Advanced Enzyme Technologies, in the right industry in right health, is a good prospect

MUMBAI: A profitable company in a niche industry with high entry barriers presents a good investment proposition. Advanced Enzyme Technologies (AETL) is one such player in the promising industry of enzymes – especially for nutraceuticals. Its public issue comprises of offer for sale of over Rs 350 crore (by promoters and private equity investors) as well as a fresh issue of equity shares worth Rs 50 crore, altogether valuing the company at nearly Rs 2,000 crore.

Business: AETL is an integrated player supplying enzymes to different industries over 25 years. Starting from seven, the company’s portfolio has grown to over 60 enzymes – focused on human and animal nutrition. It ranks among the top 15 global companies in terms of enzymes sales and has the second highest market share in India, after Denmark-based Novozymes, the world’s largest enzyme maker. AETL earns over half of its revenues from the US, 36 per cent from India and the remaining from Europe and Asia. At a capacity utilisation of 40-45 per cent, the company has significant scope of ramping up its scale of operations. Financials: The company has a track record of profitable growth. For the five years ended FY16, consolidated revenues have grown at a CAGR of 14 per cent to Rs 293.7 crore, while operating profit rose by 22 per cent to Rs 138 crore. The operating profit margin has been maintained at over 40 per cent in the past four years except in FY14, when it was impacted by a voluntary recall in the US. Debt repayment from proceeds of the fresh issue will improve the balance sheet further. With the regulatory environment getting tougher in North America and Western Europe, compliance and execution is the most critical risk factor for the company.

Valuations: AETL does not have a comparable listed Indian peer. Novozymes is trading at a price-toearnings multiple of 35 and is valued at over seven times its revenues. ETL is valued at 25 times FY16 earning per share of Rs 35. The company’s valuation of Rs 2,000 crore also stands at seven times of its revenues for FY16. The fair valuations and the recent trend of healthcare IPOs doing well on the bourses agurs well for the issue.