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Advanced Enzymes – Manufacturer of eco-friendly alternatives to chemicals


Company Name – Advanced Enzyme Technologies Limited (Advanced Enzymes)


Current Share Price – INR 270 (February 14, 2023)


Market Cap – INR 3,023 cr


 

1. What is interesting about the stock?


Enzymes are useful for us in a variety of ways. Enzymes are natural protein molecules that act as catalysts within living cells, produced by all living organisms. They are biological catalysts that speed up chemical reactions in living organisms, which is important for processes such as digestion, metabolism, and DNA replication. Enzymes are also used in a variety of industrial processes, including the production of food, medicine, and biofuels. Additionally, enzymes can be used as diagnostic tools for detecting diseases and as targets for developing new drugs.


Some of the uses of Enzymes are:

  • Food

    • Enzymes are used to break down complex molecules in food, such as starches and proteins, to improve the food's texture, flavor, and nutritional value.

    • They can be used to create specific flavors and aromas in food, such as in cheese and other dairy products.

    • Enzymes are also used in food processing to improve the efficiency of industrial processes and reduce waste.

  • Human Nutrition

    • Digestive enzymes are produced naturally in the body and help break down food into smaller molecules that can be absorbed and used by the body. Supplemental digestive enzymes can help people with certain digestive disorders, such as lactose intolerance, to digest their food more easily.

    • Enzymes are also used in the production of dietary supplements, such as protein powders and meal replacements, to enhance the absorption and utilization of nutrients in the body.

  • Animal Nutrition

    • Enzymes are added to animal feed to improve the digestibility and nutritional value of the feed. For example, phytase enzymes can break down phytic acid in plant-based feeds, making phosphorus more bioavailable to the animal.

    • Enzymes can also improve the feed conversion rate and growth performance of animals, which can lead to lower feed costs and improved animal health and productivity.

    • Enzymes are used in the production of pet food to enhance the nutrient digestibility and palatability of the food, which can improve the overall health and well-being of pets.

  • Medicine

    • Enzymes are used in the production of several important drugs, including antibiotics and chemotherapy drugs.

    • They are used as diagnostic tools to measure levels of certain enzymes in the body that can indicate disease.

    • Enzyme replacement therapy is a treatment for certain genetic disorders where patients are deficient in specific enzymes, such as in the case of Gaucher's disease or Pompe's disease.

According to a industry report, the global market size for enzymes was valued at USD 10.2 billion in 2020 and is projected to reach USD 14.7 billion by 2026, with a compound annual growth rate (CAGR) of 6.7% during the forecast period.


Indian enzyme market size was valued at ~INR 4,000 cr (approximately USD 500 million) in 2019 and is expected to grow at a CAGR of around 11.5% during the forecast period 2020-2025.


Advanced Enzyme Technologies Limited is the largest enzyme player in India. The Company was founded in 1989 and is headquartered in Mumbai, India. It specializes in the research, development, and manufacture of enzymes and probiotics for various industries, including human and animal nutrition, food and beverage, textiles, and healthcare. The Company has a strong presence in both domestic (42% of revenue in Q3FY23) and international markets and is considered one of the global leaders in the enzyme industry.


Advanced Enzymes has a strong and well-established research and development (R&D) capability. The Company has a dedicated R&D center in India with state-of-the-art facilities and a team of over 100 scientists and technologists who work on developing innovative enzymes and probiotics for various industrial applications.


The Company's R&D activities are focused on several areas, including enzyme discovery, enzyme engineering, and fermentation technology. It has also invested in biotechnology platforms such as genomics, metagenomics, and bioinformatics to enhance its R&D capabilities.


In addition, Advanced Enzymes has a strong intellectual property portfolio, with over 200 patents and patent applications in various countries. This highlights the Company's commitment to innovation and its focus on protecting its intellectual property.


Advanced Enzymes has strong manufacturing capabilities, with several state-of-the-art facilities located in India. The Company has several production facilities, including:

  • Enzyme production facilities: Two facilities, one located in the city of Thane in Maharashtra, India, and the other in Sinnar, Maharashtra, India. These facilities are equipped with advanced technology and use bioreactors and solid-state fermentation techniques to produce high-quality enzymes.

  • Probiotic production facility: The Company has a dedicated probiotic production facility located in Chino, California, USA. This facility is equipped with advanced technology and uses freeze-drying and microencapsulation techniques to produce high-quality probiotics.

  • Formulation and packaging facilities: Advanced Enzymes has several formulation and packaging facilities located in India, the USA, and Europe.

Some of Advanced Enzymes’ key customers in India are Nestle, Britannia, ITC, Amul, Coca-Cola, PepsiCo, Cadbury, Parle, & GSK Consumer Healthcare, and outside India are Danone, DuPont Nutrition & Biosciences, Kerry Group, Abbott, etc.


Why invest in Advanced Enzyme?

  • Research and Development capabilities

  • Broad Product Portfolio

  • Global Reach: Advanced Enzymes has a strong global presence, with a sales and distribution network in over 50 countries. This global reach allows the Company to reach a large customer base and expand its business across different regions.

  • Strong Customer Relationships: The Company has built strong and long-lasting relationships with its key customers, many of whom are major players in the industries it serves.

2. Key Historical Financials


  • Company revenue and PAT have grown at a CAGR of 10% and 5% respectively in the last 5 years

  • Revenue growth was tepid in FY22 and it has continued in Q2FY23

  • EBITDA margin has fallen from 46% in FY21 to 29-30% in Q2 and Q3FY23 due to higher raw material prices, freight costs, and coal prices. Company has not been able to pass on these to its customers

  • Inventory level is almost 400 days leading to higher working capital need and low cash flow (CFO/EBITDA) convertibility

  • ROCE and ROE fell in FY22 as the EBITDA margin contracted. Return ratios would further come down in FY23

3. What is my view on company valuation?


The share price has appreciated ~10% in the last 5 years vs. ~80% increase in the Nifty 50 index. So, the share price has significantly underperformed the market.


Company trades at P/E (TTM) multiple of 31x vs a 5-year median multiple of 26x. The current valuation seems to be high in the context of the growth in the last 5 years.


On an overall basis, Advanced Enzymes is an interesting company. However, they need to turn around the margin decline or pass on the increased cost to their customers.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Large working capital level – high growth may need external funding

  • Susceptibility to regulatory and compliance-related issues

  • High exposure to the US market which has recession fear – 56% of revenue in FY22 comes from exports to the US

 

About the Author


I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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