Aether Industries Ltd IPO

About the company:

Aether Industries is a specialty chemical manufacturer in India focused on producing advanced intermediates and specialty chemicals involving complex and differentiated chemistry and technology core competencies. The company is coming out with an IPO which is a mix of fresh issue and offer for sale.

Issue Details

IPO Opening Date: 24th May 2022

IPO Closing Date: 26th May 2022

Minimum Lot: 23 shares

Price Band: Rs. 610 to Rs. 642 per share

Minimum application amount (Cut Off): Rs. 14,766

Objectives

Total Issue size: Rs. 808.04 crores, out of which fresh issue of Rs. 624 crores will be used for:

·        Part-financing of the Greenfield capacity – Rs. 163 crores.

·        Repayment/prepayment of borrowings – Rs. 137.9 crores.

·        Funding working capital requirements – Rs. 165 crores

·        Remaining for general corporate purpose.

Offer for sale: Rs. 181.04 crores

Company Overview

A majority of Aether’s products are exported internationally, and they export products to 18 countries, including Italy, Spain, Germany, the United States, and other parts of the world. Their revenue from exports (including deemed exports) has grown at a CAGR of 58.56% from Rs.100 crores in Fiscal 2019 to Rs. 251 crores in Fiscal 2021. Revenue from exports (including deemed exports) was Rs. 2,804.23 million in the nine months ended December 31, 2021.

The business is carried out from their two sites at Sachin in Surat (Gujarat, India). Manufacturing facility 1 is an approximately 3,500 square meters facility including the R&D facilities, their analytical sciences laboratories, the pilot plant, the CRAMS facility, and the hydrogenation facility. Manufacturing Facility 2 spans approximately 10,500 square meters and acts as a large-scale manufacturing facility with an installed capacity of 6,096 MT per annum (for the solvent recovery plant (“SRP Plant”): 13,140 MT). Their capacity utilization was 77.47% in the nine months ended December 31, 2021, and 73.75% in Fiscal 2021.

It operates in 3 different business models, such as large-scale manufacturing of its own intermediates and specialty chemicals, CRAMS (contract research and manufacturing services), and contract / exclusive manufacturing.

Addressable Market

From calendar years 2020 to 2025, the Asia Pacific (APAC) chemicals market is expected to grow at the fastest rate of 7-8%. The value of the Indian chemicals industry is expected to grow at a CAGR of 12.2% from US$186 billion in 2020 to US$330 billion in 2025. Also, this sector has high barriers to entry.

China’s specialty chemicals market has seen a downturn in recent years due to various factors. Most prominent amongst these is the recent environmental norms introduced by the Chinese government in 2015, which have led to a shutdown of a number of chemical plants. Several global players prefer a “China + 1 offshore strategy”, with manufacturing capacities shifting to cost-efficient markets with strong technology capabilities like India. GoI has launched the PLI scheme to push for indigenous manufacturing of pharmaceutical raw materials and active ingredients. Following these reforms and the Indian company’s proactiveness the growth in exports is expected to increase gradually.

Financials

The company’s revenue has compounded at a CAGR of 49.53% from FY19 to FY21, while the operating profit grew at the same levels for the time period. This is one of the highest among its peers, while it has been consistently giving high returns. The company is reducing its debt levels from the previous years, yet it has the highest debt/equity among its peers.

 Strengths

·        The company offers a differentiated portfolio of market-leading products. The company is a global market leader in some of the chemistries which have high barriers to entry.

·        The products have applications across a wide spectrum of uses in the pharmaceutical, agrochemicals, material science, coatings, high-performance photography, additives, and oil & gas industries. They are the sole manufacturer in India of 4MEP, MMBC, T2E, OTBN, NODG, DVL, and Bifenthrin Alcohol.

·        Aether has a strong focus on R&D which has been critical for the company’s growth and has been a differentiating factor. The in-house capacity displays the company’s expertise in the different chemistries which are difficult to replicate, causing a barrier to entry.

·        They operate with a diversified customer base of over 160 multinational, global, regional, and local companies. As of March 31, 2022, our product portfolio was sold to 34 global customers in 18 countries and to 154 domestic customers.

·        It operated in 3 different models diversifying the working of the business as they have synergies with each other. Along with this the extensive experience of the promoters in the segment is a key positive as well.

Risk

·        The business has a reliance on certain industries such as Pharmaceuticals for a significant portion of the sales. An effect of the business of their customers will have a ripple effect on Aether.

·        The raw material is procured from Europe, China, and Taiwan among others. Disruption in the supply chain and increased freight costs would put the margins under pressure. Also, some of the raw materials are crude based, the prices of which are highly volatile.

·        Aether’s R&D activities are important for future success. Failure to successfully develop new products or continue their product portfolio expansion in a timely and cost-effective manner will affect the product portfolio and the company’s profit metrics.

·        They do not have long-term agreements with suppliers for procurement of the raw materials and an increase in the cost of, or a shortfall in the availability or quality of such raw materials could have an adverse effect on the business, financial condition and results of operations.

Peer Comparison & Conclusion

The company intends to leverage its strong position in specialty chemicals and expertise in order to capitalize on industry opportunities. The company does have impressive financial metrics and return ratios as well as commands a world leadership position in a few of its products. Further, given the double-digit growth opportunity of the specialty chemical space, the company seems poised for a promising long-term outlook. Having said this, the raw materials of the company are from China, as well as Europe dependent plus, are linked to crude prices. Considering that the company in its RHP has reported numbers only till December 2021, that is pre-Russia-Ukraine war, the huge spike in crude prices and the China lockdown, the margins for Q4 of FY22 as well as Q1 of FY23 will certainly be under pressure.

On the valuations front, the IPO is priced at a P/E of 68-72 times FY22 annualized earnings. So the IPO looks completely priced in and thus expensive considering the current market sentiment. Due to the above reasons, we would advise investors to “AVOID” this IPO for now from a listing gains perspective. However, considering the promising long-term prospects aided by the industry tailwinds, investors can keep this company on their radar and can consider investing for the long-term at a better price post listing.