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Breaking the mould

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Advanced Enzymes Technologies’ stellar debut at the stock exchange, despite the niche nature of its business, demonstrates that there is no fixed formula for success By LakshmiPriya Nair

Treading the untrodden path is not new to Advanced Enzymes Technologies. Its Founder, Late LC Rathi pioneered the extraction of papain, an enzyme complex derived from papaya fruit and used for pharma and medical purposes. Reportedly, he also established India’s first enzyme manufacturing plant in 1958, though the company, Advanced Enzymes Technologies was incorporated only in 1989. The same pioneering spirit led the current generation leaders to go down the IPO route, an uncommon choice for a B2B company in India, to further its progress. A risky venture with several pitfalls.

A spectacular debut….

Yet, the company’s IPO received an overwhelming response, with the issue seeing a demand 115 times more than the offered shares. Reportedly, the three-day IPO, from July 20-22, 2016, got applications for 374.80 million shares, compared with the issue size of 3.23 million shares. At Rs 1178.10, the shares of Advanced Enzymes Technologies rose 31 per cent higher over its issue price of Rs 896 each share and the company raised Rs 411 crores through the IPO.

Let’s examine the factors which led to Advanced Enzyme Technologies’ phenomenal performance.

A leadership position: The promoters of the company, Vasant Laxminarayan Rathi and Chandrakant Laxminarayan Rathi have over three decades of experience in the enzyme industry. Under their stewardship, the company has grown to become the largest domestic enzyme company engaged in research, development, manufacturing and marketing of over 400 proprietary products developed from 60 indigenous enzymes. With reportedly 20 per cent market share in India, it is second to only Novozymes, the global market leader in this space.

Sound financial standing: The company’s record in terms of revenue and profitability has been notable since 2012, with a compounded annual growth rate (CAGR) of over 14 per cent in the last five years. The net profits of the company in FY12, FY13 and FY14 stood at Rs 47.68 crores, Rs 76.16 crores and Rs 27.75 crores, respectively. The revenue of the company stood at Rs 294.64 crores in FY16, registering a steady growth from Rs 174.88 crores in 2012. Its net profit stood at Rs 122.53 crores for the year ended March 31, 2016, as compared to Rs 73.75 crores in the last year. Currently, the US offers 54.94 per cent of revenue, India accounts for 36.44 per cent, 3.84 per cent comes from Europe, 3.63 per cent from Rest of Asia, and other geographies account for 1.15 per cent. (Source: http://www.financialexpress.com/markets/indian-markets/advanced-enzyme-technologies-shares-listing-bse-and-nse-on-august-1-2016/334520/)

Growing overseas presence: With over 700 global customers in across 50 countries globally, the company has earmarked a place for itself among the top 15 enzyme manufacturing companies in the world.  Sanofi India, Cipla, Ipca Laboratories, Alkem Laboratories, and Emcure Pharmaceuticals are some of its clientele in the pharma segment. It has six manufacturing units, four in India and two in the US. Thus, it is poised to expand its footprints in the global arena as well.

High entry barrier: Factors like huge dependency on R&D, highly technical nature of the business, scarcity of qualified professionals in enzyme and biotechnology industry etc. have acted as entry barriers to new players. This, in turn, has proved beneficial for existing players like Advanced Enzymes Technologies as it has to deal with less competition. As one of the top players, it has managed to get a substantial slice of the market share.

Significant investments in R&D: The company has also fortified its own standing in the industry through noteworthy investments in R&D. It has four R&D units, three in India and one in the US; as well as a strong team of 55 members. Reportedly, its R&D expenditure is around 5-7 per cent standalone of revenues. The company owns 13 patents till date while another four are awaiting approval. The company has also launched its branded enzyme supplements in the US.

No listed peers: Domestically, Advanced Enzymes Technologies has no like to like listed peer and the shares of Novozymes, its international competitor trades at considerably higher prices. Moreover, Novozymes focuses more on the industrial enzymes segment while healthcare and nutrition is one the major focus areas for Advanced Enzymes Technologies. Catering enzymes to various major pharma and nutraceutical players, the healthcare and nutrition segment accounted for 88 per cent of the company’s revenue in FY16.

As per reports in the media, including The Financial Express, renowned market analysts also gave a cautious thumbs up to investors interested in buying the company’s stocks.

Angel Broking predicted that the company could have a ‘robust growth’ in future, spurred by the strong standing of the company and its experience in this sphere. They believe that the cost advantage offered by India would also work in the company’s favour. “High return ratios, reasonable valuations and healthy earnings and EBITDA growth,” were the reasons stated by Reliance Securities to recommend the IPO. Bullish on the IPO, Hem Securities opined that the lack of listed peers in the domestic market would work in the company’s favour. (Read: http://www.financialexpress.com/markets/indian-markets/advanced-enzyme-technologies-ltd-ipo-hit-bse-nse-on-july-20-should-you-invest/321319/)

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Mahesh Singhi

Speaking to Express Pharma, Mahesh Singhi, Managing Director, Singhi Advisors, airs similar views. He says, “At IPO price, Advanced Enzymes was available at PER of 20.3x FY17 earnings (market consensus). It was inexpensive as the company has no listed peer in India while global enzymes leader Novozymes trades at a PER of 35x. So, Advanced Enzymes was safe bet given reasonable valuations, strong return on equity (ROE) and solid cash flow generation.”

He further elaborates, “For Advanced Enzymes, the healthcare and nutrition segment, which supplies enzymes to various major pharma and nutra players, accounts for over 85 per cent of revenue. Major global players such as Novozymes and Dupont Danisco are more focused on serving the industrial enzymes segment as compared to the nutraceutical segment. Thus, limited competition in the nutraceutical segment in the core market, augurs well for Advanced Enzymes Technologies to capture market share and growth.”

…..but not without challenges

Thus, Advanced Enzyme ticks most of the check boxes that investors look for and this has led to its stellar debut at the stock exchange. However, it’s been a hard earned victory. Various hurdles on different fronts could have derailed the company’s march to progress.

For instance, the company had to recall one of its products from the market due to contamination issues in 2014. The incident hurt the profit margins considerably, it helped the promoters to salvage the reputation of the company. However, the top management at Advanced Enzymes Technologies believe that the incident was a tough but learning experience which helped them emerge as a stronger entity.  This claim is validated by the fact that it posted a growth of almost 50 per cent in the subsequent year.

Similarly, its decision to go for an IPO was received with mixed reviews. While there were many points in its favour, the market experts had also highlighted that the company’s major share of revenue depends on a few products groups. Any decline or interruption in the demand of these product groups could have a substantial adverse effect on the company’s profit margins. Moreover, it was also pointed out that only 35-36 per cent of its revenue comes from the Indian units and the rest is dependent on its foreign subsidiaries. This could pose a problem due to foreign currency fluctuations and/ or if any of the subsidiaries encounter operational difficulties.

In yet another instance, during the three days of the IPO, rumours surfaced that the company produced enzymes from animal sources which made them ‘non-veg’. These rumours could have hurt the company as many investors belong to the Gujarati Jain community who practice vegetarianism as a part of their religion. To lay these fears to rest, the management had to issue a statement clarifying that the company uses only microbial fermentation to produce enzymes.

Thus, time and again, the company tackled these trials and managed to create a favourable impression in the minds of the investors. The result – one of the most successful IPOs of this year.

Creating a win-win situation

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CL Rathi

But for the company, it is merely a foothold, albeit a significant one, in its journey to the pinnacle of success. CL Rathi, MD, Advanced Enzymes Technologies puts it very quaintly. He informs that his company had reached a ‘marriageable age’ and goes on to explain that marriageable age for a company is its ability to sustain the share capital coming and offer more value than ever before. “Our company is ready for more growth and family capital can take a business only so far. There was a need for more capital to drive more growth and an IPO is the means to raise large amount of capital,” says Rathi, explaining why they chose to go for an IPO. He also feels that despite the risks, IPO is also an effective way to raise cheap capital. He states, “A PE investor would have more expectations and would look at a return of 25 per cent but the common public would be very happy with 15 per cent because it is much more than what a bank offers.”

He attributes the phenomenal success of the IPO to the company’s philosophy of creating a win-win situation for all. He believes that the IPO ensured that all those who were involved, be it those who were selling the shares or the investors who chose to buy the shares, benefitted from the exercise. Moreover, it has also become the first and, currently, the only public listed Indian company in this space. However, he is also aware that a public-listed company has renewed share of responsibilities and obligations. He says, “The company now has to be more transparent, ensure good governance and comply with all the regulations and operate in a completely ethical manner.”

Rathi also claims that being a public-listed company also accelerate the growth rate of Advanced Enzymes Technologies because now it would be able to offer more value to its stakeholders, customers and employees. He says, “We are now in a better position to grow more financially, attract better talent, grow more customers etc. These in turn would further propel the growth of the company. We would also grow our partner network. We have got renewed respect since the IPO.”

Dreaming big

Thus, the company is now poised to grow exponentially in the coming years, states Rathi. Outlining an ambitious blueprint, he informs that around Rs 40 crores of the money raised would go towards settling the debts of Advanced Enzyme USA, the wholly – owned subsidiary of Advanced Enzymes Technologies. Becoming debt-free is one of the foremost goals for the company. Rathi informs that becoming debt-free, would enable them to pursue their expansion plans in full swing as the cash flow from the US company would spur their expansion plans on the Indian front as well as globally.

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CL Rathi, MD, Advanced Enzymes Technologies and Piyush Rathi, Director and CMO, with their team

Expanding R&D is the first priority. Expanding their footprint comes a close second. “We would want to make our presence felt in new geographies and wherever we already present, we want to make our foothold stronger,” updates Rathi. The company foresees huge potential to grow in the US, a $2 billion market. The company’s been operating there for a couple of decades but their market share is not yet substantial. In 2011, they acquired Cal India, a specialty enzymes and biochemical company, to aid their growth plans. Rathi claims, “The US is the largest market for nutraceuticals and it is a major focus area for us. Long experience, sound knowledge, complete entrenchment in the market etc. would help us in expanding our presence. We see huge potential to grow to $100 million in the US itself. Combined with our growth in other markets, this company can easily grow to $200 million in a matter of three to four years.”

“We are also planning to expand in the European markets. But Europe is a difficult market because of cultural and linguistic diversities, regulatory differences in each country etc. Thus, expanding in Europe is challenging but we will definitely continue to grow there as well,” explains the MD. The company plans to expand into Japan and Latin America as well.

Setting an example

Consequently, the company is gung-ho on growth and raring to achieve new heights of glory. Will it succeed in its endeavours and live up to the expectations of its investors is something only time will tell.

But, it’s undeniable that the company has broken the mould and chosen to take a route  untravelled by its peers in India. Will Advanced Enzyme Technologies’ step inspire the rest of them follow suit? Singhi doesn’t think so. He opines, “India is a small market in overall global market proposition. Overseas companies are much ahead of Indian firms in terms of R&D and patents. In our view, Indian firms will take longer time to make this business model successful.”  If he is correct in his surmise, then the company would have proved itself to be a disruptor, rewriting the norms of the industry and creating its own formula for success. Either way, the company seems to be creating history.

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