Ami Organics IPO: A detailed analysis and our recommendation

Ami Organics Limited IPO opens for subscription on 1st September. The company is looking to raise Rs 570 crore through the public issue. Here are the details:

About the IPO

Ami Organics IPO Date: 1 September - 3 September 2021

Ami Organics IPO Price band: Rs 603 - Rs 610

Issue Size: Rs 565 - 570 Cr (Fresh Issue of Equity shares aggregating up to Rs 200 Cr and Offer for sale of 6,059,600 Equity shares)

Post Issue Implied Market Cap: Rs 2,199 – 2,223 Cr

Reservation: QIB 50%, Retail - 35%, NII 15%

Bid lot: 24 shares, and in multiples of 24 shares

IPO Objective

The funds raised from the IPO will be utilized:

• to fund the working capital requirement of the company
• for prepayment/repayment of certain financial facilities availed by the company
• for general corporate purposes

About Ami Organics

• Ami Organics, incorporated in 2004, is one of the leading research and development-driven manufacturers of specialty chemicals.
• Ami Organics is in the business of manufacturing different types of Active Pharmaceutical Ingredients (API) and Advanced Pharmaceutical Intermediates for new chemical entities and materials for agrochemicals and fine chemicals.
• It has developed over 450 pharma intermediates across 17 key therapeutic areas. Some areas are retroviral, anti-cancer, anti-Parkinson, anti-inflammatory, antipsychotic, anti-depressant, and anticoagulant.
• The company has over 150 customers both in India and overseas. Some of the regions where Ami Organics has customers are the USA, China, Israel, Japan, Latin America, etc.
• The company has three manufacturing facilities in Gujarat, situated at Ankleshwar, Sachin, and Jhagadia, with an aggregate installed capacity of 6,060 MTPA.

Ami Organics Products

Pharma Intermediates Business - The company has years of experience in developing, manufacturing, and commercializing advanced pharma intermediates used for manufacturing NCE and API in India and overseas.

Specialty chemicals - Ami Organics manufactures specialty chemicals which are primarily chemical components used in fine and agrochemicals chemicals. Over the years, they have expanded their commercialized product portfolio. 

Custom manufacturing - They also have the capacity to manufacture advanced pharmaceutical intermediates and other specialty chemicals on a make-to-order basis. Its R&D team works closely with customers and provides them cost-efficient and innovative solutions.

Financials

• The revenue from operations has increased from Rs 238.51 crore in FY19 to Rs 340.61 crore in FY21, an increase of 42.13% over the previous year.
• Although the revenue increased by 42% in FY21 over FY20, the Net profit increased by 100%. The management says this is because of their acquisition of Gujarat Organics during the fiscal year. However, no specific details of what part of profit came from the acquisition is not revealed.
• Most of their revenue comes from the Pharma Intermediates business. It accounted for 85.28%, 90.92%, and 88.41% of their total revenue from operations for FY19, FY20, and FY21.
• In FY19, FY20, and FY21, their revenue from exports contributed 49.61%, 45.89%, and 51.57%, respectively of their total revenue from operations. Their revenues from exports have grown at a CAGR of 21.84% between FY19 and FY21.
• Its top ten customers have been with them for over three years. They have contributed to 61% of their total revenue from operations in FY21.
• Ami Organic’s capacity utilization has improved significantly from 36% in FY19 to 63% in FY21. 

Ami Organics Peer Analysis

Ami Organics is in a very competitive industry, and most of the listed peers of Ami Organics are big players. The listed peers include Aarti Industries, Hikal Limited, Valiant Organics Ltd, Vinati Organics Ltd, Neuland Laboratories Ltd, and Atul Ltd.

• It is evident from revenues and RoNW numbers that Ami Organics is a small but high return company.  Ami Organics comes at the bottom of the table with a revenue of Rs 340.61 crore for FY21 but tops the list on the RoNW. 
• If you exclude Atul Ltd, the average Earning Per Share (EPS) of the listed peers is 35. Ami Organics is well below the average EPS of peers and has reported EPS of 17.14 in FY21.
• The company’s PE ratio is not the best among the peers but it is still slightly lower than the average of 45.

USP

Strong product portfolio supported by R&D - The company has a strong market research-based model wherein they focus on the development of Pharma Intermediates either for molecules that are under clinical trials or for molecules that have been launched in the patented as well as generic space. It is because of the strong R&D team they have been able to file eight process innovation patent applications.

High entry barriers - Some therapeutic areas in which companies manufacturers APIs and NCEs have high entry barriers. It is because of the long gestation period to be enlisted as a supplier with the customers and the involvement of complex chemistries in the manufacturing process.

Strong sales and marketing capabilities - The company is focused on developing and growing its engagement with specialists and super specialists. The marketing team uses many sales and marketing programs and techniques to promote their products.

Extensive geographical presence - Since the company has a strong presence in domestic and global markets, it has limited exposure to a risk of concentration. It enables them to further diversify and expand their business relationships. 

Growth Potential

Plan to introduce new products - The company constantly plans to introduce new product verticals and develop its R&D capabilities to find an edge over its competitors. The company intends to develop, test, and manufacture new products meeting regulatory standards. It also plans to make investments on an ongoing basis in new product launches and research and development for future products. 

Focus on cost efficiency - The company focuses on running a business in an environmentally responsible manner. The company has developed backward integration capabilities for key raw materials that have helped them in minimizing reliance on third-party vendors. They also plan to enter into contract manufacturing agreements with vendors to supply raw materials.     

Diversification of business - Ami Organics plans to develop internal capacities and production abilities to achieve intended levels of organic growth. The company is in the process of building its synergies and such inorganic expansion will help them build synergies going forward.

Key Risks

Highly regulated industry - The company operates in a highly regulated industry and is subject to strict quality requirements, regular inspections, and audits. The success and wide

acceptability of its products are largely dependent upon quality controls and standards. Any manufacturing or quality control problem may impact the business of the company.

Dependency in therapeutic areas - Ami Organics gets a significant portion of its revenue from the sale of products in therapeutic areas, and a reduction in demand for these products could have an adverse effect on the company's business.

Relationship with existing customers - The top ten customers of the company contribute a major part of its revenue. Its inability to maintain good relationships with top 10 customers could hurt the financials of the business.

Ami Organics IPO: INDmoney Recommendation

Ami Organics has reported a very strong growth over the previous year, aided by the acquisition of Gujarat Organics during the fiscal year. The company’s bottomline has also doubled over the previous year. The company has also reported healthy margins and return ratios. Ami Organics' margins have also expanded over the last three years. The PAT margins have increased from 9.8% in FY19 to 15.9% in FY21. The company was able to expand its margins due to a high market share in certain key products. 

At the higher end of the price band, Ami Organics is priced at a PE ratio of ~41 times FY21 EPS (on a fully diluted on post-issue basis). This is lower as compared to peers such as Aarti Industries (56 times), Vinati Organics (66 times). While Ami Organics has reported higher RoNW numbers than these peers, the sustainability of superior financial performance remains to be seen. However, the issue appears to be fully priced as compared to the industry average (~46 times).

Given factors such as good growth in bottomline, healthy margins, robust return ratios, high market share in key products we remain 'positive' on the long-term prospects of this issue.