Ami Organics Ltd: Expect returns in the medium term

Ami Organics Limited (AOL) is tapping the capital market with its fresh issue of Rs200 crore and an offer for sale of 60,59,600 shares in a price band of Rs603-610. The company had earlier completed allocation to anchor investors. The company allotted 28,01,485 shares to 15 anchor investors comprising 20 entities at Rs 610. The issue opens on Wednesday the 1st of September and closes on Friday the 3rd of September.

The highest allocation was made to State Bank of India (SBI), which was allotted 4,09,848 shares or 14.63 per cent of the anchor book to two entities. This effectively meant that the top seven investors were allotted 64.38 per cent of the anchor book.

The company is into manufacturing of pharma intermediates, speciality chemicals and other products where the revenue breakup is 88 per cent, 5 per cent and 7 per cent respectively for the year ended March 2021. It has three manufacturing facilities with a total capacity of 6,060 tons. Of this capacity, 3600 tons is from the newly acquired slump sale from Gujarat Organics. The plants are located in Sachin near Surat in Gujrat of Ami Organics while the two plants of Gujarat Organics are located in Ankleshwar and Jhagadia, both in Gujrat.

The company Ami Organics reported revenues of Rs340.6 crore for the year ended March 2021. This is without including the Rs 106 crores of revenue for the slump sale of Gujarat Organics. The company has 52 per cent of revenues from exports which has been hovering around the 50 per cent level. The net profit was Rs 54 crores and PAT margins were a healthy 15.9 per cent. They have grown significantly from 9.8 per cent to 11.5 per cent and now to 15.9 per cent over the last two years. Looking at the growth prospects and the advantage of new capacity which has been added since the acquisition, this would move up on a stand-alone basis and also on a consolidated basis going forward.

Ami Organics is a R&D driven, manufacturer of speciality chemicals and has a large portfolio of products which it has been commercialising on a yearly basis. The margins in such products are higher and this ensures that the companies' margins have been increasing on a steady basis. The capacity utilisation of Ami Organics is around 60-65 per cent and that of Gujarat Organics substantially lower at around 40 per cent. This offers substantial growth opportunities for the company going public and benefits of this would be visible in the current year itself.

The company has taken a loan of Rs65 crore to acquire the unit which was done at a total price of Rs 93 crores. The object of the issue is to repay debt of Rs 140 crores and fund capex of Rs 90 crores. The company had done a pre-IPO placement of Rs 100 crores and allotted shares at the lower price band of Rs 603 to four investors. This has effectively helped the company in discovering the price for this issue and sort of justifying the same.

The EPS of the company was Rs17.14 for the year ended March 2021. Based on this EPS, the PE band for the issue is 35.18-35.59 which seems lower than the competitors mentioned. The company has mentioned its peers as Aarti Industries, Hikal Limited, Valiant Organics, Vinati Organics, Neuland Organics and Atul Limited. On the comparison front, all the competitors mentioned have revenues which are significantly higher than Ami Organics. This would remain the same even if one were to consolidate the results of Gujarat Organics with Ami Organics.

The company scores on the fact that they have a product portfolio and pipeline going forward and have now acquired a capacity which makes them effectively 2.5 times bigger than their existing capacity in a chemical zone.

There is a buzz about the company and it is expected to do well on listing. Grey market premiums are healthy and they currently discount the possible oversubscription by HNI's at over 100-120 times. Considering the prospects of speciality chemical manufacturers, it makes sense to apply for the issue for listing pop as well as returns in the medium term.

The cause for concern would, however, be the allotment as the retail portion would require just 1.36 lakh applications to be subscribed one time. Taking a conservative number of 20 lakh applications it would be subscribed between 14 and 15 times at the base.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)