 "IPO Review: Advantage Advanced Enzyme")
Advanced Enzyme Technologies, one of the largest enzyme makers in the world, is raising Rs 400 crore via an initial public offering (IPO), which is largely an offer for sale by promoters and other investors. While only Rs 50 crore of the IPO is through fresh issue of shares, which will be used to repay debt at the company’s US subsidiary, there are reasons that make the IPO attractive including good business prospects, strong track record, niche limited competition segment the company operates in, higher entry barriers, and reasonable valuations.
The company, which gets about two-thirds of its revenues from international operations, is also looking at the inorganic route to enter new product areas, enhance research expertise and grow its market share. A focus area would be to increase its presence in the US market, which is significant as 55 per cent of its revenues come from this geography.
Within the enzymes space, the company focuses on health care and nutrition (nutraceuticals), which accounts for 88 per cent of revenues. Enzymes are natural proteins produced by a living organism that acts as a catalyst to bring about a specific biochemical reaction. Unlike the industrial segment where the level of competition is higher given its high volume and low value characteristic, lack of substitutes in the nutraceuticals space translates into better margins. The company indicated its addressable market size is about $2.2 billion in the nutraceuticals space, which is growing at seven per cent thus ensuring enough potential for growth given the current revenues of Rs 294 crore or $44 million.
Strong growth in the enzymes segment and the company’s niche presence in a limited competition market has helped it achieve 14 per cent growth in revenues, 22 per cent rise in operating profit and 24 per cent growth in earnings on annual basis over the FY12-16 period. The end-to-end integrated business model — where the company makes its own enzymes, and customises and markets those — has helped build scale and offer solutions tailored to various clients. These are the reasons why margins have been upwards of 40 per cent over the past few years.
There are risks, too. Investors will have to be mindful of any impact on financials such as the one that the company experienced due to product recall, which saw muted revenues in FY14 and FY15. While the company has indicated it will be able to manage such risks better, any repeat at this scale (the company took an exception charge of Rs 54 crore due to the recall) could peg back growth. Given the relatively smaller size, the other issue is its ability to scale up on the human resources front, given that a majority of its revenues come from outside the country.
While there are hurdles, for now, its strengths outweigh the risks listed above. Given the strong cash flows, it has been able to bring down debt (debt to equity of 0.3 times). It also has significant spare capacity given its utilisation levels of 45 per cent. Higher operating leverage and lack of manufacturing capex should support higher earnings.
At Rs 896 (the higher end of the price band), the stock is valued at 25.5 times its fully diluted post issue FY16 earnings. While there are no listed Indian peers, Copenhagen Stock Exchange-listed Novozymes is available at 35.4 times its trailing 12 month earnings. Given the potential, investors can consider the issue with a longer-term horizon of three years and above.
The company, which gets about two-thirds of its revenues from international operations, is also looking at the inorganic route to enter new product areas, enhance research expertise and grow its market share. A focus area would be to increase its presence in the US market, which is significant as 55 per cent of its revenues come from this geography.
Within the enzymes space, the company focuses on health care and nutrition (nutraceuticals), which accounts for 88 per cent of revenues. Enzymes are natural proteins produced by a living organism that acts as a catalyst to bring about a specific biochemical reaction. Unlike the industrial segment where the level of competition is higher given its high volume and low value characteristic, lack of substitutes in the nutraceuticals space translates into better margins. The company indicated its addressable market size is about $2.2 billion in the nutraceuticals space, which is growing at seven per cent thus ensuring enough potential for growth given the current revenues of Rs 294 crore or $44 million.
Strong growth in the enzymes segment and the company’s niche presence in a limited competition market has helped it achieve 14 per cent growth in revenues, 22 per cent rise in operating profit and 24 per cent growth in earnings on annual basis over the FY12-16 period. The end-to-end integrated business model — where the company makes its own enzymes, and customises and markets those — has helped build scale and offer solutions tailored to various clients. These are the reasons why margins have been upwards of 40 per cent over the past few years.
There are risks, too. Investors will have to be mindful of any impact on financials such as the one that the company experienced due to product recall, which saw muted revenues in FY14 and FY15. While the company has indicated it will be able to manage such risks better, any repeat at this scale (the company took an exception charge of Rs 54 crore due to the recall) could peg back growth. Given the relatively smaller size, the other issue is its ability to scale up on the human resources front, given that a majority of its revenues come from outside the country.
While there are hurdles, for now, its strengths outweigh the risks listed above. Given the strong cash flows, it has been able to bring down debt (debt to equity of 0.3 times). It also has significant spare capacity given its utilisation levels of 45 per cent. Higher operating leverage and lack of manufacturing capex should support higher earnings.
At Rs 896 (the higher end of the price band), the stock is valued at 25.5 times its fully diluted post issue FY16 earnings. While there are no listed Indian peers, Copenhagen Stock Exchange-listed Novozymes is available at 35.4 times its trailing 12 month earnings. Given the potential, investors can consider the issue with a longer-term horizon of three years and above.