Ami Organics was established in 2003 in the state of Gujarat with the purpose of manufacturing pharmaceutical intermediates and specialty chemicals. Its biggest client group are the API (active pharma ingredients) manufacturers in India and from across the globe. Pharmaceutical intermediates account for over 85% of the sales of the company with specialty chemicals accounting for the balance.
Currently, Ami Organics has a total installed capacity of 6,060 MTPA across its 3 plants located in Sachin, Ankleshwar and Jhagadia. However, the annual numbers for FY21 will only include the numbers of the Sachin plant, which accounts for around one-third of this total capacity. The Ankleshwar plant and the Jhagadia plant were acquired only in March 2021 and are not incorporated in the FY21 numbers. Ami Organics currently caters to 150 clients spread across 25 countries, including India.
The IPO of Ami Organics will open on 01-Sep and has been priced in the band of Rs.603-610. The total issue size is Rs.570 crore consisting of fresh issue of Rs.200 crore and an OFS of Rs.370 crore. Here is a quick wrap of the IPO details.
Key financials of Ami Organics
Ami Organics is a profit making company that has seen good progress in its top line and more importantly its bottom line. Even key ratios like EBITDA margins and net margins have grown significantly in the last 2 years. The table below captures the gist.
The only ratio that has shown a fall in the return on capital employed or ROCE. However, that is likely to see a sharp improvement since the company will be utilizing 70% of the fresh funds raised through the IPO to defray its debt. Currently, the capacity utilization is 63% of just one plant at Sachin.
With the scale up, the capacity will be thrice and the company expects higher utilization in line with the surge in global demand and the preference of Indian suppliers over China for many global players. This will result in better cost absorption and profit metrics in the coming quarters. The growth in net margins and RONW is already quite significant for the company.
Investment case for Ami Organics
Let us look at pharma ingredients at a macro level first. For a long time, China was the global leader in supply of pharma intermediates; and it still is. However, post the COVID pandemic many of the global pharmaceutical players are looking to diversify their dependence on China due to the supply chain embarrassment they had to face over the last 2 years.
Even at a company specific level, there are some clear advantages that Ami Organics brings to the table. Here is a quick summary
- Some of the top intermediates that Ami Organics manufactures have a virtual leadership position, not only in India but also globally. For example, in many of its key revenue generators like Trazodone, Dolutegravir, Entacapone and Pazopanib, Ami Organics has a intermediates market share ranging from 70% to 85%.
- While this may be a commodity like industry, it is an industry with high entry barriers. There is a premium on relationships and delivery experience. For example, the compliance requirements are stringent and it takes a long time for a company to get enlisted as a preferred API supplier. This entry barrier will benefit Ami Organics.
- Let us turn to valuations. The indicative post issue market cap of Rs.2,225 crore gives a P/E ratio of 41X based on historical earnings of FY21. That is not counting the expanded base. Even at P/E of 41, it is lower than most of the established players in the industry like Aarti Industries and Vinati Organics.
To sum it up, Ami Organics does bring some key advantages to the table like entry barriers, rising demand for pharma intermediates from India, solid financials and a debt reduction program. However, it is a small cap company so the concomitant risks are always there.
The article is for informative purpose and does not suggest to buy or sell or hold. Decision or investing is to be taken by individuals.
Evaluate investing in the IPO based on your individual risk tolerance, investment Span etc.