IPO Analysis- Advanced Enzyme

About the issue

Advanced Enzyme’s IPO has hit the market on July 20, 2016 to mobilise around Rs 412 crore. The offer is open from July 20 to July 22, 2016 for retail investors. The offer is available in the price band of Rs 880- 896 per share. 

Purpose of the IPO

Advanced Enzyme’s IPO will raise around Rs 400 crore by sale of 4.0 million shares (Rs 361.5 crore) for face value of Rs 10 through offer for sale by existing shareholders. The company is also raising Rs 50 crore by issuing new shares.  Out of this, Rs 40 crore will be used for the payment of a certain loan amount taken by its fully owned subsidiary Advanced Enzymes USA. The Company will not receive any proceeds from the Offer for Sale.

Industry Outlook

Enzyme belongs to the niche industrial sector. Enzymes are sustainable alternatives to hazardous chemicals used in many industrial bio-chemical processes. The global enzyme market stood at USD 5.1 billion in 2012, which is expected to grow by a CAGR of 6.3 per cent every year to USD 7.0 billion in 2017. Market is further expected to grow at a 5 year CAGR of 6.5 per cent after 2017. Enzymes are split into two segments:  Industrial Enzymes and Speciality Enzymes. Demand for enzymes in the world market can be gauged from the below table.



Global demand for enzymes is expected to be led by speciality enzymes, which are used for diagnostic, research and biotechnology related works. Industrial enzyme segment is expected to grow by a decent rate, led by sub-segments food and beverages and animal feed. This demand has been catalysed by the rise in the middle class population and their improved lifestyle, which has fuelled meat consumption. Factors like a challenging environment for in starch processing, textile and leather production; and environment friendly use of enzymes pose a major hurdle for efficient growth.

On the geographical front, North America dominates the global enzyme market accounting for 41.5 per cent of the global enzyme demand in 2012, implying a market size of USD 2.1 billion. Between 2002 and 2012, the share of North America and Western Europe in the global enzyme market has been gradually declining, while that of Asia Pacific and other regional markets including Central & South America, Eastern Europe, Africa and Middle East have been on an upswing. This trend is expected to continue, going forward, with Asia Pacific becoming the second largest enzyme market by 2017, and further outpacing Western Europe by 2022. Nevertheless by 2022 North America shall continue to be the largest regional market, (accounting for 34.8 per cent of the global enzyme demand) and Asia Pacific region will grow to become another largest enzyme market after North America. 

Company Outlook

Advanced Enzyme deals in specialised business with a high entry barrier. The company enjoys second highest market share on the domestic front and stands next only to the world's largest enzyme company Novozymes. The firm is engaged in research, development, manufacturing and marketing of over 400 proprietary products developed from 60 indigenous enzymes. Global demand for enzymes offers bigger opportunity for the company making it a long term player, as company has larger global presence. Company also focuses on R&D of various enzymes. In FY16, FY15 and FY14 on a standalone basis, the company has spent 5.8, 7.2 and 5.9 per cent respectively on R&D activities. 

AET has de-risked its business model by having a diversified client base, with top 10 customers (some of them are Sanofi India, Cipla, Ipca Laboratories, Alkem Laboratories, and Emcure Pharmaceuticals) accounting for 41.48 per cent of total revenues on a consolidated basis in FY16. The company operates in two primary business verticals, namely Healthcare & Nutrition (87.6% of revenue in FY16); and Bio-Processing (12.4% of revenue). AET sells these products to more than 700 global customers spread across 50 countries. In terms of geographical presence, USA, India, Asia (ex-India), Europe and other geographies (ex- India and USA) accounted for 54.9, 36.4, 3.6, 3.8 and 1.2 per cent of total revenues, respectively in FY16. US is an important focus market for the company, which contributes to a major portion of international revenues.

AET has 13 patents and 172 trademarks registered in its name, with 4 patents and 14 trademarks pending before relevant authorities. Enzyme industry at global and domestic front is expected to rise by a CAGR of 6.4 per cent and 15 per cent respectively. Changing food habits from junk to healthy; healthy market share in US and Indian market; and high entry barrier gives significant growth potential to AET in near future. 

Management

Company is getting parentage from promoters, Chandrakant Laxminarayan Rathi and Vasant Laxminarayan Rathi, who have a cumulative experience of more than seven decades in the global enzyme industry and have contributed widely in the company’s success and growth.

Financial Performance



The company has been seeing a growth in revenue at a CAGR of 20 per cent over 2011-2016. Topline has been expanded by 32 per cent YoY in FY16, which looks much better than de-growth in FY15, by 7 per cent. Company’s EBITDA and PAT margin have been spiked by 47 per cent and 27 per cent respectively in FY16 on a yearly basis. Company also enjoys low debt status (net debt-equity ratio- 0.2). We can see fair growth numbers in FY17 driven by enzyme demand at global and domestic level. 

Valuation

AET does not stand with any peer set being a niche business segment. Company at EPS of 35 looks attractive with PE of 25.5x and P/B of 7x.  AET enjoys ROCE of 35 per cent. Huge demand for enzymes and sole market position creates a win-win condition for the company. So we can expect to see an upside gain of upto 15 per cent after listing in the market.