Equity Research: Aether Industries Ltd.

Summary

Aether Industries Ltd. looks strong for an up move of more than 28% from its CMP with a CAGR growth of 42% by FY24.

Aether Industries Ltd has a technology-oriented business model and it sells innovations in chemistries and technologies. Competencies in eight chemistries and eight technologies has enabled the company to successfully build all three of its business verticals—large-scale manufacturing, contract manufacturing and contract research and manufacturing services (CRAMS)—in less than six years of operation. The company is more than doubling its manufacturing capacity by FY24 end. Augmentation of capacity will not only allow it to fulfil the demand of the existing and potential customers for existing products, but also provide an opportunity to launch new products. It is tripling its research and development (R&D) infrastructure and strengthening its team size. Capacity addition and strengthening of R&D infrastructure will support its growth pace. Constant focus on research and development is the key success factor in a technology- oriented business model. Research & development is the core strength of Aether Industries. The company’s business model requires it to launch products regularly and continuously add competencies. In order to achieve this, it has to invest in R&D infrastructure. The company’s promoters strive hard to make sure that Aether remains a research driven organisation. Aether is expanding its R&D infrastructure and team members. It has already expanded number of fume hoods from 18 to 30, and is planning to expand further to 55.

Expansion in its R&D infrastructure will help increase the company’s products and add competencies. The company is focused on and expanding its competencies. Currently, it is working on metallic fluorination chemistry and organolithium chemistry, apart from developing other competencies and technologies. The company has a strong product pipeline for its large-scale manufacturing and is also working on a number of projects in CRAMS. The company has the vision to develop leadership within the organisation. The delegation is very strong from the promoters. There are 5-6 senior scientists who handle individual projects or assignments. It selects products that can be manufactured by using its core competencies, that should be made first time in India, and one that would generate a minimum revenue of INR 500mn at maturity with market leading positions. The company has launched 23 products in its large-scale manufacturing business. The uniqueness of the company’s products is that all of these products are developed inhouse. Reactors for these are conceptualised, designed, and constructed inhouse. Moreover, the company makes its own catalyst for fixed bed continuous flow reactors. Thus, Aether controls the primary technologies behind the products it manufactures.

Leader in its domain:

In the eight major products that contributed 75% to the revenue in FY22, Aether is a market leader globally for four products and the second-largest producer globally for two products. The company has achieved these market positions by developing differentiated processes with the use of its core competencies of chemistry and technology. The market opportunity for eight of their major products is INR 45.4bn in FY24. We believe, owing to its market leadership position in these products, the company is well-positioned to capitalise on market opportunities. With a loyal customer base of over 188 multinational, regional and domestic pharmaceutical, agrochemical, material science, oil & gas and textile companies. Top-20 customers contributed ~73% to the total revenue in FY22 having a relationship in excess of five years with 70% of customers. These enduring customer relationships have helped Aether expand its product offerings and geographic reach. 

Diversified Customer Base:

The company has a diversified customer base. It caters to the demand of pharmaceuticals, agrochemicals, material science, oil & gas, coatings and food additives industries. Instead of focusing on products, it focuses on chemistries and technologies. This helps it fulfil requirements for a wide range of industries. Grignard chemistry is one of the core competencies of Aether. The company carries out Grignard reactions in a continuous reactor. This enables it to handle complex Grignards on a very large scale. The company uses complex Grignard chemistry with 20MTPD of Grignard reaction. The average molecular weight of Grignard used by Aether is more than 205. 

Capex is under process:

Aether currently has two sites at Sachin in Surat. The manufacturing facility 1 includes the company’s R&D facilities, analytical sciences, pilot plant, CRAMS facility and hydrogenation facility. The manufacturing facility 2 acts as a large-scale manufacturing facility with an installed capacity of 6,100 MT per annum. In order to address the growing demand of its existing customers and to meet requirements of new customers, the company is expanding its manufacturing capacities for existing products. It also intends to add manufacturing capacities for its new product line that it is in the process of developing and commercialising.  Aether commenced construction of a new manufacturing facility at a third site near its existing manufacturing facilities in 2021. This new facility is proposed to host four streams for production of new speciality chemicals and intermediates, these products have applications in pharmaceutical, agrochemical and material science industries.

Increasing Product Base:

Aether’s current product portfolio comprises over 25 products. These products are advanced intermediates and speciality chemicals, which are n-1 to n-6 molecules, where n is the final product. They find application in a number of therapeutic segments in the pharmaceuticals industry like hypertension, anti-platelet, anti-psychotic, anti- histamine and non-steroidal anti-inflammatory drugs. The company’s products also find application in various other industries like agrochemicals, material science, coatings, high-performance photography, additives and oil & gas. The company is also looking to diversify into additional business segments. It is actively considering the advanced organic silicone products market, which lends itself into high-end high-value applications in material sciences, coatings, advanced electronics and other similar applications. The company has emerged as one the greatest competitions and threats to the Chinese specialty chemical companies for these products and the Chinese customers are dependent on Aether for supplying these products. 

Strong Clientele relation with Pharma Companies:

Indian pharmaceutical companies like Aarti Drugs Ltd, Alembic Pharmaceuticals Ltd, Atul Bioscience Ltd, Cadila Healthcare Ltd, CTX Lifesciences Pvt Ltd, Divis Laboratories Ltd, Dr. Reddy’s Laboratories Ltd, Granules India Ltd, Hetero Drugs Ltd, IOL Chemicals, Ind-Swift Laboratories Ltd, IPCA Laboratories Ltd, Laurus Labs Ltd, Lupin Ltd, Mankind Pharma, Neogen Chemcials Ltd and MSN Laboratories Private Ltd.  Global generic pharmaceutical companies like Moehs Iberica SL (Spain), Microsin SRL (Romania) and Dr. Reddy’s Laboratories (Mexico) are strong client of Aether Industries.

Aether Business Segment:

(i) Speciality chemicals and intermediates:

Aether specialises in speciality chemicals and advanced intermediate products based on an intricate marriage of complex chemistry and technology core competencies. The company’s focus on core competencies also helps it mitigate risk because its business strategy and R&D are not targeted to any specific product, customer, region, or industry. 

(ii) Contract Research and Manufacturing Services (CRAMS):

The CRAMS business includes services that customers outsource to the company and Includes, Contract research, Pilot scale-up services, Contract manufacturing, Full time equivalent (FTE) services, where one or more of the company’s employees work full-time on the project such as Technology development; and Process development and optimisation. CRAMS customers work jointly with the company’s scientists and engineers, and the company executes their projects in its R&D facilities, analytical sciences laboratories, and its pilot plant. Molecules developed in the CRAMS business have the potential to convert into regular commercial supplies and become large-scale manufacturing products for the company. 

Financials:

Valuation:

Aether’s revenue would grow at 42% CAGR over FY22-24E to INR 17.5bn, owing to more than tripling of its capacity by FY24 end and capacity ramp-up. At the same time, EBITDA CAGR would be ahead of revenue growth at 52%, due to favourable change in the product mix and operating leverage. We expect an upmove in Aether's price by 28% from its CMP of Rs.968.