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.
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 outlookAccording 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.