Ami Organics is a research and development driven specialty chemicals manufacturer with varied end usage, focused on the development and manufacturing of advanced pharmaceutical intermediates for regulated and generic active pharmaceutical ingredients (APIs) and new chemical entities (NCE) and key starting material for agrochemical and fine chemicals, especially from its recent acquisition of the business of Gujarat Organics (GOL).

Promoters of the company are NareshkumarRamjibhai Patel, Chetankumar Chhaganlal Vaghasia, Shital Nareshbhai Patel and Parul Chetankumar Vaghasia

The company is one of the major manufacturers of pharma intermediates for certain key APIs, including Dolutegravir, Trazodone, Entacapone, Nintedaniband  Rivaroxaban, as per the F&S (Frost & Sullivan ) report. The pharma intermediates which it manufactures, find application in certain high-growth therapeutic areas including anti-retroviral, anti-inflammatory, anti-psychotic, anti-cancer, anti-Parkinson, anti-depressant, and anti-coagulant, commanding significant market share both in India and globally.

The company has developed and commercialised over 450 pharma intermediates for APIs across 17 key therapeutic areas since inception and NCE, with a strong focus on R&D across select high-growth high margin therapeutic areas such as anti-retroviral, anti-inflammatory, anti-psychotic, anti-cancer, anti-Parkinson, anti-depressant, and anticoagulant, for use across the global pharmaceutical market.

The company has recently completed the acquisition of two additional manufacturing facilities operated by GOL which has added preservatives (parabens and parabens formulations which have end usage in cosmetics, animal food and personal care industries) and other specialty chemicals (with end usage in inter alia the cosmetics, dyes polymers and agrochemicals industries) in its existing product portfolio, which command significant market share globally in the supply of certain paraben derivatives. The acquisition is in line with its inorganic growth strategy of foraying further into the specialty chemicals sector. The company intends to pursue strategic acquisitions and partnerships to complement its organic growth and internal expertise. The company may use some of the land area available to it in the future (which currently stands at 15,830.00 sq mtr) in Jhagadia facility to explore brownfield expansion opportunities. The sales turnover for fiscal 2021 of the 2 plants acquired as part of the recent acquisition was Rs 106.04 crore.

The pharma intermediates used for manufacturing of APIs and NCEs portfolio has expanded from over 425 products as of March 31, 2019, to over 450 products as of March 31, 2021. Revenue from operations from pharma Intermediates business was Rs 301.14 crore for fiscals 2021 accounting for 88.41% of its total revenue from operations.

The company has eight process patent applications (in respect of intermediates used in the manufacture of Apixaban, Rivaroxaban, Nintedanib, Vortioxetine, Selexipag, Pimavanserin, Efinaconazole and Eliglustat) and three additional pending process patent applications for which applications were made recently, in March 2021.

The company supply pharma intermediates used for manufacturing of APIs and NCEs to various multi-national pharmaceutical companies which cater to the large and fast-growing markets of Europe, China, Japan, Israel, UK, Latin America, and the USA. In the fiscals 2021, 2020, and 2019, revenue from exports contributed 51.57%, 45.89% and 49.61%, respectively of its total revenue from operations. Revenues from exports have grown at a compound annual growth rate (CAGR) of 21.84% between fiscals 2019 and 2021.

The company supply products to more than 150 customers (including international customers) directly in India and in 25 countries overseas, using a distributorship network in certain cases. Some of its domestic customers include Laurus Labs, Cadila Healthcare and Cipla and some of key export customers include Organikes.r.l.a Socio Unico, Fermion Oy, Fabbrica Italiana Sintetici S.p.A, Chori Co. Ltd., Medichem S.A. and Midas Pharma GmbH. It has established long standing relationships with some of key customers. Thirteen of its customers have been customers since the past 10 years and fifty of its customers have been customers since the past five years

The specialty chemicals find use in the agrochemicals and fine chemicals industry. The specialty chemicals manufactured by the facilities which it acquired as part of the acquisition, find use in cosmetics, preservatives, and agrochemicals. Revenue from operations from specialty chemicals business was Rs 16.59 crore, for fiscals 2021 accounting for 4.87% of total revenue from operations.

The company has three manufacturing units located at GIDC, Sachin, Gujarat, spread over an aggregate land area of 8,250 sq. mtrs with an installed capacity of 2,460 mtpa (metric tonne per annum), GIDC, Ankleshwar Industrial Estate, Gujarat, spread over an aggregate land area of 10,644 sq. mtrs. with an installed capacity of 1200 mtpa, and GIDC Industrial Estate, Jhagadia, Gujarat, spread over an aggregate land area of 56,998.35 sq. mtrs. with an installed capacity of 2,400 mtpa. Total annual installed capacity is 6060 mtpa. The Ankleshwar facility and Jhagadia facility have been recently acquired from GOL. The Sachin Facility is inspected and approved (EIR issued) by US FDA for manufacture and supply of advanced pharmaceutical intermediates for manufacturing of APIs and NCEs since 2016. The management systems of Sachin facility has been certified by the Bureau Veritas Certification Holding SAS - UK Branch to be compliant with ISO 9001:2015, ISO 14001:2015, ISO 45001:2018 and SA 8000:2014 for designing, manufacturing and dispatching of pharmaceutical intermediates for bulk drugs. Similarly, Jhagadia and Ankleshwar facilities are compliant with ISO 9001:2015 and ISO 14001:2015 standards.

The manufacturing operations require a significant amount of power and water. Power requirements are fulfilled through electricity connection from the state electricity board for a maximum contracted demand of 1000 KvAH at Sachin facility, 1,000 KvAH at Ankleshwar facility and 1,000 KvAH at Jhagadia facility, and the state water board provides potable water for operating manufacturing facilities. It has entered into an arrangement with Gujarat Gas Company for supply of natural gas and also have an in-house captive power generation plant.

The company has a dedicated in-house R&D facility located in GIDC, Sachin spread over an aggregate built-up area of 2,200 sq. mtrs and is also supported by its analytical development laboratory in relation to developmental activities, freezing specifications and developing the method of analysis for finished products, in process intermediates, key starting materials (KSMs) and raw materials. The R&D facility has been approved and certified by the Department of Scientific and Industrial Research, Ministry of Science and Technology of India (DSIR).

The company has incurred an expenditure of Rs 6.50 crore, Rs 8.59 crore and Rs 2.36 crore towards R&D activities during the fiscals 2021, 2020 and 2019 representing 1.91%, 3.59%, and 0.99% of its revenue from operations in such periods, respectively.

The company has also made an investment in its Joint Venture, Ami Onco-Theranostics, LLC, a Delaware, USA entity (AOL), which, by way of a transfer of patent usage rights by its JV Partner Photolitec LLC, is entitled to the worldwide usage (except China) of certain patents used in the development of new photosensitizing compounds used to identify and treat cancer through patent and patent applications and additional know-how regarding the same.

The key raw materials that the company use for manufacturing operations include Chloroacetaldehyde Dimethylacetal, SemicarbazideHcl, Meta Chloro Aniline,1-Bromo 3-Chloro Propane and Bis-(2-Chloethyl) AmineHcl. The company identify and approve multiple vendors to source its key raw materials and place purchase orders with them from time to time. It currently source 73.22% of its total raw materials from domestic vendors, 19.39 % from China and the remaining from other overseas sources for fiscal 2021.

The Offer and the Objects

The offer comprises fresh issue of 3278689 equity shares at upper price band of Rs 610 and 3316750 equity shares at lower price band of Rs 603 aggregating up to Rs 200 crore by the company and an offer for sale by Parul ChetankumarVaghasia- promoter selling shareholder (700000 equity shares) and  other selling shareholders (5359600 equity shares) together of up to 6059600 equity shares aggregating to Rs 370 crore at the upper price band of Rs 610 and Rs 365 crore at lower price band of Rs 603. The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders, in proportion to the offered shares sold by the respective selling shareholders as part of the offer.

Promoter Parul Chetankumar Vaghasia post-issue shareholding shall decrease to 8.89% from 11.87% pre issue shareholding at the upper price band of Rs 610.

The company has undertaken a Pre-IPO placement of 1,658,374 equity shares at a price of Rs 603 per share, aggregating to Rs 100 crore. The company allotted 497512 equity shares to Plutus Wealth Management LLP aggregating Rs 30 crore, 729685 equity shares to Malabar India Fund aggregating Rs 44 crore, 331675 equity shares to IIFL Special Opportunities Fund - Series 7 aggregating Rs 20 crore and 99502 equity shares to Malabar Value fund aggregating Rs 6 crore.

The company proposes to utilize the net proceeds of the fresh issue and the proceeds from the Pre-IPO placement towards repayment/prepayment of certain financial facilities availed by the company amounting Rs 140 crore, funding working capital requirements amounting Rs 90 crore and balance towards general corporate purposes. Total outstanding loan amount as on June 30, 2021, is Rs 145.35 crore

Strengths

The company has developed and commercialised over 450 pharma intermediates for APIs including Dolutegravir, Trazodone, Entacapone, Nintedanib and Rivaroxaban and NCEs across 17 high growth therapeutic areas since inception, such as anti-retroviral, anti-inflammatory, anti-psychotic, anti-cancer, anti-Parkinson, anti-depressant, and anti-coagulant

The Indian chemicals market is valued at US$ 166 billion (around 4% share in the global chemical industry) in 2019. It is expected to reach around US$ 326 billion by 2025, with an anticipated growth of around 12% CAGR. The specialty chemical industry forms around 47% of the domestic chemical market, which is expected to grow at a CAGR of around 11-12% over the same period.

India's specialty chemical companies are gaining favor with global MNCs because of the geopolitical shift after the outbreak of Covid-19 as the world looks to reduce its dependence on China. Currently, China accounts for around 15-17 percent of the world's exportable specialty chemicals, whereas India accounts for merely 1-2 percent, indicating that the country has a large scope of improvement and widespread opportunity. It is anticipated that specialty chemicals will be the next great export pillar for India.

The Indian pharmaceuticals market was valued at US$ 59 billion in 2020, contributing to around 4% of the global market. The Indian pharma market is expected to grow at around CAGR of around 10% between 2020 and 2025 fueled by substantial increase in Indian API domestic consumption

The pharmaceutical intermediates business has high entry barriers inter alia due to a long gestation period to be enlisted as a supplier with the customers, particularly with the customers in US and European countries, which requires suppliers to adhere to strict compliance requirements, leading to a high regulatory gestation period and the involvement of complex chemistries in the manufacturing process, which is difficult to commercialize on a large scale.  Any change in the vendor of the product may require significant time and cost for the customer resulting in a propensity amongst customers to continue with the same set of suppliers.

The company has secured REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) registration for some of its products for the purposes of selling and marketing these products in the European Union with an added advantage of being a preferred supplier to its customers in the said territory. This is a significant entry barrier that works in favor of the company and places it in a major advantageous position vis-a-vis its competitors in the critical European market wherein the company intends to cater to the regulated players (i.e., the originators and not generic makers).

Some of the raw materials that the company use such as Thionyl Chloride, Phosphorus Oxychloride and Sodium Methoxide requires a high degree of technical skill and expertise, and operations involving such hazardous chemicals ought to be undertaken only by personnel who are well trained to handle such chemicals. The level of technical skill and expertise that is essential for handling such chemicals can only be achieved over a time, creating a further barrier for new entrants

The company has 8 process patent applications (in respect of intermediates used in the manufacture of Apixaban, Rivaroxaban, Nintedanib, Vortioxetine, Selexipag, Pimavanserin, Efinaconazole and Eliglustat) and 3 additional pending process patent applications for which applications were made recently, in March 2021.

The company supplies their products to more than 150 customers (including international customers) directly in India and in 25 countries overseas, using a distributorship network in certain cases. In Fiscal 2018, it had established a new state-of-the-art fully GMP-compliant manufacturing unit at the Sachin facility, and this new and excess capacity will help them capitalize on the growth opportunities. In addition, the acquisition of the Ankleshwar facility and the Jhagadia facility, both multipurpose backward integrated facilities in fiscal 2021, has enabled them to expand their product portfolio to include the manufacture of specialty chemicals. Going forward, they may consider acquisition/ investment opportunities to selectively expand in other verticals.

Weaknesses

Top ten customers for fiscal 2021 have contributed to 60.99% of total revenue from operations

The company is subject to strict quality requirements, regular inspections and audits, and the success and wide acceptability of its products is largely dependent upon quality controls and standards. Any manufacturing or quality control problems may subject it to regulatory action, damage reputation and have an adverse effect on business, results of operations, financial condition, and cash flows.

The company operates in a hazardous industry and is subject to certain business and operational risks consequent to its operations, such as, the manufacture, usage, and storage of various hazardous substances.

The company imports a significant portion of its raw materials from China (amounting to 19.39%, 21.85% and 22.11%, of its total raw material purchases during fiscals 2021, 2020 and 2019, respectively). Existing geopolitical tensions between India and China may adversely affect its abilities to effectively source raw materials for business and operations.

The company facilities are subject to client inspections and quality audits and any failure on its part to meet their expectations or to comply with the quality standards set out in contractual arrangements, could result in rejection of its product lot(s) and/or the termination of contracts which may adversely affect business, results of operations, financial condition, and cash flows.

The company requires many approvals, licences, registrations and permits to operate its business and the failure to obtain or renew these licences in a timely manner, or at all, may have an adverse effect on business, results of operations and financial condition.

Valuation

For FY 2021, consolidated sales were up by 42% to Rs 340.61 crore primarily due to increased sales of its products resulting from a robust growth of domestic and export demand. OPM rose 640 bps to 23.5% which led to 95% increase in operating profit to Rs 80.15 crore. Other income decreased 51% to 1.38 crore while interest cost rose 1% to Rs 5.62 crore and depreciation increased 19% to Rs 4.19 crore. PBT increased 106% to Rs 71.73 crore. Tax expenses rose 143% to Rs 17.73 crore. Net profit increased 97% to Rs 54 crore.

At the higher price band of Rs 610, the offer is made at around 41.2 times its EPS of Rs 14.8 for the period ended March 31, 2021, on a post-issue equity share capital of Rs 36.44 crore of face value of Rs 10 each. Listed industry peers of the company are Aarti Industries, Hikal, Valiant Organics, Vinati Organics, Neuland Laboratories and Atul.

In comparison Aarti Industries trades at 31 times its FY2021 EPS of Rs 30 at the current market price of Rs 932, Hikal trades at 59.8 times its FY2021 EPS of Rs 10.8 at the current market price of Rs 646, Valiant Organics trades at 29.1 times its FY2021 EPS of Rs 44.7 at the current market price of Rs 1299, Vinati Organics trades at 68.4 times its FY2021 EPS of Rs 26.2 at the current market price of Rs 1793, Neuland Laboratories trades at 26.7 times its FY2021 EPS of Rs 62.9 at the current market price of Rs 1680 and Atul trades at 41.4 times its FY2021 EPS of Rs 221.2 at the current market price of Rs 9162.