Strong player in a niche market with high entry barriers

35 Pages·2016·0.54 MB·English

E mkay
India Equity Research | Speciality Chemicals
©
November 10, 2016

Initiating Coverage
Advanced Enzyme T echnologies
Your success is our success

CMP Target Price

Strong player in a niche market with Rs1,931 Rs2,760

high entry barriers
Rating Upside

BUY 42.9 %

(cid:1) Advanced Enzyme Technologies Ltd (AETL) enjoys niche position in the highest growth Change in Estimates
category of the specialty chemicals segment and is the global leader in the fast growing EPS Chg FY17E/FY18E (%) NA
enzymes market catering to human nutraceuticals. Target Price change (%) NA
(cid:1) A business model, characterized by high entry barriers with significant growth potential Previous Reco NA
that puts AETL in high growth trajectory delivering topline growth of 25%+ while strong
margins profile (EBIDTA margins at ~50%) generates strong return ratios Emkay vs Consensus
(cid:1) We believe that strong growth in end-user industry, introduction of enzymes for newer EPS Estimates
applications, geographical expansion, and deeper penetration in existing geographies will FY17E FY18E
drive AETL’s top-line while inorganic growth opportunities would spur further growth. Emkay 51.2 69.8
(cid:1) We believe that AETL will continue to enjoy premium valuations supported by its niche Consensus 50.0 63.2
position in the enzymes industry and is likely to post Sales/PAT CAGR of 27%/37% over Mean Consensus TP Rs 1,830
FY16-19E with RoCE of 43%. We assign 30x multiple to its FY19E EPS of Rs92 and
initiate coverage with a BUY recommendation and target price of Rs2,760. Stock Details
Bloomberg Code ADVENZY IN
AETL will benefit from its unique position in high growth industry
Face Value (Rs) 10
We believe that specialty enzymes is a relatively young market and offers strong growth Shares outstanding (mn) 22
potential (growing at ~8% globally) as it is witnessing increasing applications in industries like
52 Week H/L 2,377 / 1,161
pharmaceuticals, health supplements, biotechnology etc. AETL is the largest Indian enzyme
M Cap (Rs bn/USD bn) 43 / 0.65
company and ranked amongst the top 15 global companies in terms of enzyme sales. It caters
Daily Avg Volume (nos.) 351,649
to marquee customers like Sanofi India, Cipla, Ipca Laboratories, Alkem Laboratories, and
Emcure Pharmaceuticals. Daily Avg Turnover (US$ mn) 9.3

Huge potential to gain market share
Shareholding Pattern Jun '16
AETL has presence in the world’s largest market, the US (accounting for 55% to its total
Promoters 59.5%
revenues), with ~12% estimated market share in the blended other specialty enzymes space
FIIs 12.0%
and is the second largest player in the Indian market. AETL’s strong performance is driven
DIIs 14.7%
by high growth in end-user industry, geographical expansion and deeper penetration in
existing geographies along with market share gains led by increasing applications for Public and Others 13.9%
enzymes. This will lead to revenue growth of 25-30% over the near to medium term.
Price Performance
Initiate coverage with BUY
(%) 1M 3M 6M 12M
We believe that AETL will benefit from its strong presence in the high growth enzymes
Absolute 7 31 - -
industry which is protected by strong entry barriers and sticky customer profile. We estimate
Rel. to Nifty 10 35 - -
a Revenue/EBITDA/PAT CAGR of 27%/31%/37% over FY16-19E. Strong cash flow
generation (driven by PAT margins of 30-35% with potential increase in asset turnover) will
further strengthen its debt-free balance sheet. We believe AETL deserves a 40-50% valuation
premium over other specialty chemical companies, replicating valuation trend witnessed
among other companies in the global enzymes space, given its earnings CAGR of 37% over
FY16-19E with ROCE of 40%+. We assign a 30x multiple to AETL’s FY19E EPS of Rs92 and
initiate coverage with a BUY recommendation and target price of Rs2,760.
Financial Snapshot (Consolidated)
(Rs mn) FY15 FY16 FY17E FY18E FY19E
Revenue 2,231 2,938 3,823 4,793 5,969
EBITDA 905 1,376 1,875 2,427 3,111
EBITDA Margin (%) 40.6 46.8 49.0 50.6 52.1
Sneha Talreja
APAT 510 799 1,142 1,557 2,058
[email protected]
EPS (Rs) 23.4 36.7 51.2 69.8 92.2
[phone]
EPS (% chg) (31.1) 56.7 39.3 36.3 32.2
ROE (%) 27.0 32.6 32.0 30.9 31.3
Rohan Gupta
P/E (x) 82.4 52.6 37.7 27.7 20.9
[email protected]
EV/EBITDA (x) 47.2 30.9 23.0 17.3 13.0
[phone]
P/BV (x) 19.8 15.1 9.9 7.5 5.8
Source: Company, Emkay Research
Emkay Research is also available on www.emkayg lobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES. Emkay Global Financial Services Ltd.
Advanced Enzyme Technologies (ADVENZY IN) India Equity Research | Initiating Coverage

Investment Rationale
Largest domestic player in the Indian enzyme industry
AETL is the largest manufacturer and exporter of enzyme products in India. As per our estimates,
the company commands a ~12% market share in the Indian enzyme market, making it the
second largest enzyme company in India, next only to the global leader Novozymes. AETL is
also ranked amongst the top 15 global enzyme companies on the sales parameter.
Exhibit 1: AETL’s revenue mix (Rs mn) Exhibit 2: Indian enzyme demand (USD Mn)
3500 300 279
3000 250
2500
200 173
2000 1867
1500 1290 1510 1304 150 105
1000 1067 100 56
500 914 884 927 1071 50 31
650
0 0
FY12 FY13 FY14 FY15 FY16 2002 2007 2012 2017 2022
Within India Outside India India Enzyme Demand (Industrial and Specialty) in USD Million
Source: Company, Emkay Research Source: Industry, Emkay Research
Well positioned to grow in the world’s largest enzymes market
55% of AETL’s revenues come North America is the largest enzyme market in the world accounting for ~42% of the global
from the US market, which is enzyme demand. Further, enzyme demand in North America is heavily concentrated in the US,
also the largest enzyme market which alone accounts for 90% of the regional demand. Majority of AETL’s revenues (~55%)
in the world come from the US market, which also remains the key focus area for the company. The company
has launched its own branded enzyme supplements in the US market, offering healthcare
professionals and consumers a natural therapeutic alternative for preventive care and health,
using high quality systemic and digestive enzyme supplements. The segment currently accounts
for ~5% of total revenues and is expected to be one of the growth drivers for the company.
Exhibit 3: North America Enzyme Demand (USD Mn)
3310
3500
3000 2630
2500 2130
2000 1576
1500
1065
1000
500
0
2002 2007 2012 2017 2022
North America Enzyme Demand (Industrial and Specialty)

Source: Industry, Emkay Research
Immense scope for market share gain
In the US blends market of AETL is a marginal player in the global enzyme market with less than 1% market share. It’s a
roughly US$200mn, AETL’s leading player in the niche nutraceutical industry and holds ~10% market share in the other
market share stands at ~12% specialty enzyme market which provides significant scope for further market share expansion.
providing immense scope for Further, in US, the world’s biggest enzyme market, AETL’s market share is only ~1%, whereas in
growth other specialty enzymes market its share is ~22%. AETL has significant presence in the blends
market in the US, which is ~2-3x the size of other specialty segment market. AETL has a share of
~12% in an estimated US$200mn blends market and we see immense scope for further growth.
The specialty enzymes space, mainly pertaining to nutraceutical industry offers strong growth
potential and AETL through its long standing relationships is likely to reap the benefit of the
same. Further, the company is having a market share of only 1-2% in the animal feed segment
and we see it benefiting from higher growth in the Asia Pacific region and as developing countries
gather momentum in the adoption of feed enzymes.

Emkay Research | November 10, 2016 2
Advanced Enzyme Technologies (ADVENZY IN) India Equity Research | Initiating Coverage

Strong growth opportunities in sunrise industry
Newer applications like Palm oil AETL is a leading player in the niche market of enzymes catering to key user industries like
extraction and Biodiesel are healthcare and nutrition. This niche area of enzyme industry is growing at a much faster rate
likely to support company’s mainly led by discovery of newer applications like obesity management, immunity development,
growth cardiovascular health, anti-allergic applications etc. Further, the same enzymes can be used in
many industries, thus expanding the horizons of AETL.
AETL is also working on newer applications like palm oil extraction and biodiesel which will result
in its overall target market expansion. It will continue to selectively pursue areas with growth
opportunities such as development of enzymatic product solutions in biodiesel and biocatalysis,
as well as enter into the non-food based industries that are complementary to or synergistic with
its existing product portfolio. In the last few years, almost 60-70% of revenue growth was from
newer enzyme applications.
Exhibit 4: World Enzyme demand (In USD Mn) Exhibit 5: Niche others specialty enzyme market (In USD mn)
10,000 5% 5% 6% 6% 600 530
5%
8,000 4% 9,500 5% 500
4% 370
6,000 6,950 400
3%
4,000 5,130 300 255
2%
3,700 175
2,000 1% 200
2,400 97
0 0% 100
2002 2007 2012 2017 2022
0
2002 2007 2012 2017 2022
World Enzyme Demand
Other Specialty Enzymes as a % of Enzyme market Other Specialty Enzyme Demand

Source: Industry, Emkay Research Source: Industry, Emkay Research
Sticky customer base reduces the risk of volatile earnings and ensures stable
margins
Technical and specialized AETL has a typically prolonged customer lifecycle which begins with a rigorous testing process,
nature of the business and followed by the final approval of the product. The business model involves working closely with
heavy reliance on R&D operate customers in innovating and developing technologies that can be applied effectively in increasing
as an entry barrier to new the operational efficiency and improving the performance of the customers’ end products. Thus,
players in the market the technical and specialized nature of the business and heavy reliance on R&D operate as an
entry barrier to new players in the market. Further, these enzymes account for a very small
proportion of the overall cost of the product and play a key role in the performance of the end-
product. Buyers restrict switching between different suppliers, which provides better bargaining
power to suppliers and ensures stable margins.
Exhibit 6: EBITDA Margins (%)
50% 47%
43%
41% 41%
40% 36%
30%
20%
10%
0%
FY12 FY13 FY14 FY15 FY16
EBITDA Margins

Source: Company, Emkay Research

Emkay Research | November 10, 2016 3
Advanced Enzyme Technologies (ADVENZY IN) India Equity Research | Initiating Coverage

M&As presents lucrative growth opportunities; recent acquisition of JC Biotech
is just a beginning
We believe that there are significant growth opportunities through inorganic route as company
consolidates its leadership position by acquiring companies based on products, geographical
expansion or customer acquisition.
Recently in October 2016, AETL announced acquisition of 70% stake in API maker JC Biotech
With acquisition of J C Biotech,
(JCB) for a total consideration of Rs500mn. JCB makes a single product, namely API
AETL’s market share for
Serratiopeptidase, which is an anti-inflammatory enzyme and has a R&D pipeline of
Serratiopeptidase is likely to go
biopharma molecules. It has a fairly advanced technology for manufacturing algal DHA,
up from 30% to more than 80%
an Omega 3 Fatty Acid which finds wide application in human nutrition.
As of March 2016, JCB’s revenues stood at Rs390mn and PAT at Rs25mn. It’s currently
generating an EBITDA margin of 19-20% and PAT margin of ~6%. With this acquisition AETL's
margin profile is expected to improve with accretion of significant competitive advantage. We
expect AETL’s market share in Serratiopeptidase to improve from 30% currently to 80%+ (JCB
currently commands 50%+ share in the Indian market).
JCB's current debt stands at Rs170mn. AETL plans to provide long term loan to this company
AETL is open to acquisition of
(amounting to 50% of the debt) to offset its debt, while the balance 50% will be provided by the
products/ technology/R&D to
current promoters. Further, current employees and promoters will continue to stay with the
enhance its capabilities and to
company.
enter new market segments
This acquisition can further help AETL in cross selling its other products to JCB's customers. The
acquisition, to be financed through internal accruals, is expected to close latest by end of
December 2016 and be EPS accretive for AETL in FY17.
Growth will be further supported by inorganic expansions
Through acquisition of group company Cal-India in April 2011 and AST Enzymes in October
2012 AETL was able to market and sell its products in the United States. In a similar way, the
company intends to actively seek and evaluate potential acquisition targets outside group in
order to expand its presence in other markets or other growth areas. Acquisition of JCB is a
progress in this direction and we believe inorganic expansions would support company’s growth
plans. AETL is open to acquisition of products/ technology/R&D to enhance its capabilities and
to enter new market segments. It is also willing to explore partnership/out-licensing/in-licensing
to enter new geographies/products.
Earnings growth momentum to remain strong
Introduction of newer enzymes, Over FY08-16, AETL has delivered Revenue/EBITDA/PAT CAGR of 22%/37%/41%
increasing application of respectively, led by strong growth in both domestic and international operations. We expect
enzymes, geographical company’s growth momentum to continue with Revenue/ EBITDA/ PAT CAGR of 27%/31%/37%
expansions and deeper respectively over FY16-19E. The growth will be supported by introduction of newer enzymes,
penetration in current increasing application of enzymes, geographical expansions and deeper penetration in current
geography is likely to drive geographies. Further, company will continue to seek growth opportunities through inorganic
company’s growth expansions. Also, with increasing capacity utilization rate, company is expected to reap the
benefit of operating leverage with its margins increasing from 47% in FY16 to 52% in FY19E.
Exhibit 7: Revenue (Rs bn), EBITDA (Rs bn) and EBITDA margins (%) Exhibit 8: PAT (Rs mn) and PAT growth (%)
7.0 49% 51% 52% 60% 2,500 154% 200%
47%
6.0 43% 50% 150%
41% 2,000
5.0 3.8 4.8 6.0 40% 100%
4.0 2.9 3.1 30% 1,500 49% 51% 36% 32% 50%
23..00 2.4 2.2 1.4 1.9 2.4 20% 1,000 0%
1.0 1.0 0.9 10% 500 -59% -50%
201 510 758 1,142 1,557 2,058
- 0% - -100%
FY14 FY15 FY16 FY17E FY18E FY19E FY14 FY15 FY16 FY17E FY18E FY19E
Revenues EBITDA EBITDA Margins PAT PAT growth

Source: Company, Emkay Research Source: Company, Emkay Research

Emkay Research | November 10, 2016 4
Advanced Enzyme Technologies (ADVENZY IN) India Equity Research | Initiating Coverage

Improvement in margins to drive further improvement in return ratios
Return ratios are likely to Robust revenue growth and sustained margin expansion have led to gradual improvement in
witness a gradual improvement AETL’s return ratios. RoCE and RoE have witnessed gradual improvement from 11% and 16%
with ramp up of capacities and in FY08 to 39% and 33% in FY16, respectively. Going forward, we expect return ratios to witness
steady improvement in margins a gradual improvement with ramp up of capacities and steady improvement in margins. The
increased asset sweating and margin expansion will translate into higher return ratios in the
medium term.
Exhibit 9: RoCE and RoE (%)
50 45
43
40 41
39
40
30 33 32 31 31
30 28 27
20
10
0
FY14 FY15 FY16 FY17E FY18E FY19E
RoCE RoE

Source: Company, Emkay Research
Strong cash flow generation with current debt free balance sheet only
strengthens company’s positioning
Out of the Rs500mn raised AETL has gradually reduced its debt over the years that has led to improvement in its debt-equity
though the recent IPO, the ratio from 2.2x in FY12 to 0.4x in FY16. Further, out of the Rs500mn raised though the recent
company plans to utilize Rs400- IPO, the company plans to utilize Rs400-500mn for repayment of debt. This will lead to further
500mn for repayment of debt decline in interest cost and strengthen the company’s balance sheet.
Moreover, there is no major foreseeable capex requirement in the near term, as the company is
currently operating at 40-45% utilization level which leaves immense scope for business
expansion. Further, capacity of its new Indore facility can be doubled at a very small amount of
Rs500mn. This can help the company generate revenues of around Rs10bn from Rs2.9bn
currently. Thus, with minimum capex and healthy revenue growth, company is expected to
generate healthy cash flows.
Exhibit 10: Debt (Rs mn) and Debt-equity ratio (x) Exhibit 11: Net operating cash flows (Rs mn)
2,500 2.5 2,500
2,086
1,974
2,000 1,849 2.0 2,000
2.2 1,669
1,516
1,500 1.5 1,500
1,151
1,014 1,027
888
1,000 1.0 1,000
1.1 1.0 533 383 486 411 433 539
500 283 0.5 500
0.1
0.5 0.1 0.0
- 0.4 0.0 -
FY12 FY13 FY14 FY15 FY16 FY17EFY18EFY19E FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Total Debt Debt/Equity Net operating cash flows

Source: Company, Emkay Research Source: Company, Emkay Research

Emkay Research | November 10, 2016 5
Advanced Enzyme Technologies (ADVENZY IN) India Equity Research | Initiating Coverage

Valuations – Quality demands premium
Enzymes is one of the youngest and fastest growing categories
Enzymes industry is one of the Enzymes are a part of the biotechnology industry and is a fast growing sector in the international
youngest and fastest growing economy with the current trends in the sector showing tremendous growth opportunities. The
industries globally at 6%+ sector is expected to continue with its strong growth momentum as consumers are becoming
growth with rapid increase in more educated of the benefits of enzymes. Further, with health care coverage getting more
newer applications expensive, people are turning increasingly health conscious to avert medication expenses.
Newer applications are driving growth in this industry as enzymes are now being used in products
for more than just digestion. These include products in segments like anti-inflammation, immune
support building and medical aids in breaking down gluten within foods to reduce digestive side
effects (i.e. bloating).
Exhibit 12: Growth rate for different specialty chemical categories
Global Market Size (USD Bn) CAGR Growth
Industry Category
2009 2014 2019E (FY14-19E)
Agrochemicals Matured 43 54.5 71.3 5.5%
Flavours and Fragrances Emerging 20 25.6 33.6 5.6%
Dyes and Pigments Matured 23 27.8 33.9 4.0%
Surfactants Matured 24.4 30.4 38.8 5.0%
Polymer Addictives Growing 37.4 43.4 55.2 5.0%
Personal Care Ingredients Growing 2.2 2.7 3.6 5.7%
Construction Chemicals Emerging 12.8 17.5 24 6.5%
Water Chemicals Emerging 19.1 25.1 33.3 5.8%
Textile Chemicals Matured 17.2 20.3 24.3 3.6%
Enzymes Emerging 4.2 5.8 7.9 6.3%
Other Specialty Enzymes Market
(AETL derives majority of its Emerging 0.2 0.3 0.4 7.6%
revenues from this segment)
Source: Industry, Emkay Research
Note: For calculating the market size of Enzymes and Others Specialty Enzymes market, we have
extrapolated numbers from Freedonia report to arrive at 2009, 2014
We must consider the complex nature of the industry while valuing the company
Strong business model In our view, the company enjoys strong entry barriers and benefits from high degree of customer
supported by entry barriers, high stickiness. This is also reflected in its strong margin profile. The industry is also complex in nature
level of customer stickiness, as it goes through strict and stringent regulatory approvals like in the case of pharma or food
strong margins, healthy return industry. The company supplies critical materials used in these industries. These high-value/low-
ratios and high process and volume products contribute a small percentage of the total cost of the end-product but enjoy a
knowledge-dependency high level of client stickiness.
Exhibit 13: Comparative Industry analysis
Flavours and
Parameters Agrochemicals Specialty Chemicals Pharma - CRAMS Enzymes Industry
fragrance
Entry Barriers Very strong Very strong Very strong Very strong Very strong
Low in fragrance and
Regulatory approvals High Low High High
high in flavous
Toll / Toll / Toll /
Customer profile Toll manufacturers Toll manufacturers
open arrangements open arrangements open arrangements
Customer stickiness Very high Very high Very high Very high Very high
Fixed arrangements Fixed arrangements Fixed arrangements Fixed arrangements
End product pricing Fixed arrangements
with pass on clause with pass on clause with pass on clause with pass on clause
1 to 3 suppliers with 2 to 4 suppliers with 2 to 4 suppliers with 1 to 3 suppliers with 2 to 4 suppliers with
No of suppliers for lead supplier catering key supplier catering key supplier catering lead supplier catering lead supplier catering
same product 70-80% of 85-90% of 85-90% of 70-80% of 70-80% of
requirement requirement requirement requirement requirement
Source: Industry, Emkay Research

Emkay Research | November 10, 2016 6
Advanced Enzyme Technologies (ADVENZY IN) India Equity Research | Initiating Coverage

Globally enzymes players enjoy 40-50% premium over other specialty chemical
Novozymes shares trade at a
premium of 20-22% over other Our analysis of global players in enzymes markets (there are very few focused enzymes players
global specialty chemical globally) suggests that these companies enjoy valuation premium of 40-50% over other specialty
players chemical players. This premium is justified on the ground of unique space and high growth
potential in this segment along with superior return ratios.
Exhibit 14: Global peer comparison
Peer Comparison Mcap EPS P/E (x) CAGR (2016-18E) EBITDA RoE %
Currency CMP margins
Company (mn) 2016E 2017E 2018E 2016E 2017E 2018E EPS EBITDA (2016E) (2016E)
Specialty Chemical Companies
DSM EUR 57.9 10,512 3.0 3.6 4.0 19.2 16.3 14.5 15% 8% 11% 10.0
Du Pont USD 70.3 61,097 3.2 3.7 4.2 21.7 18.8 16.7 14% 10% 18% 29.8
BASF SE (US) EUR 87.5 80,404 4.7 4.0 3.4 17.0 19.9 23.9 -16% n.a 15% 13.9
Dow Chemicals (US) USD 53.9 60,409 3.6 4.0 4.2 14.8 13.4 12.8 8% 6% 17% 17.3
Syngenta USD 78.6 36,379 3.4 3.8 4.2 23.3 20.6 18.6 12% 10% 18% 17.1
Bayer AG (Xetra) EUR 94.4 78,072 7.4 8.0 8.7 12.7 11.8 10.9 8% 6% 21% 22.1
Average 18.1 16.8 16.2 17% 18.4

Enzyme Companies
Chr Hansen EUR 384.1 50,645 1.5 1.7 1.9 35.5 30.9 27.5 14% 9% 33% 29.5
Novozymes (Germany) DKK 33.1 10,202 10.1 10.6 11.3 24.2 23.0 21.6 6% 5% 36% 25.1
Average 29.9 26.9 24.5 34% 27.3
Source: Bloomberg, Emkay Research
AETL will continue to enjoy scarcity premium
We believe that similar to the global players in enzymes market, AETL to also enjoy premium
Advanced Enzymes will
valuation over other speciality chemicals players. We believe, the company’s business model is
continue to enjoy scarcity
supported by strong entry barriers, high level of customer stickiness, strong margins, healthy
premium supported by strong
return ratios and high process and knowledge-dependency and hence it should enjoy a valuation
business model with high entry
premium over other specialty chemical companies. The other niche player in Indian flavors and
barriers
fragrance industry – S H Kelkar also trades at a premium multiple of 33x its FY18E EPS.
Exhibit 15: Valuation comparison with domestic specialty chemical companies
Specialty Chemical CMP M cap Sales CAGR PAT CAGR EBITDA RoE EPS P/E
Reco margins
Companies (Rs) (Rs Bn) (FY16-18E) (FY16-18E) (FY16) (FY16) FY16 FY17E FY18E FY16 FY17E FY18E
Aarti Industries 723 60 NR 15% 22% 20.6 21.9 31 38 45 23.4 18.9 15.9
Atul Ltd 2,285 68 NR 12% 17% 18.1 23.3 91 106 124 25.2 21.6 18.5
Navin Fluorine 2,490 24 Accumulate 14% 44% 15.7 11.9 12 18 26 28.9 22.4 16.4
S H Kelkar 306 44 NR 15% 33% 16.8 12.6 6 8 9 52.3 40.1 33.3
SRF 1,772 102 Accumulate 23% 21% 17.1 28.4 8 7 11 23.0 20.0 17.0
Vinati Organics 581 30 NR 16% 13% 32.8 23.3 26 27 33 22.8 21.5 18.0
Advanced Enzymes 2,015 45 Buy 28% 39% 46.8 32.6 37 51 70 52.6 37.7 27.7
Source: Company, Bloomberg, Emkay Research
Initiate coverage with BUY recommendation as growth prospects remain strong
On back of its higher market share in human nutraceuticals and presence in the fast growing
markets like US and significantly high return ratios (RoCE of 40%+) coupled with strong earnings
growth (38% CAGR in FY16-19E) will keep the valuation multiple high. We assign a P/E multiple
of 30xFY19 estimated EPS of Rs 92 to arrive at price target of Rs 2760 and initiate coverage
with BUY.
Inorganic growth opportunities, new launch of any blockbuster products like palm oil extraction
and biodiesel, which are not factored in our estimates offers additional upside to our estimates.

Emkay Research | November 10, 2016 7
Advanced Enzyme Technologies (ADVENZY IN) India Equity Research | Initiating Coverage

AETL is among the few pure enzyme players in the world
Global enzyme demand is catered to by less than 20 major producers and 400 minor suppliers.
Nearly 75% of the total enzymes
According to industry reports, nearly 75% of the total enzymes are produced by the top three
are produced by the top three
enzyme companies, ie Denmark-based Novozymes, US-based DuPont (through the May 2011
enzyme companies, ie
acquisition of Denmark-based Danisco) and Switzerland-based Roche. The remaining market is
Denmark-based Novozymes,
mostly covered by specialized players present in niche enzyme spaces. AETL figures in this
US-based DuPont (through the
category as a leading player in the niche nutraceutical market. The other major players which
May 2011 acquisition of
are present only in enzymes market are Novozymes a Denmark based company mainly present
Denmark-based Danisco) and
in industrial enzymes market, and Amano a Japan based company present in segments like
Switzerland-based Roche
pharmaceuticals and dietary supplements.
Exhibit 16: Major Global Competitors
Company Location Established year Major Enzyme products About company (Listed/Unlisted)
House hold care, food and beverage, Pure enzyme company with major presence in
Bagsvaerd,
Novozymes 1921 bioenergy, Feed and other Technique industrial enzyme segment. The company is
Denmark
enzymes, biopharmaceuticals listed on the NASDAQ OMX Nordic exchange
Genencor revenues are part of DuPont’s (listed
Genencor Copenhagen, Biofuels, food, animal nutrition, textiles,
1982 company) Industrial Biosciences segment
(Now Dupont) Denmark Detergents
which accounts for ~4% of revenues.
Listed company with strong presence in Animal
Delft, the Animal nutrition, food ingredients, personal
DSM 1952 Feed segment, apart from presence in Human
Netherlands care, pharmaceutical
Nutrition & Health and Personal Care market.
Strong biopharmaceuticals company and a
Grenzacherstrabe,
Roche 1896 Diagnostics, pharmaceuticals leading supplier of in-vitro diagnostics and an
Switzerland
innovator across major disease areas.
Pharmaceuticals, dietary supplement,
Pure unlisted enzyme company with major
Amano Nagoya, Japan 1899 biotransformation, diagnostics, food
presence in industrial enzyme segment.
processing
Part of Associated British Foods plc (ABF)
Feldbergstrasse, Feed additives, food, textile, detergent, pulp which is listed on the London Stock Exchange.
AB Enzymes 1907
Germany & paper, biofuels AB Enzymes is a part of ABF’s Ingredients
division (accounting for ~10% of revenues)
Ludwigshafen, Feed additives, pharmaceuticals, Large chemical company having small
BASF 1865
Germany detergents presence in enzymes industry.
Listed company with its Cultures & Enzymes
Chr. Hansen Horsholm, Denmark 1870s Enzymes for cheese
division accounting for ~60% of revenues.
Source: Company, Industry, Emkay Research
Exhibit 17: Domestic competitors
Company Product category
Listed company which used to be India's largest enzymes company. However, company has divested its enzymes business
Biocon
for USD115mn.
Unlisted company having presence in versatile industries like Textile, Leather, Baking, Alcohol, Brewing, Detergent, Starch,
Maps Enzymes
Animal feed and Pulp & Paper.
Lumis Enzymes Unlisted company having presence in food, feed and textile based enzymes.
Unlisted company having presence in Specialty Chemicals, Textile Chemicals, Textile and Non-Textile Enzymes, Laundry
Rossari Biotech Ltd
Chemicals, Construction Chemicals, AHN and Commodity Chemicals
Source: Company, Industry, Emkay Research

Emkay Research | November 10, 2016 8
Advanced Enzyme Technologies (ADVENZY IN) India Equity Research | Initiating Coverage

Company background
AETL was incorporated in 1989 as Advanced Biochemicals Pvt Ltd. The company started its first
fermentation facility at Sinnar, Maharashtra in 2011 and then expanded its presence in the US
market by taking over Cal-India Foods Intl. The company has also won various awards like:
(cid:1)

Bio Excellence Award in Industrial Biotech by Govt. of Karnataka in 2010
(cid:1)

Emerging India Awards in Life Science - Pharmaceuticals & Chemicals by ICICI Business
Banking & CNBC TV18 in 2010
(cid:1)

Fastest Growing Mid-Sized Business Award by Inc. India in 2013
(cid:1)

Bio Excellence Awards in Industrial Biotech by Govt. of Karnataka in 2014
AETL, a leading player in the niche market of enzymes
Typically, customers have long AETL is a leading player in the niche market of enzymes. These enzymes find application in key
term volume requirements, user industries like healthcare and nutrition and require their manufacturers to follow stringent
which ensures low volatility in quality with consistency standards. The enzymes industry endures strong entry barriers, leading
margins to a sticky customer profile. Customer approval systems and processes are highly elongated as
customers lay paramount emphasis on (i) Quality of the product; ie products should exactly meet
specifications, and (ii) Consistency of order delivery. The long approval processes lead to a high
level of customer stickiness. Typically, customers have long term volume requirements, which
ensures low volatility in margins and the same is clearly evident in the margin profile of AETL.
Exhibit 18: Enzymes and its uses
Enzymes Usage of Enzymes
Enzymes are natural protein molecules Enzymes

Produced by all living organisms

Industrial Enzymes Specialty Enzymes
Function as specialized catalysts and
High volume, low Low volume, high
accelerate the pace of biochemical
value - added value - added
reactions
application application

Source: Company, Industry, Emkay Research
Exhibit 19: Revenue mix for Advanced Enzymes

{88%} {12%}
Fy2016 Revenue: INR 2,574 m n FY 2016 Revenue: INR 364 mn
Healthcare & Nutrition Bio-processing
Human healthcare Food Non-food
Animal Nutrition
& Nutrition processing processing
Enables animals to Helps customers to Improve efficiency of
Used by customers as
maximize the nutrients improve quality of their industrial process
active ingredient in
they absorb products Saves energy, water &
Pharmaceuticals and
Reduce feed cost Optimize resources raw material
Nutraceuticals
Minimize animal waste Produce higher yields & Reduce waste &
formulations
production reduce cost effluent load

Global clientele of more than 700 customers De-risked business model with top 10
spanning presence across customers having ~42% share of
50 countries total revenues

Source: Company, Emkay Research

Emkay Research | November 10, 2016 9
Advanced Enzyme Technologies (ADVENZY IN) India Equity Research | Initiating Coverage

Present in full spectrum of manufacturing enzymes
AETL is catering to various AETL produces value-added enzymes from all four existing natural sources: plant, fungal, animal
verticals and end-user and bacterial. The company has a diversified product portfolio catering to various verticals and
industries with more than 400 end-user industries with more than 400 proprietary enzyme products developed from 60
proprietary enzyme products enzymes. The company offers these products to more than 700 customers, spanning presence
developed from 60 enzymes across 50 countries worldwide. AETL’s vast customer base and broad product portfolio helps the
company to mitigate the risk of concentration on a single industry, product or customer.
A well-diversified product portfolio also helps AETL to enjoy better margins, as it benefits from
product and process integration. The company’s large customer base, both domestic and
globally, reflects its reach and penetration, as well as its ability to cater to needs of diverse
industries, which in turn should help boost its growth going forward.
Its process driven production facility benefits from integrated operations
AETL’s operations are The company’s aggregate fermentation capacity is 360 cubic meters. Further, the manufacturing
integrated, with presence facilities are largely process-driven and not based on a particular product. This gives the
across the enzyme value chain company flexibility to manufacture different types of enzyme products with different batch sizes,
from R&D, commercial-scale thereby resulting in optimum utilization of production capabilities. Further, the company’s
manufacturing, to marketing of operations are integrated, with presence across the enzyme value chain from R&D, commercial-
enzyme products and scale manufacturing of enzymes (including seed preparation, fermentation, filtration and
customized enzyme solutions formulation processes), to marketing of enzyme products and developing customized enzyme
solutions. This makes AETL one of the few enzyme companies in the country having presence
across the industry value chain. The integration enables the company to be cost-effective vis-à-
vis competition, and helps ensure end-to-end quality control, resulting in superior products.
Exhibit 20: Production facilities
Unit No & Location Facilities Key Products Manufactured Capacity
India
Fermentation, Recovery & Serratiopeptidase, Cellulase, Xylanase, Lipase, Fungal Amylase,
Unit I - Nasik 120 cubic meters
Formulation Pectinase, Protease, Lipase, Beta Glucanase, Lactase
Unit II - Nasik Extraction and Recovery Papain, Bile salts 36 metric tons p.a.
Fermentation, Recovery & Serratiopeptidase, Cellulase, Xylanase, Lipase, Fungal Amylase,
Unit II - Indore 240 cubic meters
Formulation Pectinase, Protease, Lipase, Beta Glucanase, Lactase
Blending, Mixing and
Unit IV - Thane Biograin Series, Aciplex Series 2,000 metric tons p.a.
Formulation
California
Blending, Mixing and
Unit I & II - SEB, California Custom Enzyme Blends, Lactase, Peptizyme, Xylanase 6,500 metric tons p.a
Formulation
Source: Company, Emkay Research
R&D focus with thrust on product innovation
AETL is competing on the basis AETL is a knowledge-based company, competing on the basis of R&D capabilities and more
of R&D capabilities and more than two decades of fermentation experience in the production of enzymes. Company’s R&D
than two decades of team consists of more than 55 members comprising of scientists, microbiologists, engineers,
fermentation experience in the food technologists, biotechnologists etc. The company has four R&D facilities, of which, two are
production of enzymes. located at Thane, and one each at Sinnar and Chino, California.
Exhibit 21: R&D spend
1670 9.0%
1470 7.9% 7.9%
8.0%
1270 7.3%
1070 7.0%
6.2%
870 6.0% 5.7% 5.8% 6.0% 5.9%
670 6.0%
470
5.0%
270
599 812 1070 1113 1130 1416 1358 1259 1391
70 4.0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
R & D Spend (Rs mn) R & D spend as a % of revenues

Source: Company, Emkay Research

Emkay Research | November 10, 2016 10