Reblog: Ami Organics Ltd. IPO review

• AOL is manufacturing speciality chemicals and critical APIs.
• Robust performance in pre-IPO year raises concern.
• Based on financial parameters, IPO is fully priced.
• Risk seekers/cash surplus investors may consider the investment.

ABOUT COMPANY:
Ami Organics Ltd. (AOL) is a research and development (“R&D”) driven manufacturer of speciality chemicals with varied end usage, focused on the development and manufacturing of advanced pharmaceutical intermediates (“Pharma Intermediates”) for regulated and generic active pharmaceutical ingredients (“APIs”) and New Chemical Entities (“NCE”) and key starting material for agrochemical and fine chemicals, especially from its recent acquisition of the business of Gujarat Organics Limited (“GOL”)(“Acquisition”). As per the F&S Report, it is one of the major manufacturers of Pharma Intermediates for certain key APIs, including Dolutegravir, Trazodone, Entacapone, Nintedanib and Rivaroxaban. The Pharma Intermediates which the company manufactures, find application in certain high-growth therapeutic areas including anti-retroviral, anti-inflammatory, anti-psychotic, anti-cancer, anti-Parkinson, anti-depressant and anti-coagulant, commanding significant market share globally.

It has developed and commercialized over 450 Pharma Intermediates for APIs across 17 key therapeutic areas since inception and NCE, with a strong focus on R&D across select high-growth high margin therapeutic areas such as anti-retroviral, anti-inflammatory, anti-psychotic, anti-cancer, anti-Parkinson, anti-depressant and anticoagulant, for use across the global pharmaceutical market. AOL’s Pharma Intermediates used for manufacturing of APIs and NCEs portfolio has expanded from over 425 products as of March 31, 2019, to over 450 products as of March 31, 2021.

It recently completed the acquisition of two additional manufacturing facilities operated by GOL which has added preservatives (parabens and parabens formulations which have end usage in cosmetics, animal food and personal care industries) and other speciality chemicals (with end usage in inter alia the cosmetics, dyes polymers and agrochemicals industries) in the existing product portfolio, which command significant market share globally in the supply of certain paraben derivatives, as per the F&S Report). The Acquisition is in line with its inorganic growth strategy of foraying further into the speciality chemicals sector and believes that it will enable it to significantly diversify its existing product portfolio, with an objective of attaining inorganic expansion of business.

As of the date of this RHP, it has eight process patent applications (in respect of intermediates used in the manufacture of Apixaban, Rivaroxaban, Nintedanib, Vortioxetine, Selexipag, Pimavanserin, Efinaconazole and Eliglustat). It currently supplies its products to well-known 150 plus Indian customers and in 25 overseas countries. It has three manufacturing facilities in the state of Gujarat.

ISSUE DETAILS / CAPITAL HISTORY:
To part finance its needs for repayment/prepayment of certain borrowings (Rs. 140 cr.), working capital (Rs. 90 cr.) and general corpus fund, AOL is coming out with a maiden IPO comprising fresh equity issue worth Rs. 200 cr. (approx. 3278688 shares at the upper cap) and an offer for sale of 6059600 equity shares of Rs. 10 each (Rs. 369.64 cr. at the upper cap). Thus overall the company will be raising approx. Rs. 569.64 cr. at the upper price band. The issue opens for subscription on September 01, 2021, and will close on September 03, 2021. The company has fixed a price band of Rs. 603 – Rs. 610 per share. Minimum application is to be made for 24 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.63% of the post issue paid-up equity capital of the company. The company has raised Rs. 100 cr. as pre-IPO placement in August 2021 by the issue of 1658374 equity shares at Rs. 603 per share to few institutional investors. AOL has allocated the issue as 50% for QIBs, 15% for HNIs and 35% for Retail investors.

Book Running Lead Managers to this issue are Intensive Fiscal Services Pvt. Ltd., Ambit Pvt. Ltd. and Axis Capital Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue.

Having issued initial equity at par, AOL raised further equity at Rs. 603.00 per share in August 2021. It has also issued bonus shares in the ratio of 6 for 1 in April 2018 and in the ratio of 2 for 1 in March 2021.

The average cost of acquisition of shares by the promoters/selling stake holders is Rs. 0.48, Rs. 0.56, Rs. 23.49 /Rs. 0.48, Rs. 20.67, Rs. 25.53, Rs. 30.02, Rs. 31.04, Rs. 31.85, Rs. 32.07, Rs. 33.85, Rs. 33.91, Rs. 39.45, Rs. 40.19, Rs. 41.70, Rs. 47.44, Rs. 48.29 and Rs. 58.18 per share.

Post issue, AOL’s current paid-up equity capital of Rs. 33.16 cr. (33158374 shares) will stand enhanced to Rs. 36.44 cr. (approx. 36437062 shares based on upper cap). At the upper price band, the company is looking for a market cap of Rs. 2222.66 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, on a consolidated basis, AOL has posted turnover/net profits of Rs. 238.90 cr. / Rs. 23.30 cr. (FY19), Rs. 242.49 cr. / Rs. 27.47 cr. (FY20) and Rs. 341.99 cr. / Rs. 54.00 cr. (FY21). A sudden jump in the top and bottom lines in a pre-IPO year with a pandemic is a bit surprising.

For the last three years, on a consolidated basis, AOL has reported an average EPS of Rs. 12.71 and an average RoNW of 29.09%. The issue is priced at a P/BV of 11.51 based on its NAV of Rs. 52.99 as of March 31, 2021, and at a P/BV of 4.76 based on its post-issue NAV of Rs. 128.15 per share (at the upper cap).

If we attribute FY21 earnings on post IPO fully diluted equity, then the asking price is at a P/E of around 41.16, making it a fully priced offer (at the upper cap).

COMPARISON WITH LISTED PEERS:
As per offer documents, AOL has shown Aarti Ind., Hikal Ltd., Valiant Organics, Vinati Organics, Neuland Labs and Atul Ltd., as its listed peers. They are currently trading at a P/E of 56.49, 47.32, 29.98, 66.14, 28.97 and 39.67 (as of August 27, 2021). However, they are not truly comparable on an apple to apple basis.

DIVIDEND POLICY:
AOL has not declared any dividend for the last three years to date. However, it will follow a prudent dividend policy post listing based on its financial performance and future prospects.

MERCHANT BANKER’S TRACK RECORDS:
The three BRLMs associated with this issue have handled 27 public issues in the last three years out of which 12 issues closed below the offer price on the listing dates.

CONCLUSION / INVESTMENT STRATEGY
Based on super financial performance for FY21, the issue is fully priced. The sustainability of such higher margins going forward is a major concern. Many options at cheaper valuations are available in secondary markets. On financial parameters, AOL is no way near to its listed peers. Greedy pricing is perhaps on account of the current fancy for chemical counters. Hence risk seeker/cash surplus investors may take a call of investment with a long term perspective.

The original review has been authored by Dilip Davda, appears on chittorgarh.com and is available here.