect / speculate this ), they cannot increase the current levels of revenue meaningfully,

Given the uncertainty on R&D yielding new DRUG discovery and it’s commercial production, long gestation period and delay in merger as well as BioSecure Act.

I speculate this counter could very well take much longer to run again

Disclaimer: Tracking , This is purely personal view and purely for understanding business and valuation purposes

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NSE listing is planned in future . BCG payment and Pune lab have been big expense - According to few people near company they have 2 MNC contracts in pipeline

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will they be able to cater to them with their current capacity at pune ?? I mean will they be able to do brownfield capacity expansion??

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They hold 31% in Innovassynth Technologies. Innovassynth Technologies had sales of 160 crs in FY24.
31% of 160 crs is approximately economic ownership of 50 crs worth of sales.

At current market cap of 287 crs, this translates to price/sales of 5.75x which is not cheap, especially given the fact that we have not factored in holding company discount here

Disc: not invested

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The current entity will cease to exist post merger

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@pratikjain1310 would appreciate your inputs as someone with insights on ITL