IPO Analysis: Aether Industries Ltd

IPO Rating: Invest for long-term

About the issue:

Aether Industries is engaged in the manufacturing of specialty chemicals. It is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 10 per equity share. The maiden offer comprises of fresh issue of Rs 627 crore and offer for sale by existing shareholders of Rs 181.04 crore, according to its red herring prospectus. The price band of the issue has been fixed at Rs 610 to Rs 642 per equity share. The IPO opening date is May 24, 2022, and it will be closing on May 26, 2022. The issue will be listed on the exchange on June 3, 2022. The IPO market lot size is 23 shares. A retail-individual investor can apply for up to a maximum of 13 lots (299 shares or Rs 191,958).

The objects of the issue are:

• Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company.
• Funding capital expenditure requirements for the manufacturing facility (Proposed Greenfield Project).
• Funding working capital requirements of the company.
• General corporate purposes.

Aether Industries IPO Details:

About the company:

Incorporated in 2013, Aether Industries Limited is a manufacturer of speciality chemicals. The company is the sole manufacturer in India of chemicals such as 4-(2-Methoxyethyl) Phenol (4MEP), 3-Methoxy-2-Methylbenzoyl Chloride (MMBC), Thiophene-2-Ethanol (T2E), Ortho Tolyl Benzo Nitrile (OTBN), N-Octyl-D-Glucamine, Delta-Valerolactone and Bifenthrin Alcohol.

The company has three business models: large scale manufacturing of intermediates and speciality chemicals, CRAMS (contract research and manufacturing services) and contract manufacturing.

Aether Industries has two manufacturing sites at Sachin in Surat, Gujarat. Manufacturing Facility 1 is a 3,500 square metre facility including R&D and Hydrogenation Facilities and Pilot Plant. Manufacturing Facility 2 encompasses roughly 10,500 square metres, with an installed capacity of 6,096 MT per year spread among three buildings and 16 production streams as of September 30, 2021.

As of March 31, 2022, Aether Industries Limited's product portfolio comprised over 25 products which were sold to over 34 global companies in 18 countries and to over 154 domestic companies. The company is the largest manufacturer of 4MEP, T2E, NODG and HEEP products in the world by volume.

Competitive Strengths

Differentiated portfolio of market-leading products.

Focus on R&D to leverage the core competencies of chemistry and technology.

Long-standing relationships with a diversified customer base.

Synergistic Business Models focused on Large Scale Manufacturing, CRAMS and Contract Manufacturing.

Focus on Quality, Environment, Health and Safety (QEHS).

Strong and consistent financial performance.

Experienced Promoters and Senior Management with extensive domain knowledge.

Company Financials:

For the period FY19 to FY21, the revenues, EBITDA and PAT have grown with a CAGR of 49.4 per cent, 53.5 per cent and 74.57 per cent, respectively. Financial information is summarized in the following table.

Recommendation:

From CY 2020 to CY 202 the Indian Speciality chemical market at a CAGR of 11.2 per cent, according to Frost & Sullivan.

The company is focused on the core competencies model of chemistry and technology. According to Frost & Sullivan report, chemical companies usually have a single or a couple of chemistry competencies for their entire product portfolio; however, Aether has eight chemistry competencies to use for its wide array of products, which enables it to cater to niche and advanced intermediate requirements of a wider range of end-products and applications. All these competencies have been developed in-house, which is one of the core strengths of its R&D team. Out of its 25 products, it is the only manufacturer for 7 of them in India. It’s a pure chemical play company.

In the view of Frost & Sullivan, it has been focused on developing high value products, which has resulted in the average selling price of all its products to grow by a CAGR of 6.8 per cent between Fiscal 2016 and Fiscal 2021. Its products find application in a number of therapeutic segments in the pharmaceuticals industry and also other industries like agrochemicals, material science, coatings, high performance photography, additives and oil & gas. Most of its advanced intermediates and speciality chemicals product portfolio was developed for the first time in India and constitute 100% import substitution.

One of the concerns for the company is its top 10 customers contributed approximately 55.76 per cent and 56.23 per cent for the nine months ended December 31, 2021 and Fiscal 2021, respectively.

It has three business models under which it operates: (i) large scale manufacturing of its own intermediates and speciality chemicals; (ii) CRAMS (contract research and manufacturing services) and (iii) contract/exclusive manufacturing. According to F&S, it is among the few Indian specialty chemical companies to have successfully launched these three separate business models in just 5 years into commercial manufacturing.

In the short period of 9 years of incorporation and 5 years into commercial manufacturing, it has reached revenue of over Rs 4,500 million in Fiscal 2021. It has built its business organically and has demonstrated consistent growth in terms of revenues and profitability. It is one of the fastest growing specialty chemical companies in India, growing at a CAGR of nearly 49.53 per cent between Fiscal 2019 and Fiscal 2021. On the valuation front, the asking P/E comes around 72.3 if we annualize FY22 earnings. It might appear expensive in the short run as growth stocks are being punished in current market conditions. However, in the long run, company’s prospects appear reasonable. Hence, we recommend investors to invest in the IPO for long term when it trades at discount.