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Investors with a penchant for risk can consider
subscribing to the initial public offer of Advanced Enzyme Technologies
with a two-to-three-year perspective. This Mumbai-based company is in
the business of manufacturing and marketing a range of enzyme products,
catering to over 700 customers across 50 countries.
The company has been growing at a decent clip. Its revenue grew at the
rate of 14 per cent annually between FY12 and FY16 while its post-tax
profit grew 24 per cent during the same period. The company’s leadership
position in the domestic enzyme market, R&D capability and large
portfolio of products will support growth in the coming years. A
reasonable debt-to-equity ratio of 0.26 times also helps.
The issue is reasonably valued; the offer price discounts the company’s
2015-16 earnings around 25 times. The company does not have any listed
peers in India but the global major Novozymes, that is 45 times the size
of Advanced Enzymes, trades at 35 times its 12-month trailing earnings.
However, since the stock is a small-cap, the price is likely to be
volatile after listing.
Good visibility
With over 95 per cent of its revenue coming from the B2B segment, the
company’s product offerings can be broadly classified under two primary
business verticals; healthcare and nutrition, and bio-processing. While
the former comprises enzymes that are supplied to manufacturers of
healthcare and nutrition products for humans and animals, the
bio-processing segment supplies enzymes to the food and non-food
processing sectors. But it is the health and nutrition business that
brings in the bulk of its revenue, having contributed 88 per cent last
fiscal.
Bulk of its revenue is contributed by the US
and India with 55 per cent and 36 per cent share, respectively. The
company’s top 10 customers accounted for 41 per cent of total revenues
in 2015-16.
The company has six manufacturing plants
– four in India and two in the US. According to the management, the
average capacity utilisation is estimated at between 40 and 45 per cent.
This provides room for increase in output without any additional capex
spends.
The company has developed 60 indigenous
enzymes and has 11 food enzyme dossiers with the European Food Safety
Authority as of July 2016.
Although it has 14
patents to its credit, the company prefers to take a proprietary route
for specialty manufacturing. Its product suite consists of over 400
proprietary products developed in-house from 60 enzymes.
Growth outlook
According
to a report by Freedonia, a market research firm, growth in the global
enzyme market is expected at a moderate 6-7 per cent, while the Indian
enzyme market is likely to grow faster at 15 per cent annually between
2015 and 2022. The company, which enjoys 20 per cent domestic market
share, could gain from this trend.
In 2013-14, the
company faced a setback when some consignments were recalled, on the
company suspecting these to be potentially contaminated. While the
management has beefed up its quality processes since, net profit took a
hit of around ₹54 crore.
The company’s financials
have recovered since. The revenue share of healthcare and nutrition, a
high-margin business, has risen over the
last few
years. Its share-to-total revenue increased to 88 per cent in 2015-16
from 74 per cent in 2012-13. In 2015-16, the company reported sales of
₹295 crore, up 32 per cent y-o-y. Operating margins grew to 47 per cent
from 41 per cent over the same period.
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