About the company:
After a brief pause in the IPO market, another opportunity awaits investors. Ami Organics Ltd is coming out with an IPO which has an issue size of Rs. 570 crores, a combination of fresh issue of Rs. 200 crores and an offer for sale worth Rs. 370 crores.
Issue Details:
Dates: September 1, 2021 to September 3, 2021
Price Band: Rs. 603 to Rs. 610 per share
Minimum Lot: 24 shares
Minimum Application Amount: Rs. 14,640
Objects of the Issue:
Proceeds from pre-IPO placement worth Rs. 100 crores and fresh issue are expected to be utilized towards:
Repayment of a few loans to the tune of Rs. 140 crores
Funding working capital requirements of Rs. 50 crores in FY22 and Rs. 40 crores in FY23
General corporate purposes
Company Overview:
Incorporated in 2004, Ami Organics is one of the leading R&D driven manufacturers of specialty chemicals with a focus on the development and manufacturing of advanced pharmaceutical intermediates for regulated and generic Active Pharmaceutical Ingredients (APIs) and New Chemical Entities (NCE). The firm has also forayed into key starting material for agrochemical and fine chemicals, after their recent acquisition of Gujarat Organics Ltd (GOL).
The Pharma Intermediates (88 percent of revenue) that they manufacture find application in certain high-growth therapeutic areas including anti-retroviral, anti-inflammatory, anti-psychotic, anti-cancer, anti-depressant, anti-Parkinsons, etc. commanding significant market share in India and globally.
Manufacturing Facilities and R&D:
The company has three manufacturing facilities at Sachin, Ankleshwar and Jhagadia in Gujarat with a combined installed capacity of 6,060 MTPA. Additionally, the Jhagadia facility has 15,830 sq. meter free land which can be used for further expansion.
Their R&D capabilities are evident from its portfolio of 450 Pharma Intermediates for APIs and 8 process patent applications. However, for a R&D-focused company, its R&D expense as a percent of total expenditure stood at a mere 2.4 percent in FY21.
Financial Snapshot:
| (in Rs. Crore) | FY19 | FY20 | FY21 | 3 - year CAGR |
| Revenue | 239 | 240 | 341 | 19.40% |
| EBITDA | 42 | 41 | 80 | 38.00% |
| EBITDA Margin (%) | 17.60% | 17.10% | 23.50% | - |
| PAT | 23 | 27 | 54 | 53.20% |
| PAT Margin (%) | 9.80% | 11.50% | 15.90% | - |
| EPS | 7.4 | 8.72 | 17.14 | - |
| Net Worth | 82 | 112 | 167 | 42.70% |
| ROE | 28.30% | 24.60% | 32.40% | - |
| Debt | 48 | 54 | 117 | 56.12% |
| D/E | 0.59 | 0.48 | 0.7 | - |
Strengths:
Among the leading manufacturers of certain Pharma intermediates i.e.,Dolutegravir, Trazodone, Entacapone, Nintedanib and Rivaroxaban.
Strong & diversified product portfolio ably supported by strong R&D and process chemistry skills.
Extensive geographical presence and long-standing relationships with customers.
High entry barriers in the chemicals manufacturing industry.
Consistent financial performance.
However, the company does have a few risks:
Product concentration: A significant portion of revenue is derived from sale of products in certain therapeutic areas and any reduction in demand and availability of alternatives could have an adverse effect.
Customer concentration, absence of long-term contracts: The company is dependent on a limited number of customers for a significant portion of revenue. For FY21, the top five customers contributed 44.43 percent. Further, absence of long-term contractual arrangements with significant customers is a big risk.
Dependence on select group of suppliers and absence of long-term contracts makes them susceptible to raw material price fluctuations.
Ami Organics is subject to stringent quality requirements, environmental, health and safety laws and regular inspections. The company did receive ‘Notice of Inspectional Observations’ from the USFDA on Aug 12, 2016 and Mar 13, 2020 but both these inspections were closed.
Given a working-capital intensive business, insufficient cash flows or inability to borrow could adversely affect the operations. The working capital days have increased to 117 days in FY21 from 71 days in FY19 which means the company is taking longer to convert working capital to revenue.
Peer Comparison:
| Company | P/E | ROE | D/E | PAT Margin |
| Ami Organics | 35.6x | 32.40% | 0.7 | 15.90% |
| Industry Average | 44.3x | 17.40% | 0.31 | 15.40% |
| Aarti Industries | 55.4x | 16.20% | 0.71 | 11.90% |
| Hikal | 47.3x | 15.20% | 0.65 | 7.70% |
| Valiant Organics | 30.0x | 26.20% | 0.25 | 20.00% |
| Vinati Organics | 66.2x | 19.10% | 0 | 28.20% |
| Neuland Laboratories | 28.9x | 9.50% | 0.23 | 7.60% |
| Atul | 37.9x | 18.30% | 0.03 | 17.20% |
Samco’s Stance:
Ami Organics demonstrated a good financial performance in FY21, despite pandemic-induced difficulties. However, with high customer and supplier concentration and exposure to fluctuations in raw material prices, the sustainability of margins posted in FY21 poses a question. This can be better assessed from the next few results. Additionally, the PAT margin is more or less in line with the industry average but it is not one of the best in the industry. The rising working capital days is also worrisome. Nevertheless, the company does have sound financials and the highest ROE among listed peers. Thus, risk-taking investors can gamble and subscribe from a listing gains perspective only if the sentiment improves towards the last day of subscription.
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