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Logistical issues, RM inflation continue to weigh…

About the stock: Advanced Enzyme Technologies (AET) is a focused, research driven Indian enzymes company with a product basket of 400+ proprietary products developed from 68 indigenous enzymes and probiotics.

The business is divided into three segments - 1) human healthcare, 2) animal healthcare and 3) industrial processing business

It has seven manufacturing and six R&D facilities, which consist of three integrated fermentations, recovery & formulation facilities, one extraction and recovery facility and one satellite blending, mixing & formulation facility

Q3FY22 Results: Margin pressure due to logistics challenge and high raw material cost continues to weigh on numbers.

Revenues were up 3% YoY to | 133.6 crore

EBITDA was at | 49.1 crore, down 26.1% YoY with margins at 36.7%

Adjusted PAT was at | 27.5 crore (down 36.2% YoY)

What should investors do? AET’s share price has de-grown by ~0.9x over the past five years (from ~| 358 in February 2017 to ~| 319 levels in February 2022)

Below-par performance notwithstanding, we retain BUY as we expect normalcy to return by H2FY23. The momentum in core Enzymes businesses of Probiotics, bio-catalysis, animal nutrition, baking, etc, is likely to persist under normal circumstances

Target Price and Valuation: We value AET at | 380 i.e. 24x FY24E EPS of | 15.8

Key triggers for future price performance:

Easing of input cost inflation as well as logistical challenges

AET remains a marginal player in the global enzymes landscape that is estimated at ~US$10 billion and poised to grow as more applications across usage industries incorporate enzymatic technologies

It has got proven capabilities and stable financials, thanks to a mix of organic and inorganic growth strategy employed by management

Going ahead, AET plans to augment its R&D capability that bodes well in the long run in its quest to improve scalability & foraying into complex enzymes

Alternate Stock Idea: Apart from AET, in our healthcare coverage we like Laurus

Laurus is evolving as a strong vertically integrated player with strong order book visibility and incremental traction from custom synthesis

BUY with a target price of | 625

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