Advanced Enzyme - Will this enzyme accelerate?

When it rains, they say it pours. That is what is happening in the IPO market right now - It is pouring IPOs! It is now the turn of Advanced Enzyme Technologies Ltd, one of the top 15 companies globally in enzyme production.

Advanced Enzyme Technologies Ltd. has opened its IPO today and will close on 22-Jul-2016. The IPO is priced in the range of INR 880-896 per share. The issue will primarily be an Offer of Sale by existing shareholders with the company also looking at raising INR 500 Million. Shares can be applied in lots of 16 shares and its multiples. The retail investors will not be get any discount in this issue while the qualified employees getting a discount of INR 88 per share. The icing on the cake for the retail investors is that they are going to be allotted 35% of the total issue. The company will issue a total of 4.034 Million shares. As mentioned earlier, most of the proceeds will go to the existing shareholders. With the INR 500 Million that the company is raising, it intends to retire some of the debt of its subsidiary in the US.

Advanced Enzyme is India’s biggest enzyme company. It is engaged in the R&D, manufacturing and marketing of over 400 proprietary products developed from 60 indigenous enzymes. In the domestic market, it has the second highest market share behind Novozymes which is the global leader in this business. The company operates in 2 major segments:

1. Healthcare and Nutrition – This business accounts for nearly 88% of the revenues for Advanced Enzyme;
2. Bio Processing – This business accounts for 12% of the revenues for the company.

None of the competitors of Advanced Enzyme are listed in India. We will have to look for its global peers while we review their valuation a little later in this post. 

One of the biggest positives is the financial performance of the company. The revenue has grown at a CAGR of 14% in the 4 years from 2012 to 2016. The margins have also been increasing over the same period. For the year ending March 2016, the EBITDA margin stands at 47% and Net Profit margin stands at 26.6%. The net profit has grown at a CAGR of 24% in the same period and margin has increased by 750 basis points in the 4 years.

Advanced Enzyme’s consolidated financial performance (in INR Millions)
Details	FY2012	FY2013	FY2014	FY2015	FY2016
Total revenue	1748	2241	2405	2243	2946
Total expenses	1272	1479	1587	1505	1721
EBITDA		895	1037	908.6	1382
EBITDA margin (%)		40.60%	43.30%	40.70%	47.10%
Profit after tax	333	492	201	501	784
Net profit margin (%)	19.10%	22.00%	8.40%	22.30%	26.60%

The company has been able to increase their margin levels by consciously reducing their long term debt levels which stood at INR 1.39 Billion. As of 31-Mar-2016, the company’s long term debt stands at INR 387.5 Million (expected to reduce further with the proceeds from this issue). This results in a debt-equity ratio of 0.26. This has resulted in the company’s RONW (Return on Net Worth) doubling in the 2 years from 2014. It now stands at 28% in 2016 compared to 12% in 2014.

The company had a consolidated diluted EPS of Rs. 36.03 per share for the year ending March 2016 giving a PE (Price to Earnings) range of 24.40 and 24.90 at the lower and higher spectrum of the issue price. As mentioned earlier, AETL doesn’t have a listed peer to compare if this valuation is rightly priced or not. We will need look at their global peers like Novozyme and Koninklijke DSM NV. Both these companies are trading at PE of 35.5 and 46 respectively. Considering these ratios, there is an upward premium in the range of 46% and 85%.

Considering that AETL operates in an industry with high entry barriers and the producers enjoy the power to set prices plus the fact that the company has a diverse set of customers including Sanofi India, Cipla, Ipca Labs, Alkem labs with the top 10 customers accounting for 44% of revenues and only 36% of the revenues coming from India, this is a good company to invest in. Whether you want to exit with some listing gains or hold on to it for long term, is your choice. J

L&T Infotech - Giant in the making?

A big IPO is opening next week. L & T Infotech is coming up with its IPO to raise about INR 12,425 Million. This will be through an Offer of Sale by the promoters to the tune of 17.50 Million shares at a price range of INR 705-INR710. The IPO will be open from 11-Jul-2016 to 13-Jul-2016. Shares can be applied in lots of 20 shares and the retail investors will be allotted 35% of the total issue. The company will not get any proceeds from the IPO as promoters are selling a stake from the company.

The company offers a suite of business solutions including technology consulting, enterprise solutions, systems integration, custom application development, application maintenance and production support amongst others. The company is also working with its customers to develop capabilities in emerging technologies. This accounts for about 11% of the company’s revenue. Application development, maintenance and outsourcing accounts for nearly 42% of the revenue followed by enterprise solutions which accounts for 24%.

From a sectoral perspective, BFSI sector accounts for nearly 47.50% of the revenues while Energy and processes account for nearly 13% of the revenues with the other sectors taking the rest of the share of revenue. L&T Infotech’s revenues are very concentrated geographically with the US accounting for 66.80% of the revenues with Europe accounting for 17.40% of the revenues. That said, Brexit doesn’t have an impact on the company as the Nordic countries account for 11% of the 17% of the revenues from Europe.

L&T Infotech’s consolidated financial performance (in INR Million)
Details	FY12	FY13	FY14	FY15	FY16
Total revenue	31,915.00	38,735.00	48,371.00	50,695.00	61,430.00
Total expenses	24,922.00	29,809.00	37,732.00	39,735.00	48,114.00
Net Profit	4,193.00	5,100.00	6,598.00	7,600.00	9,223.00
Net Profit Margin	13.14%	13.17%	13.64%	14.99%	15.01%

The revenues have been growing at a CAGR of about 18% in the four years between 2012 and 2016. The profits, however, grew at higher rate of 22% in the same period. Also, the net profit margin has been consistent at 15% in the last couple of years, up by a couple of hundred basis points. The company’s RONW is also very high at 45% even beating the Jambhavaans of the industry like TCS and Infy. The company also has a very strong balance sheet (hardly any debt).

L&T Infotech’s business thrives on customer retention and repeat business from its clients. This could prove to be quite risky especially when the top 10 clients contribute to nearly 53% of the total revenue of the company with specifically Citi contributing to nearly 15% of the company’s revenue.  This could turn tricky. One good thing for the company is that it’s parent company Larsen & Tourbo has global operations and helps the company get long term contracts at good rates to ensure the growth continues.

The company had a diluted EPS of Rs. 56.13 per share for the year ending March 2016 giving a PE (Price to Earnings) range of 12.64 higher spectrum of the issue price. The company has provided a INR 10 discount for retail customers which makes the PE 12.47 for the retail customers. NASSCOM has ranked L&T Infotech as the 6^th largest exporter of IT Services and hence comparable to the likes of HCL Technologies, Wipro and Tech Mahindra. All these companies enjoy a PE of 15 and above based on their March 2016 earnings. It is also worth noting that these companies have a far less RONW (20%-30%) than L&T Infotech (45%).

Considering the robust growth and good margins, L&T Infotech is a sure pick. Whether one wants to enjoy a quick listing gain or want to hold it long term is a personal choice.  Either way, go for it.