IGI Logo

SSPL acquisition augments growth trajectory; upgrade to Buy

* ADVENZY has completed the acquisition (on 11th Jan’20) of a controlling stake (51%) in SciTech Specialties Pvt Ltd. (SSPL) for a total cash consideration of ~Rs316mn. This was announced in late Dec’20. Such growth acquisition would enable management to focus on the high-margin B2C business, and presents potential cross-selling opportunities that would augment the core earnings potential of the business.

* SSPL, which is involved in contract manufacturing with niche technology specializing in effervescent granules and tablets, complements ADVENZY’s existing business verticals like human health, animal nutrition and food, which in turn affords operational synergies.

* Transaction proceeds (~Rs300mn) is intended to be deployed for capacity expansion, debt reduction, R&D and other operational improvements. Management is confident of improving the margin profile of SSPL by realizing synergies in long term.

* We believe that SSPL acquisition is an opportunistic move and would be a net positive for the overall earnings momentum of the business in the long run. We raise our EPS estimates for FY22/23 by 7%/8% and raise our TP to Rs368 (+11%) at FY23E (at 20x) EPS, upgrading to Buy rating from Hold earlier (remain EW in EAP).

Seizing lucrative growth opportunities from time to time

ADVENZY’s inorganic growth acquisition would allow the company to tap into new drug delivery capabilities for its existing products. It would also enhance the company’s sales potential across different geographies, given strong presence of SSPL in export markets. Export sales account for over 50% of the total sales for SSPL and management believes that there is enormous potential yet to be realized in these markets. One of the many benefits of the effervescent technology is that it would allow ADVENZY to a number of health products in much smaller quantities/batches to existing customers, which will tremendously complement the overall product profile of the business, given better competitive products in the market.

SSPL fits well with the existing portfolio of ADVENZY and strengthen their control/position in all business verticals. Management plans to leverage the benefit of cross-selling opportunities (est. addtl sales growth of 3-5%) and expand its high-margin B2C business (>50%) going ahead, which is currently below 3% of total revenue. Also, given the numerous regulatory approvals SSPL has in place, ADVENZY can leverage the international presence to monetize opportunities in unrealized markets. We expect consolidated EBITDA margin to compress by 160/130bps to 44.9%/45.2% in FY22/23 due to relatively lower margin profile of SSPL although management is upbeat on the margin scope available in the acquired business. ADVENZY has subscribed 4,92,630 equity shares of SSPL via preferential issue and purchased 27,778 from the few selling shareholders of SSPL, aggregating to 5,20,408 shares for a total consideration of ~Rs316mn.

Outlook: We remain positive on the long term story in enzymes industry and believe that ADVENZY is well poised to benefit from steady uptick that is underway. Incremental benefits shall accrue from SSPL’s transaction over long term in domestic and international markets, through technology and operational synergies. We raise our EPS estimates for FY22/FY23 by 7%/8% and raise our TP to Rs368 (20x FY23E, from Rs332 earlier) upgrading to Buy from Hold rating earlier (remain EW in EAP). Key risk: Synergies fail to materialize as anticipated from such a deal.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer