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Advanced Enzymes Technologies (AETL) has seen extended correction in its stock price in the last 10 months, declining by 37 per cent from its peak in May-21 to ₹300 per share now. Prior to this, the stock had rallied 325 per cent from a low of ₹116 in March-20 to ₹480 in May-21. The stock is facing testing times in the last one year, having flagged high raw material prices as early as Q1FY22 and logistical issues hampering even basic demand delivery. The recovery expected by H1FY23 (according to management) , may likely be extended owing to even higher inflation and global disarray since.
The current correction though presents a good opportunity to accumulate shares for investors with long term view , considering that the structural theme is still intact. Enzymes use is growing worldwide (US$ 10 billion industry expected to grow at 7 per cent going by market reports) but is still nascent in India. The shift to natural ingredients in processing of food, pharmaceuticals, animal feed, nutrition, textiles, detergents and biofuels can find increased adoption, more so in the post-Covid world. AETL reported revenue/EBITDA/PAT growth of 10/11/13 per cent CAGR from FY17-21 reflecting the growth potential, historically. On normalization of the current scenario on inflation and trade channel access, AETL can return to growth in the medium term, while investments for long-term are ongoing (R&D at 3-4 per cent of sales across years).
What it does
Enzymes are proteins that help chemical process and the current portfolio consists of 68+ enzymes and 400+ proprietary products developed and manufactured by AETL. Human nutrition segment (69 per cent revenue contribution in 9MFY22) serves pharmaceutical and nutraceutical companies across India and developed countries. Anti-inflammation solutions, digestives, probiotics, and bio-catalysis (enzymes used in processing APIs) are the broad applications. Animal nutrition (10 per cent) and Bio-processing (Food – baking, diary and Non-food – textile, detergent and leather) (12 per cent) are the emerging segments. In January-21, AETL acquired India based SciTech Specialities - SSPL (9 per cent revenue contribution) operating in effervescent granules and tablets. Geographically, in 9MFY22 AETL revenue from India and US accounted for 44 and 40 per cent respectively with Europe, Asia, and rest of the world’s contribution in single digits each.
The manufacturing process uses raw materials wheat flour, sugar, soya flour, mixing compound and chemicals which are then fermented for the right output. The biological process using oleochemicals (plant based), unlike synthetic chemical processes, sets up a high entry barrier ; The approval process and establishing supply history too is not easy. This is still work-in-progress for AETL. The study and product development takes 7-8 years and AETL has 4-5 products approved by US FDA and European Food Security Authority with few more molecules pending for approval. Of the 25 domestic operators, most are distributors and internationally only Novozymes is the major player, active in detergent and biofuel enzymes.
Operations
Inflation has been pronounced in raw materials and being in the early stages of growth, AETL is focused on building scale and has held back price hikes. This has impacted revenue growth (compared to other speciality players who have passed on higher oil-based raw material prices) and EBITDA margins (40.5 per cent in 9MFY22 compared to 47.9 per cent in 9MFY21). The company managed to pass on prices in recently acquired speciality segment leading to 30 per cent QoQ growth in revenue in 3QFY22 in this division. AETL has initiated the process of passing prices in nutraceuticals and probiotics.
Logistics costs within India and export markets have also added to pressure. The company lost a major customer in US in FY21 (9 per cent of US sales) as shipping delays led AETL to be less aggressive in making commitments, indicating intact demand, unmet by logistics. This aspect may recover faster than cost pressures as shipping normalizes; Animal Feed (largely export) has recovered with 19 per cent growth in revenues in 9MFY22. Customer stocking ahead of use as a result of supply chain disruptions, resulting in lumpy sales, is also expected to normalize with easing logistics.
In the long term, AETL is focused on expanding the product portfolio in bio-catalysis, probiotics, baking and animal nutrition and adding new geographies and distributors leveraging its existing portfolio. Specialty acquisition has added differentiated effervescent delivery capabilities to enzyme ingredients and AETL can now provide enzymes in such formulation, in addition to powder and liquid state. Establishing a B2C in US took 8 years for AETL, and the company is doing the same in India where it already has a leading B2B presence.
Financials
The consensus estimates show strong growth in FY23 (14 and 18 per cent revenue and EPS YoY) following flat growth in FY22 of which 9MFY22 delivered 8 per cent revenue growth (including acquisition of SSPL) and 17 per cent decline in EPS (margin impact).
AETL’s 1-year forward earnings multiple at 20 times FY23 earnings reflects the headwinds the company is facing currently, but it is trading close to broader index indicating normal long term growth in line with market. But AETL which has niche growth opportunities and high entry barriers on its side can deliver above market growth in the longer term, making the correction a good time to accumulate the stock.
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