Ami Organics (Ami) had a strong listing in secondary markets. Ami opened at 48 per cent premium (₹902) compared to IPO price (₹610) and further strengthened to ₹925 or 52 per cent premium, at the time of writing. Ami now trades at 54 times FY21 earnings (35 times at the time of IPO) and the valuation is now comparable to well established speciality chemicals players.

The valuation jump underlines our shift in stance to a ‘book profit’ call on the stock. We earlier recommended subscribing to the issue based on Ami’s strong growth with established product and customer relations. Ami can maintain this growth with its portfolio of 450 pharma intermediates (supplies to manufacturers of active pharmaceutical ingredients or API), with customers in export and domestic markets.

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The recent acquisition of Gujarat Organics Limited (GOL) at reasonable valuations and in a timely manner, can add further capacity to the fast growing company. However, post listing premium, its valuations now capture the strong growth potential. Risk-reward, which was attractive at the IPO price, is now not so favourable.

Ami derives 88 per cent of its revenues from pharma intermediaries; speciality chemicals and contract manufacturing services contribute the rest. Ami relies on large volumes to sustain operations profitably and has a leading global market share for some of its intermediaries including dolutegravir, trazodone, pazopanib, and around 50 per cent market share for a few other intermediaries.

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The product profile is largely chronic in nature and finds use in fast growing therapies like antipsychotic, antidepressants, Parkinson’s, anticoagulants, and antiretrovirals. Exports account for close to half of the revenues. Ami’s NCE (new chemical entity) relations with product originators, along with originator segment sales accounting for more than 50 per cent of exports, ensure a longer product cycle.

Ami’s top 10 customers account for 61 per cent of FY21 revenues. Ami reported revenue and EBITDA CAGR of 20/38 per cent for FY19-21. Its net debt/ EBITDA is around 1.42 times and the working capital cycle has been higher at 117 days in FY21 against 89 and 71 days, respectively, in FY20 and FY19.

The fresh issue proceeds will be used to lower the debt of ₹140 crore (from a recent acquisition) and shore up stretched working capital requirements of the company (₹90 crore).