AETL IPO Review: Should you invest in Advanced Enzyme?

AETL IPO Review: Should you invest in Advanced Enzyme?

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Investors’ wait for Advanced Enzyme Technologies IPO (AETL IPO) is going to end on 20 July when the offer opens for subscription. AETL IPO will involve sale of 4,034,470 shares by existing shareholders through an offer for sale (OFS) while the company will also raise INR50 crore by issuing new shares. In total, AETL IPO will mobilize around INR411.5 crore at the upper end of the price band.

While retail investors will not get any discount on the price band of INR880 – 896 per share, employees will get a rebate of INR86 per share or nearly 10% on offer price. The saving grace is that retail investors will be offered 35% shares in the offer, unlike the IPO of Quess Corp which had retail participating limited at just 10%. Shares of Advanced Enzyme are proposed to be quoted on BSE and NSE and listing is expected on 1 August.

AETL IPO
From Left to Right: CL Rathi (MD, AETL), VL Rathi (ED, AETL) and Beni Rauka (CFO, AETL)

This is the second time the company is approaching IPO market. Earlier in 2013, Advanced Enzyme received SEBI approval to bring the IPO but did not go ahead with the planned offer. Is AETL IPO going to be lucky for investors (not many but those allotted shares) who have made money in the last six IPOs? In this IPO review, we try to find out if this Thane-based specialty chemicals company has what it takes to reward shareholders. Here is a quick snapshot of AETL IPO before we delve deeper in the analysis.

Read Also: Advanced Enzyme Technologies IPO explained in 10 points

AETL IPO details

IPO dates 20 – 22 July 2016
Price Band INR880 – 896 per share
Issue Size INR411.5 crore
Fresh Issue INR50 crore
Offer for share (OFS) 4,034,470 shares (INR361.5 crore)
Minimum Bid 16 shares
Retail allocation 35%

 

AETL IPO Structure

Promoted by Vasant Laxminarayan Rathi and Chandrakant Laxminarayan Rathi, AETL started as a family-owned firm and has continued this way. Although Kotak Private Equity (Kotak PE) owns nearly 4.75% in the company, promoters and promoter group hold 63.11% equity stake in the company. Kotak’s investment in Advanced Enzyme is not very old and the private equity house invested in 2012 through its three entities – Kotak Employees Investment Trust, Kotak India Venture Fund I and Kotak India Venture (Offshore) Fund. Although the IPO is largely an OFS, we like the fact that Kotak will continue to hold half of its shareholding in the company post the offer.

Advanced Enzyme IPO 2

Read Also: Advanced Enzyme IPO price band fixed at INR880-896 per share

Major shareholders in Advanced Enzyme

Name of shareholder Equity Shares Percentage (%)
Vasant Laxminarayan Rathi 7,480,900 34.37
Chandrakant Rathi Innovations and Projects Private Limited 4,295,400 19.73
Atharva Green Ecotech LLP 2,492,940 11.45
Vasant and Prabha Rathi Generation Trust 1,500,000 6.89
Pradip Bhailal Shah 750,800 3.45
Kotak India Venture Fund I 679,900 3.12
Mukund Madhusudan Kabra 381,100 1.75
Kishor Laxminarayan Rathi 343,200 1.58
Kotak India Venture (Offshore) Fund 336,600 1.55
Rachana Rathi 325,000 1.49
Total 21,765,600 100.00

Use of proceeds

The IPO is largely an exit route for existing investors and the company will only raise INR50 crore by issuing new shares. Out of this, INR40 crore will be used for repayment / pre-payment of certain loans availed by its fully-owned subsidiary Advanced Enzymes USA.

Advanced Enzyme’s business background

Many of our regular readers are already well aware of what Advanced Enzyme does but for the benefit of others, here is a gist of what we know about the company:

Established in 1989, Advanced Enzyme is India’s largest enzyme company and is engaged in the research and development, manufacturing and marketing of 400+ proprietary products developed from 60 indigenous enzymes. The company claims to be a fully integrated enzyme manufacturing company and ranks among the top 15 global companies in terms of enzyme sales. In the domestic market, it has the second highest market share after Novozymes which is the global leader in the business. Advanced Enzyme operates in two primary business verticals – Healthcare & Nutrition (87.6% of total revenues in FY 2016) and Bio-Processing (12.4% of total revenues in FY2016). The company offers these products to its global clientele of more than 700 customers spanning presence across 50 countries worldwide.

Advanced Enzyme’s solid financial performance

Advanced Enzyme’s financial performance is underlined by an expanding top line and improving margins. Between FY2012 and FY2016, Advanced Enzyme’s top line grew at a compounded average growth rate (CAGR) of 14.4% while profit after tax (PAT) expanded at an average rate of 23.9%. In fact, the company has consistently made profits and paid dividends since the last 20 years. The company’s net margin is also pretty solid at 26.6% in FY2016, increasing for the third year straight. Except in FY2014 when its financial performance was impacted due to a product recall in the US, net margins have been strong in the last five years. This has been possible as the global enzymes market is highly concentrated among few players due to high entry barriers and required specialized knowledge.

In addition to the limited competition, Advanced Enzyme’s profitability was aided by growing revenues and declining leverage. Between FY2012 and FY2016, Advanced Enzyme’s long term borrowings declined from INR1.39 billion (INR139.3 crore) to INR387.5 million (INR38.7 crore). As on 31 March 2016, Advanced Enzyme’s long term debt/equity ratio stood at just 0.26.

Advanced Enzyme’s consolidated financial performance (in INR crore)

  FY2012 FY2013 FY2014 FY2015 FY2016
Total revenue 174.8 224.1 240.5 224.3 294.6
Total expenses 127.2 147.9 158.7 150.5 172.1
EBITDA  89.5 103.7 90.86 138.2
EBITDA margin (%) 40.6% 43.3% 40.7% 47.1%
Profit after tax 33.3 49.2 20.1 50.1 78.4
Net profit margin (%) 19.1% 22.0% 8.4% 22.3% 26.6%

Should you invest in AETL IPO?  

At IPO Central, we have been following the simple guiding principle that every business is good to invest at the right price and valuation. With its visibly strong financial performance and strong balance sheet, Advanced Enzyme ticks most of the check boxes but since it has no listed peer in the Indian markets, we need to take a look at how its competitors in other markets are valued.

Global leader Novozymes is listed on Copenhagen Stock Exchange while ADRs are also traded actively in the US.  The Denmark-based enzymes giant trades at a trailing 12-months PE ratio of 35.5. In the year ended 2015, Novozymes has EBIT and EBITDA margins of 27.7% and 35.8% (link to PDF), respectively. Although both figures are up from previous year, Advanced Enzyme beats its larger peer hands down with an EBITDA margin of 47.1% in the year ended 31 March 2016. Advanced Enzyme’s EBIT margin or operating margin was 44.1% for the same period. Advanced Enzyme registered consolidated earnings per share (EPS) of INR36.03 in FY2016. Consequently, the IPO price band of INR880 – 896 per share values Advanced Enzyme in the range of 24.9 – 24.4 times its earnings. While it has no listed peer in India, it helps to know that global enzymes leader Novozymes trades at a PE ratio of 35.5. Koninklijke DSM NV – parent of DSM Nutritional Products – trades at a PE ratio of 46. We like the valuations with global peers.

With a good grip on finances and reducing indebtness, the company’s Return on Net worth (RONW) has been growing and the values stood at 28.14%, 23.85% and 12.07% for the fiscal years ended 2016, 2015 and 2014, respectively. Given the high entry barriers and concentrated set of producers, it is natural that enzyme manufacturers enjoy pricing power. Moreover, Advanced Enzume has a diversified customer base which includes Sanofi India, Cipla, Ipca Laboratories, Alkem Laboratories, and Emcure Pharmaceuticals. Its top 10 customers accounted for 41.4% of its consolidated revenues in FY2016 while geographical reach or dependence for business is also fairly diversified with 54.94% of revenue coming from USA, 36.44% from India, 3.84% from Europe, 3.63% from Rest of Asia, and 1.15% from other geographies in the latest FY.

As a supplier of key ingredients to consumer products, Advanced Enzyme is close to fragrance maker SH Kelkar which rewarded investors with superior returns. S H Kelkar offered shares at INR180 apiece and currently trades at INR225 at a PE ratio of more than 40. Advanced Enzyme has a bit of domestic consumption element but let’s not forget India accounts for only 36.4% of its annual revenues.

Management and promoter credibility is one of the better indicators for identifying good IPOs. Both promoter brothers have kept a low profile so not much is known about them. Although Advanced Enzyme was set up in 1989, both brothers have been engaged in the enzymes business since 1978 as co-founders of Rathi Papains Private Limited. The low media profile makes our job difficult but we absolutely like the entrepreneurs who have a narrow focus on their business. The fact that Kotak PE invested in the business and is not exiting fully yet speaks for itself and indicates that the PE firm sees more growth for its investment. Overall, we quite like this homegrown success story of Advanced Enzyme.

We will round-up broker recommendations in the coming days; meanwhile, check out this page to see grey market premium (GMP) and what our readers have got to say about AETL IPO.

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