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