Ami Organics IPO: Growth prospects come with premium valuation

Ami Organics (Ami) is the latest in a line of chemical companies tapping the markets with an IPO. The IPO, which is already open, includes an OFS portion of ₹370 crore and a fresh issue of ₹200 crore.

The fresh issue proceeds will be utilised to lower the debt of ₹140 crore (from a recent acquisition) and shore up stretched working capital requirements of the company (₹90 crore). The IPO values the company at ₹2,180 crore and the post-IPO promoter shareholding will be at 41.7 per cent (47 per cent pre-IPO). We recommend subscribing to the IPO based on strong growth with established product and customer relations.

While the valuation of 35 times FY21 earnings might appear to be at premium on an absolute level, its growth prospects can support these levels. Ami’s portfolio of 450 intermediates is marketed in export and domestic markets, selling to API/formulators companies and has leading global market shares for some its products.

Product profile

Ami derives 88 per cent of its revenues from Pharma Intermediaries; Speciality chemicals and CMS (contract manufacturing services) contribute the rest. Pharma intermediaries supply to API companies, who in turn supply to originators or generics, and they capture less than 1-5 per cent of the final value in a genericised markets. This is made-up by large volume of operations.

Ami organics has a leading global market share for some of its intermediaries including for Dolutegravir (75 per cent), Trazodone (80-90 per cent for two intermediates), Pazopanib (88 Per cent), and around 50 per cent market share for intermediaries of Entacapone, Nintedanib, Rivaroxaban, and Apixaban.

The product profile is largely chronic in nature and in fast growing therapies like Antipsychotic, Antidepressants, Parkinson’s, Anticoagulants, and ARVs. These products are marketed globally by the originators as well, past the entry of 10-15 generics, by managing the unit economics for the product. Ami organics derives half of the pharma intermediates revenues from such originators and also marketing to domestic generic majors in some cases.

Ami relies on new product introduction to offset price erosion in generics end markets, apart from increasing volumes and new applications in older products. Essentially, the product turnover rate provides higher margins with new products and operating leverage with low margin older products (volumes).

The portfolio of 450 products includes around 60 products actively marketed and an equally large portion in advanced stages of development (Ami supplying test quantities), which provides a strong pipeline of product introductions. The company manages to launch 5-6 new products each year, which later scale up in volumes over a period.

Customer profile

Exports account for close to half of the revenues especially in the largest segment of intermediaries. European countries account for most of the exports including Italy, Finland, France and also China, which contributed to 35 per cent, 17 per cent, 10 per cent and 9 per cent respectively, of exports for FY21.

Compared to the US, European region with micro markets and tender-based competition, allows for originators to compete effectively. Ami gets long term contracts for most of its export markets along with a price escalation clause to cover for raw material price volatility. The domestic market primarily relies on spot buying.

Ami also engages in supplying intermediates to originators right from development stage. It is currently supplying intermediaries for Darolutamide an NCE (new chemical entity) to originators Bayer/Orion. NCE relations, along with originator segment sales accounting for more than 50 per cent of exports, ensure a longer product cycle for Ami.

Ami organics has a high customer concentration with top 10 customers accounting for 61 per cent of FY21 revenues. But the company has long gestation period with clients often having more than 10 year relationships, involving multiple products at the same time. The cost/quality aspects and the supplier replacement costs enable client stickiness for Ami Organics.

Financials and valuation

Ami reported revenue and EBITDA CAGR of 20/38 per cent for the period FY19-21. According to the management, this is within the range of its historical growth rate. Ami underwent expansion in its current facility (at Sachin) and the associated client validation impacted revenue and margins in FY20.

After commercialisation, Ami reported revenue growth of 42 per cent (40 per cent volume based growth) to ₹341 crore and an EBITDA of ₹80 crore (24 per cent margin) in FY21.

Its net debt/ EBITDA is around 1.42 times and also the working capital cycle have been higher at 117 days in FY21 against 89/71 days in FY20 and FY19, impacted by higher export percentage of sales with longer cycles. Ami organics has acquired Gujarat Organics Limited (GOL) for a consideration of ₹93 crore which reported sales of ₹103 crore with 10 per cent EBITDA margins in FY21.

The company has acquired it at a reasonable valuation owing to its lower capacity utilisation, and this can be further leveraged by Ami. GOL operates in preservatives with parabens in the specialty chemicals space and offers strong margin and revenue growth potential according to the management. GOL also holds significant capacities and space for expansion.

Ami Organics is priced at 35 times FY21 earnings and adjusted for GOL numbers in FY21, it is around 31 times earnings (assuming 10 per cent EBITDA and 7 per cent bottom line). Even as this compares well to the valuations of closest and industry peers (see table), the company is priced at a premium on an absolute basis.

The strong growth anticipated for Ami Organics, drawing from its product and client profile, substantiates the valuation premium.

COMMENT NOW