Ami Organics Limited Looking To Raise Rs 570 crore Through IPO

Ami Organics Limited (Ami Organics) is a chemicals manufacturer incorporated in 2004. The company is looking to raise around Rs 570 crore through a fresh issue of Rs 200 crore and an offer for sale of Rs 370 crore.

Business Overview:

The company manufactures various chemicals with a strong focus on research and development. It also produces several critical materials for the agrochemical sector, which is achieved through the recent acquisition of the business of Gujarat Organics Ltd (GOL). Pharmaceutical intermediates contribute to around 88 per cent of its revenues, whereas outsourced contract manufacturing services and speciality chemicals contribute to the remaining 12 per cent. Active Pharmaceutical Ingredient companies buy pharmaceutical intermediates.

Ami Organics has the leading market share for several critical APIs, including Dolutegravir (75 per cent), Entacapone (50 per cent), Nintedanib (50 per cent), Trazodone (80-90 per cent) and Rivaroxaban.

The intermediates manufactured by Ami are used in several high-growth therapeutic areas including anti-retroviral, anti-inflammatory, anti-psychotic, anti-cancer, anti-Parkinson, anti-depressant and anti-coagulant. Since its inception, Ami has produced and commercialised more than 450 Pharmaceutical Intermediates for API companies across 17 key therapeutic areas. It usually launches five to six products each year.

The company supplies its products to more than 150 customers spread over the entire world. It also leverages a distributorship network for certain areas. In line with the company’s focus on Research and Development activities, it has also made an investment in a joint venture, Ami Onco-Theranostics, LLC.

Ami has a strong focus on introducing new products to offset the risk of erosion in margins. The generic markets have high competition with several competitors moving in to capture the high return on capital, resulting in lower margins. The ability to introduce new products allows it to earn higher margins, and it makes money on low-margin older products through high sales volumes.

Financials:

Revenue has grown at a compounded annual growth rate (CAGR) of 20 per cent, while its operating profits have grown at a CAGR of 38 per cent over the last two years. Almost half of its revenues come from exports.

The company has been taking up debt, which has increased from Rs 22 crore to Rs 72 crore over the last two years as a result of capital expenditure. It plans to use a part of the proceeds from the IPO to pay down its debt.

Valuations:

The issue is priced at around 35 times the financial year 2021 (FY21) earnings. But when adjusted for GOL numbers in FY21, it is around 31 times earnings assuming a seven per cent net profit margin. Though the figures are similar to those of other companies in the sector, they are quite high on an absolute basis.

Key Risks:

Competition:

The company operates in a highly competitive space, with several competitors competing in the same segments as the company. So far, the company has been able to maintain its margins by constantly producing higher-margin products, but whether it can do so in the future remains to be seen.

Concentration of Revenue Sources:

The top ten customers of the company have contributed to 61 per cent of the companies earnings for FY21. If a large customer leaves, the company might face revenue losses.

Raw Material Sourcing:

Like most other pharmaceutical companies, Ami relies on Chinese suppliers for its raw materials. In view of the geological tensions between India and China, any supply chain disruptions could have adverse effects on Ami.

Regulatory Standards:

The company is subject to high regulatory standards as the products are used in pharmaceutical ingredients. It is also screened by clients regularly to check quality standards. Any variation from the clients’ or regulators’ standards can prove to be dangerous.