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1 Advanced Enzymes Technologies Ltd (AET) is the largest enzyme company in India. It is engaged in the R&D, manufacturing and marketing of more than 400 proprietary products developed from 60 indigenous enzymes. The company has fermentation experience of more than two decades in the production of enzymes. It is among the top 15 global companies in terms of enzyme sales and has the second highest market share in India next to the world s largest enzyme company Novozymes. The company is operating in two primary business verticals, namely Healthcare & Nutrition (human and animal) and Bio-Processing (food and non-food). It sells these products to more than 700 global customers, spanning presence across 50 countries. Key Highlights Unique business model: Manufacturing of enzymes, enzyme products and enzyme solutions requires specialized knowledge of enzyme fermentation. AET s innovation and product development platform is founded on extensive knowledge and expertise of enzymes and microorganisms. By working closely with its partners and customers, AET is able to innovate and develop technologies that can be applied effectively to increase operational efficiency and improve performance of the end products. In our view, it is a niche and unique business model that enjoys the privilege of being the largest Indian enzyme company. Strong presence across the enzyme value chain: AET is an integrated enzyme manufacturing company with a strong presence across the enzyme value chain, covering the entire range of activities from R&D, manufacturing, to marketing of enzyme products and customized solutions, whereas most of the players in the industry are present in only some parts of the value chain. Its integrated presence enables it to be cost-effective and ensures end-to-end quality control. High entry barriers: With more than 25 years of presence, AET has been able to develop unique enzymes and customized product solutions that would be difficult and expensive for new players to develop. Due to technical and specialized nature of the business, it is heavily dependent on R&D spending. Huge capital required to sustain R&D efforts until the products are brought to market. Moreover there is a scarcity of qualified professionals who have required experience in enzyme and biotechnology industry. As a result, the enzyme industry has very few players and the top players account for a significant portion of the global market share. Significant scope for increasing utilization levels: Currently the company is operating around 40-45% of its installed capacity. Hence there is an enormous scope to increase utilization levels. Consequently there is no need for major capital expenditure for the years to come resulting into free cash flow generation. AET stands to gain significantly from operating leverage with a jump in the utilization levels. A virtually debt free entity: AET intends to repay the loans from the proceeds of the issue. Total debt of the company as on 31 st March, 2016 on the consolidated books stood at `68 crore. Repayment of the same (or partial) would result in sharp decline in interest costs as the company would become virtually debt free and help in strong cash flow generation. Total interest expenses were `8 crore in FY16. Outlook and Valuations AET is a strong research driven company having invested significant amount of resources in the R&D of various enzymes, proprietary enzyme products and customized enzyme solutions. It has four R&D facilities and six geographically diversified manufacturing facilities with fermentation capacity of 360 cubic meters. AET s sales have grown at a CAGR of 14.4% (to ~`2.94bn) while profit has grown by a CAGR of 23.9% (to ~`0.78bn) during FY12-FY16. Funds from the IPO would be used mainly for re-payment / prepayment of certain borrowings. At the higher price band of `896, the stock is valued at ~25.5x of its FY16 earnings, which is at a sharp discount to its global peers. Given its experienced promoters and management team, strong R&D, enzyme development and manufacturing capabilities, unique business model with high entry barriers and superior margin and return profile, we recommend Subscribe on Advanced Enzymes Technologies for the short to medium term investors for one of its kind opportunity. Medium Term Investors Issue Details Issue Opens Issue Closes Equity Offerings (In MN shares) 20-Jul Jul Face Value 10 Price Band Bid Lot Issue Size (`) Maximum Application for Retail Investor (`) Issue Type Listing BRLMs Registrar Shareholding Pattern (%) Pre Issue 16 and its multiple ~4.12bn 2,00, % Book Building BSE, NSE ICICI Securities, Axis Capital Link Intime Post Issue Promoter 80.50% 60.40% Non Promoter 19.50% 39.60% Issue Structure (In mn no. of shares) Issue size 4.6 Offer for sale 4.05 Break-up of net issue to public: QIB's portion (minimum) 2.30 Non-institutional portion (minimum) 0.69 Retail Portion (minimum) 1.61 Analyst Details Suresh Gardas, CFA suresh.gardas@adityabirla.com Subscribe Page No. 1

2 What are Enzymes? Enzymes are natural protein molecules produced by all living organisms, functioning as highly specialized catalysts for accelerating the pace of chemical reactions. They help a chemical reaction take place quickly and efficiently, without undergoing change themselves. Enzymes are responsible for many essential biochemical reactions and metabolic processes in microorganisms, plants, animals, and human beings, but are not alive. They are highly efficient in increasing the reaction rate of biochemical processes that otherwise proceed very slowly, or in some cases, not at all, and are also biodegradable. Moreover, with the positive environmental profile offered by enzymes, there exist opportunities in the form of substituting non-renewable chemicals with the intent of reducing energy consumption or decreasing the production of harmful wastes. Enzymes are produced and harvested from living organisms such as plants, animals, bacteria and fungi. Enzymes are presently employed in a diverse array of applications that range from the manipulation of DNA in biotechnology research, to improving the softness of fabrics in the textile industry. Enzymes are used in a diverse range of applications, and therefore global demand for them is influenced by a number of macroeconomic factors including the likes of GDP growth, manufacturing output, and per capita incomes. Based on the usage of the enzymes, the global enzyme market can be broadly classified into two segments, namely Industrial and Specialty. The Industrial enzymes are used in high volume and low value-added applications, whereas Specialty enzymes are used in low volume and high value-added applications. The Industrial enzyme markets include food and beverages, cleaning products (detergents), biofuel production, animal feed, textiles, leather, pulp and paper, starch processing, etc. The Specialty enzyme markets include pharmaceutical, research and biotechnology, diagnostics and biocatalysts. About Company AET is the largest Indian enzyme company, engaged in the R&D, manufacturing and marketing of more than 400 proprietary products developed from 60 indigenous enzymes. It has more than two decades of fermentation experience in the production of enzymes. It ranks among the top 15 global companies in terms of enzyme sales, and has the second highest market share domestically, next to the world s largest enzyme company Novozymes. AET operates in two primary business verticals namely Healthcare & Nutrition (human and animal) and Bio-Processing (food and non-food). AET is a fully integrated enzyme manufacturing company driven by extensive focus on R&D of various enzymes, enzyme blends, enzyme products and customized enzyme solutions. Its experienced and qualified R&D team strives to develop creative, cost-effective unique and innovative solutions. It offers products to their global clientele of 700 plus customers spanning presence across 50 countries worldwide. It supplies value-added and eco-safe enzyme products to diverse end-user industries like human healthcare brewing, grain processing, and nutrition, animal nutrition, food processing, baking, dairy and cheese processing, fruit and vegetable processing, cereal extraction, protein processing, oil and fat processing, biomass processing, textile processing, leather processing, paper & pulp processing, bio-fuels, bio-catalysis etc. Although it has the capability to manufacture enzymes using all the four natural origins viz. plant, animal, bacterial and fungal, its major focus is on developing enzymes through microbial fermentation. AET has experienced and qualified R&D team of more than 55 members comprising of scientists, microbiologists, engineers, food technologists, biotechnologists etc. It has four R&D facilities, of which two are located at Thane, and one each at Sinnar, Nasik and Chino, California. Company s persistent R&D efforts has enabled to continuously develop new and innovative enzyme products and customised blends for various applications for their customers. At present, 13 patents have been registered and applications for registration of 4 patents are pending before the relevant authorities. Additionally, company has filed 11 food enzymes dossiers with European Food Safety Authority (EFSA) for marketing authorizations in Europe. AET has six manufacturing facilities, four of these are located in India which consist of two integrated fermentation, recovery & formulation facilities at Sinnar (Nasik) and Pithampur (MP), one extraction and recovery facility at Satpur (Nasik), and one blending, mixing and formulation facility at Vashind (Thane). Two blending, mixing and formulation facilities are located outside of India at Chino (California). Its domestic and international facilities have been approved / certified by various regulators / certifying agencies. Most of the key clients have audited and approved company s manufacturing facilities and processes. Top 10 customers account for 41.5% of its total sales. Some of their customers include Sanofi India, Cipla, Ipca Laboratories, Alkem Laboratories, and Emcure Pharmaceuticals. Both domestic and international markets are well serviced by 55 plus dedicated sales & marketing teams. Page No. 2

3 Key Risks Company exposed to risk of product recall due to potential contamination: Company is exposed to risk of product recall if any contamination is found which would have mal effect in its products. This could lead to substantial inventory as well as reputation loss to the company, the impact of which could be severely adverse. Concentration risk, currency risk and geographical uncertainties: Over 55% of the company s revenue is concentrated to the clients in North America. Also the top10 clients of company accounted for as large as ~41% of its sales. Since ~64% of the revenue is export oriented, company is highly exposed to currency fluctuation risk. Any uncertainties in these geographies may lead to disruption of the company s operations. Standing legal proceedings against the company, subsidiaries and group companies: There are several legal proceedings outstanding against the company, its subsidiaries and group companies related to Income Tax, Excise and Service Tax. Also there is a criminal proceeding against the Non Executive and Non Independent director, Mr. Kunisetty Venkata Ramakrishna. Any negative verdict of these proceedings can have negative impact on the financial position as well as reputation of the company. Conflict of interest with a group company with similar line of business: One of the group companies named Advanced Vital Enzymes Pvt Ltd. is engaged in the business similar to AET. This may lead to conflict of interest for AET and may have adverse impact on the business as well as financials of the company. IPO details The Company plans to raise around ~`4.12bn through the issue. An offer for sale of shares worth `3.61bn, by promoters and fresh issue worth ~`0.5bn. At the higher end of the price band, the issue will constitute up to 20.6% of post issue equity. At the higher end of the price band, the market-cap stands at `20bn. Source: RHP Page No. 3

4 Income Statement (Consolidated) In ` crore FY12 FY13 FY14 FY15 FY16 Net sales YoY (%) Total expenses EBIDTA YoY (%) EBIDTA (%) Depreciation & Ammor Other income EBIT Interest Exceptional Item PBT (-) Tax PAT before Minority Interest Less: Share of Minority Interest PAT after Minority Interest Balance Sheet (Consolidated) In ` crore FY12 FY13 FY14 FY15 FY16 Equity capital Reserves Minority Interest Total Debt Other Non Current Liabilities Total liabilities Asset Block (Net) Intangible assets Capital WIP Intangible assets under development Long term loans and advances Deferred tax Assets Other Non Current Assets Current assets Current liabilities Net current assets Total assets Source: ABML Research, RHP Page No. 4

5 Cash Flow In ` crore FY12 FY13 FY14 FY15 FY16 Cash Flow from Operations Cash Flow from Investing Cash Flow from Financing Per Share FY12 FY13 FY14 FY15 FY16 EPS - Basic (`) Book value (`) Debt-equity (x) ROCE (%) 21.96% 27.23% 32.01% 28.41% 36.99% RoE (%) 34.74% 30.39% 12.84% 23.85% 28.14% Source: ABML Research, RHP Page No. 5

6 IPO Note Advanced Enzymes Technologies Ltd. 18 July 2016 Research Team Vivek Mahajan Hemant Thukral Head of Research Head Derivatives Desk Fundamental Team Shreyans Mehta Construction/Real Estate Jaymin Trivedi Banking & Finance Naveen Baid IT Quantitative Team Sudeep Shah Sr.Technical Analyst Ammolh Paatil Sr. Derivative Analyst Rahil Vora Technical Analyst Smita Dhale Sr.Executive Derivative Desk Advisory Team Avinash Nahata Head - Advisory Desk avinash.nahata@adityabirla.com Suresh Gardas Advisory Desk suresh.gardas@adityabirla.com Salim Hajiani Advisory Desk salim.hajiani@adityabirla.com Pradeep Parkar Advisory Desk pradeep.parkar@adityabirla.com Mohan Jaiswal Sr. Executive.-Research Support mohan.jaiswal@adityabirla.com ABML research is also accessible in Bloomberg at ABMR Page No. 6

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