Ami Organics IPO: Information analysis

Ami Organics is a speciality-chemical company based out of Gujarat. The company was incorporated in 2007 and is one of the country's leading manufacturers of pharma intermediaries. Its pharma intermediaries are used in regulated and generic APIs (Active Pharmaceutical Ingredients) of anti-cancer, antipsychotic, anti-Parkinson medicines, and many more. The company has 450 pharma intermediaries in 17 therapeutic areas. As of FY21, almost 88.4 per cent of the company's revenue comes from pharma intermediaries, and 4.8 per cent from agrochemicals, primarily through their recent acquisition of Gujarat Organics, and 6.7 per cent from other products.

The company supplies to over 150 customers in India and 25 overseas countries like Italy, France, US, and UK, to name a few. Around 50 per cent of the company's revenues come from exports. It has over 70 per cent market share in Trazodone, Dolutegravir, and Entacapone, which are used in anti-depressants, HIV/AIDS, and Parkinson's medication. The company leverages its R&D to be a leading player in the industry.

According to the Frost & Sullivan report, the Indian speciality chemicals industry is set to grow by 11-12 per cent CAGR until 2025. Low labour costs and overseas clients wanting to diversify their supply base away from China are significant reasons for India's potential growth in this industry.

Strengths

• The company highly leverages its R&D to ensure growth and be a leader in the field. It has increased its pharma intermediaries from 425 in 2019 to 450 in 2021 and considers its R&D an asset.
• The company has a significant presence in the international market as around 50 per cent of its revenue comes from exports. Both its domestic and international customer base is well diversified.
• It operates in a high entry barrier industry. To become an established player, new entrants have to get major approvals and customer validation.
• Revenue of the company grew at a CAGR of 19.5 per cent from 2019 to 2021, and profit after tax grew at a CAGR of 52.25 per cent from 2019 to 2021.

Weaknesses

• The company operates in one of the most polluting industries in the world. Any stringent laws in the future may affect its profitability. China has also been shutting down some of its chemical plants to comply with its Blue Sky policy.
• All of its manufacturing facilities are in Gujarat. Any issues in that particular region may restrict their production and can harm the company.
• The company does not have any long-term agreements with its suppliers. Any delay in acquiring materials can delay production. Around 20 per cent of raw material is imported from China. Geopolitical tensions may cause a delay in production.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last twelve months
Yes, the company's earnings before tax for FY21 is Rs 71.1 crore.

2) Will the company be able to scale up its business?
Yes, the company is a market leader in pharma intermediaries and currently uses only 63 per cent of its capacity. This, along with increasing applications of speciality chemicals across various industries, will drive the demand in the future. The company also plans to grow organically and inorganically. It recently acquired Gujarat Organics to foray into the agrochemical industry.

3) Does the company have recognisable brand/s, truly valued by its customers?
Yes, it has built good brand equity among pharmaceutical companies. The company has 50 customers who have been with the company for the last five years.

4) Does the company have high repeat customer usage?
Yes, 13 of its customers have been with the company for the last 10 years. The top ten customers for FY21 have been associated with the company for over three years.

5) Does the company have a credible moat?
Yes, the company is one of the largest manufacturers and a market leader in some critical pharma intermediaries, giving it an edge against its competitors. Also, it has many large domestic and international pharmaceutical companies as its clients, such as Laurus Labs, Cadila Healthcare, Cipla, Organike s.r.l.a Socio Unico, and Medichem S.A., to name a few. The company has also received US FDA approval for one of its manufacturing facilities.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
No, the company operates in an industry where various approvals are needed and environmental laws are being imposed. The company also has significant exposure to international markets, and it imports around 20 per cent of raw material from China. Any significant geopolitical changes can harm the company.

7) Is the business of the company immune from easy replication by new players?
Yes, the industry has high barriers to entry due to the long gestation period to become a supplier for a client, particularly for US and Europe-based companies, which require high regulatory compliances. Also, the involvement of complex chemistries in manufacturing pharma intermediates is challenging to commercialise on a large scale.

8) Is the company's product able to withstand being easily substituted or outdated?
Yes, the pharma intermediaries of the company are being used in medications such as anti-cancer, anti-psychotics, anti-parkinson's, and many more, for which demand is increasing and cannot be easily substituted.

9) Are the customers of the company devoid of significant bargaining power?
No, the company generates almost 45 per cent of its revenues from its top five customers but does not have any long-term contractual arrangements with its clients. It conducts business with them based on orders received from time to time.

10) Are the suppliers of the company devoid of significant bargaining power
No, the company depends on a limited number of suppliers, with the top five accounting for 35 per cent of its total purchases, which also supply to other companies.

11) Is the level of competition the company faces relatively low?
No, there are several players in the speciality chemicals industry in India which have greater financial sources and better geographical reach.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters totally hold more than a 25 per cent stake in the company?
Yes, the Executive Chairman and Managing Director, Nareshkumar R Patel, will still hold 12.07 per cent of the shares. The promoter group will own a 41 per cent stake in the company post IPO.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes, the Managing Director, Nareshkumar R Patel, has been associated with the company since its inception.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with Sebi guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
Yes, the company is free from any material litigation.

16) Is the company's accounting policy stable?
Yes, we have no reason to believe otherwise.

17) Is the company free of promoter pledging of its shares?
Yes, the promoters have not pledged any of their shareholdings.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
Yes, the current year ROE is 38.74 per cent, and the three-year average is 33.59 per cent. The current year ROCE is 32.58 per cent, and the three-year average is 30.87 per cent.

19) Was the company's operating cash flow positive during the three years?
Yes, the company's operating cash flow was positive during the preceding three years.

20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
Yes, the company increased its revenue by 19.5 per cent CAGR during the last three years.

21) Is the company's net debt-to-equity ratio less than 1 or is its interest coverage ratio more than 2?
Yes. As of FY21, the company's debt-to-equity ratio is 0.82, and the interest coverage ratio is 13.77.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
No, the company needs a significant amount of working capital to conduct its business. It needs to maintain sufficient stock at all times to meet manufacturing requirements. In FY21, the company had 117 working capital days. Also, its working capital days have been increasing during the last three years.

23) Can the company run its business without relying on external funding in the next three years?
No, the company requires a significant amount of working capital, and to pursue its growth plans, the company might need to rely on external funding.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15%)?
No, the company's short-term borrowings have increased by almost 70 per cent between FY19 and FY21 and currently stand at Rs 45 crore.

25) Is the company free from meaningful contingent liabilities?
Yes, the company is free from any meaningful contingent liabilities.

Stock/valuations

26) Does the stock offer operating earnings yield of more than 8 per cent on its enterprise value?
No, its stock will offer an operating earnings yield of just 3 per cent on its enterprise value.

27) Is the stock's price to earnings less than its peers' median level?
Yes, the company's stock would trade at a P/E of 31.0, lower than its peer's median level of 43.9.

28) Is the stock's price to book value less than its peers' median level?
Yes, the company's stock would trade at a P/B of 6.0, lower than its peer's median level of 7.0.

Disclaimer: The authors may be an applicant in this Initial Public Offering.