Advanced Enzyme Technologies Research Report By ICICI Direct

Play on biotechnology with enzymes expertise…

Incorporated by second generation enzymologists, the Rathi brothers in 1989, Advanced Enzyme Technologies (AET) is one of the largest Indian enzyme companies with a product basket of 400+ proprietary products developed from 68 indigenous enzymes, probiotics. It offers these products to 700+ customers across 45 countries worldwide. AET develops enzymes mainly through microbial sources, using environment-friendly biotechnology processes. We initiate coverage on AET to capture opportunities in this integrated B2B enzymes player with plans to expand into B2C for areas like neutraceuticals and probiotics.

Oligopolistic environment, vast addressable market to the fore

Globally, growth of the enzymes market piggybacks on a diverse spectrum of customer base. This, together with limited number of meaningful players, has created a conducive business environment for existing players in the space. Note that enzymes as cost to percentage of sales is not material, yet its efficacy is very important to end product including constituency of the end product in terms of its taste, appearance, aroma and, thus, quality perception of the products leading to significant supplier stickiness. With a revenue bandwidth of just | 440 crore (~US$60 million) AET remains a marginal player in the global enzymes landscape that is estimated at ~US$10 billion and poised to grow at 6-7% CAGR as more and more applications across usage industries incorporate enzymatic technologies. Despite being a smaller player, AET’s product basket of >400 products is testimony to its proven capabilities.

Specialised business model with high entry barriers

One of the biggest challenges facing new companies looking to enter the enzyme industry is to offer continuous and differentiated solutions as per the client’s requirement that demands real time R&D capability and flexibility in manufacturing. Large manufacturing capacities, proven capabilities, experienced promoters, customer stickiness, fairly consistent track record, ability to develop new products in-house and quest for unique acquisitions are some differentiators for AET. Revenues have grown at a CAGR of 11% to | 444 crore during FY16-20 through the organic and inorganic route.

Valuation & Outlook

AET is poised to capture the growing opportunities in the enzymes and probiotics space backed by proven capabilities and stable financials that have been fairly consistent, thanks to a mix of organic and inorganic growth strategy employed by the management. Strong margins and healthy return ratios reflect the pricing power and balance sheet strength of the company. Going ahead, the management intends to augment its R&D capability for better facilitation and strengthening of in-house R&D capability, which bodes well in the long run in its quest to improve scalability and a possible foray into more complex enzymes. We ascribe a target price of | 425 based on 25x FY23E EPS of | 17.