Advanced Enzyme Technologies (AET) is the second largest enzyme company in
India and amongst the Top 15 global enzyme companies with a market share of
~0.9%. The company is engaged in research & development, manufacturing and
marketing of 400+ proprietary products developed from 60 indigenous enzymes.
Specialized business with high entry barriers: The global enzyme industry is
dominated by few players with the top 3 players (Denmark based Novozymes, US
based DuPont and Netherlands based DSM) accounting for ~75% of market
share. Among them Novozymes is the only company with a pure play approach
on enzymes and has an estimated market share of 48%. AET is a marginal player
in the global enzyme market with a market share of ~0.9% but we believe it has
lots to potential to grow and garner a higher market share.
Robust ROE driven by high margins: While AET posted a CAGR of only 14.4%
in sales during FY2012-16, it reported a strong EBITDA CAGR of 22.1% during
the same period, thus aiding a net profit CAGR of 23.9%. The performance came
on the back of improved fixed asset turnover and improvement in margins. Thus,
the company earns a healthy ROE and stable cash flows. For FY2016, the
company reported a Return on Net worth (RONW) of 32.1%.
Outlook and Valuation: AET is the second largest player in the Indian enzyme
industry. Given the Management experience in the industry and the Indian
cost advantage, we believe that the company can post robust growth going
forward. AET has reported a strong CAGR of 23.9% in net profit in-spite of
the 14.4% CAGR in sales during FY2012-16, helped by high entry barriers,
which also enables the company to get high margins. However, we believe
that the company’s scale of operations is small in comparison to its global
peers and its business is dependent on few products. At `880-896/share,
which is the lower and upper end of the offer price band, the company is
available at ~6.1-6.2x it’s FY2017E P/BV. We believe the price fully discounts
all the positives. Thus, we recommend a neutral view on the issue.
