Ami Organics' Rs 570 crore IPO kicks off: Should you apply?

The three-day initial public offer (IPO) by specialty chemicals manufacturer Ami Organics (AOL) kicked off on Wednesday. The IPO, which is a mix of an offer for sale of Rs 370 crore and a fresh issue worth Rs 200 crore, is priced in the band of Rs 603 - 610 per share. Investors can apply for the issue in the multiples of 24 shares are thereof. The company plans to utilise the proceeds raised from the fresh issue for repayment or prepayment of certain financial facilities, funding working capital requirements and general corporate purposes. On Tuesday, the firm raised Rs 171 crore from anchor investors ahead of the initial share sale.

About the company

Incorporated in 2004, Ami organics is a leading Research & Development driven company. It deals in different types of Advanced Pharmaceutical Intermediates and Active Pharmaceutical Ingredients (API) and materials for agrochemical and fine chemicals. The company has three manufacturing facilities situated in Gujarat with an aggregate installed capacity of 6060 Mtpa.

AOL has over 450 pharma intermediates across 17 key therapeutic segments. It directly supplies its products to over150 customers in India and 25 countries i.e. Europe, the USA, China, Israel, Japan and Latin America. It has a coveted customer base, including companies like Laurus Labs, Cadila Healthcare and Cipla in the domestic markets and Organike S.r.l. a Socio Unico, Fermion Oly, Medichem S.A. and Midas Pharma GmbH in the international markets.

Financial Snapshot

Ami Organic's financial performance has been impressive over the last two years. While revenue clocked 20 per cent CAGR over FY19-FY21, net profit recorded a robust 52 per cent CAGR during the same period. Healthy earnings growth is primarily on account of sustained improvement in EBITDA margin, which improved from 17.7 per cent in FY19 to 23.5 per cent in FY21, notes Vikas Jain, senior research analyst at Reliance Securities.

Meanwhile, the company's operating cash flow (OCF) has also been healthy over the years despite an increase in the working capital cycle. It has generated cumulative OCF to the tune of ~ Rs 70 crore over FY19-FY21. While the company’s net D/E remains comfortable at 0.8x in FY21, gross debt increased by 2.3x to Rs1.4bn in FY21, mainly due to the acquisition of Ankleshwar and Jhagadia facilities in March. Analysts at Anand Rathi believe that recent acquisitions will increase the company's capacity and strengthen its top line. The acquisition will lead to diversified income thereby reducing dependence on pharmaceutical intermediates, they said.

Valuations

At the higher price band of Rs 610, Ami Organics is demanding a P/E multiple of 41.2x (to its FY21 EPS of Rs 14.8), which is at discount to the peer average of 48.3x.

Grey Market Trend

The company is commanding a premium of 24-27 per cent or Rs 162 per share in the grey market over the issue price, helped by strong financial performance and the positive market mood.

"Ami Organics is one of the key players in pharma intermediates of APIs having application in high growth therapeutic areas. The company's operations look well-managed with an ROCE of 25 per cent and ROE of 32 per cent in fiscal 2021. Owing to a strong product portfolio and market share, we may see interest from investors having a long-term perspective," Manan Doshi, co-founder at UnlistedArena.com said.

Analyst Take

Most analysts have assigned a Subscribe rating to the issue. Here is a look at what they said.

Choice Broking: Subscribe

Anticipating lower profitability in the medium term, we feel that the issue is reasonably priced. Considering the dominant market positioning of the company in the manufacturing of pharma intermediates for certain high-growth high-margin therapeutic areas, business growth from the specialty chemicals and lower debt levels post-IPO, we assign a Subscribe rating for the issue.

Reliance Securities: Subscribe

The IPO is valued at 41x of FY21 earnings, which appears to be at a discount of 30-35 per cent compared to the valuation of its peers like Aarti Industries and Hikal. Notably, Ami Organics enjoys a superior return ratio compared to peers. Looking ahead, the company is expected to see healthy growth led by recent acquisitions, which led to increase in its installed capacity by 2.7x in FY21, despite which its balance sheet remains comfortable with D/E ratio of 0.8x. Further, debt reduction post-fundraising and healthy business opportunities are likely to result in healthy earnings growth in the ensuing years. Hence, we recommend Subscribe to the issue.

Anand Rathi: Subscribe

The company has shown consistent financial performance. The financials for 2020-21 doesn’t include revenue from the acquisition of the two plants. We are positive on the long-term prospects of the company. Hence, we recommend a Subscribe rating to this IPO.

Religare Broking: Positive

Ami organics is well placed in the specialty chemical space with a diversified product portfolio. Over the years, the company has established long-standing relationships with its key customers both in domestic and international markets which have helped in expansion as well as earning strong revenue. Further, it aims to strengthen its R&D capabilities, continue to focus on cost efficiency and improving productivity, and expand into new geographies. On the financial front, the company’s performance has been strong. From the long-term perspective, we have a positive view on the company.

Angel Broking: Neutral

Based on FY2021 numbers, the IPO is priced at a Price to Earnings of 35.6 times and EV/EBITDA of 25.7 times at the upper price band of the IPO, which is on the higher side, compared to the listed peer group. The company already has a higher market share of 70-90 per cent in key API’s which will limit growth in the near future. Given the expensive valuation, we are assigning a NEUTRAL recommendation to the Ami Organics IPO.