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Our Take:

Advanced Enzymes Technologies is a leading player in enzymes and probiotics that play a crucial role in health and nutrition. Its products have applications in various other end-user industries as well. Despite being a small player in a US$ 10bn+ industry, the company has more than 700 clients spread across 45 countries and a comprehensive product basket of 68 enzymes and probiotics and over 400 proprietary products. This market is dominated by the likes of Novozymes, Danisco, DSM, BASF, etc. which together account for ~75% of the market.

The company is amongst the top-15 global enzyme companies having highest market share in India. Currently Human Nutrition is the biggest segment wherein it engages with Pharmaceutical and Nutraceuticals companies in India and overseas. The opportunities in other segments like Animal Nutrition and Food Processing segments could open up in a big way over the medium term. Probiotics is used across all the key focus segments. Demand for health and hygiene is on the rise and there is huge headroom for growth in Nutraceuticals, especially in USA. Enzymes are used across all food items, including bakery, dairy products etc. which are big segments.

While Novozymes is the global leader in industrial enzymes with ~48% market share, Pharma is not its key focus area and hence direct competition is limited. Largest product which is anti-inflammatory enzyme contributed to Rs 113cr, +10% YoY in FY21. Top-10 clients contributed to 38% of revenue in FY21. Despite losing its top client in the US which contributed ~US$ 5.5mn to revenue, US sales grew 12% YoY in FY21. Over the last five years, the company has enhanced fermentation capacity from 360 cubic metre to ~510 cubic metre.

Apart from this, the company has superior R&D capabilities with seven R&D centers and nine manufacturing facilities across India and the US. Advanced Enzyme is currently operating at ~60% capacity utilisation and hence capex requirement in the next 2-3 years is minimal. Extensive technical know-how and a large product basket have led to leadership position in the domestic healthcare and nutrition segments. Recently the company had announced a positive clinical breakthrough in the randomized controlled trials (RCTs) of systemic enzymes and probiotics to resolve 'long covid' fatigue symptoms. International sales account for around 54% of the revenue, with the US being a major contributor.

Company continues to invest in R&D (~4% of revenue). Enzymes industry has very high entry barriers on account of extensive R&D focus and long gestation period before getting registration approvals for products in USA and EU. Management said that the focus area continues to be on bio-catalysis for API, probiotics and also B2C business in nutraceuticals segment. The focus continues to be on the bakery division, and further expanding baking solutions in US and European market. Company acquired 51% stake in Sci-Tech specialties (SSPL) for Rs 31.6cr in Dec-2020. It had registered revenue/PAT of Rs 38cr/Rs 3cr in FY21. Thus, the company has new segment called specialized manufacturing business. Company plans to double its revenue over the next five years with operating margin in the broad range of 42-48%.

Valuation & Recommendation:

Enzymes industry has very high entry barriers on account of extensive R&D focus and long gestation period before getting registration approvals for products in USA and EU. Most companies are now moving away from synthetic products to eco-friendly solutions and enzymes. The three future growth pillars of the company comprises of continued investment in R&D, expansion of its geographic presence and constant focus on inorganic growth opportunities. We estimate revenue/EBITDA/PAT CAGR of 16%/16%/17.3% over FY21- 23E.

Company has net debt free Balance Sheet with cash & equivalents of around Rs 320cr as on Mar-2021. The company continues to look for inorganic growth opportunities impact of which is not included in our assumptions. Management has guided for a broader EBITDA margin range of 42-48% considering likely increase in overhead expenses and some pressure on gross margin. We expect margins to remain more or less stable in the 45-47% range over FY21-23E. The enzyme industry is dominated by big MNCs like Novozymes, DSM Nutritional Products, BASF etc.

However, at the same time smaller players like Advanced Enzyme are gaining ground in the segment helped by innovation and newer technologies. We feel investors can buy the stock in the band of Rs 380-385 and add more on dips to Rs 332.5 for base case target of Rs 422.5 (23.5x FY23E EPS) and bull case target of Rs 458.5 (25.5x FY23E EPS) over the next two quarters

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