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Sequential recovery but margins still below par…

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

Q2FY23 Results: Beat on sales but margins miss.

* Revenues grew 14.1% QoQ to | 139 crore

* EBITDA grew 28.2% YoY to | 40 crore while EBITDA margins improved 307 bps to 28.6%

* Net profit increased 45.8% QoQ to | 26.1 crore

What should investors do? AET’s share price has grown by ~1.6x over the past three years (from ~| 169 in November 2019 to ~| 273 levels in November 2022).

* We upgrade the stock from REDUCE to HOLD with a neutral stance as we wait for 1) consistency in core businesses 2) improvement in margin profile

Target Price and Valuation: We value AET at | 300 i.e. 22x FY24E EPS of | 13.6.

Key triggers for future price performance:

* Easing of input cost inflation, logistical challenges and demand for enzymes and probiotics in key geographies

* Introducing more products (20 in the pipeline) in the domestic and international markets along with expansion of sales and marketing team in the US, MENA and Asian market

* Developments in global enzymes landscape that is estimated at ~US$10 billion and poised to grow as more applications across usage industries incorporate enzymatic technologies

* Going ahead, AET plans to augment its R&D capability that bodes well in the long run in its quest to improve scalability & foray 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 | 630

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