Aether Industries
Aether Industries is coming out with a 100% book building; initial public offering (IPO) of 1,29,81,475 shares of Rs 10 each in a price band Rs 610-642 per equity share.
Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
The issue will open for subscription on May 24, 2022 and will close on May 26, 2022.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 61 times of its face value on the lower side and 64.20 times on the higher side.
Book running lead managers to the issue HDFC Bank and Axis Bank.
Compliance Officer for the issue is Chitrarth Rajan Parghi.
Profile of the company
Aether Industries is a speciality chemical manufacturer in India focused on producing advanced intermediates and speciality chemicals involving complex and differentiated chemistry and technology core competencies. Its business was started in 2013 with a vision to create a niche in the global chemical industry with a creative approach towards chemistry, technology and systems that would lead to sustainable growth. In the first phase of its development through Fiscal 2017, it focused on building its team and infrastructure and on its R&D centred around building its core competencies. Its revenue generation operations commenced with its second phase in Fiscal 2017. It is one of the fastest growing specialty chemical companies in India, growing at a CAGR of nearly 49.5% between Fiscal 2019 and Fiscal 2021.
The company is focused on the core competencies model of chemistry and technology. It has three business models under which it operate: (i) large scale manufacturing of its own intermediates and speciality chemicals; (ii) contract research and manufacturing services (CRAMS) and (iii) contract/exclusive manufacturing. It has a nuanced criteria for choosing its products based on their chemical complexity, niche applications, limited competition, scalability and commercial potential. Using these criteria, it developed, and continue to develop, advanced intermediates and speciality chemicals products having applications in the pharmaceutical, agrochemicals, material science, coatings, high performance photography, additives and oil & gas segments of the chemicals industry.
It specializes in products based on an intricate marriage of complex chemistry and technology core competencies. Examples of its chemistry core competencies include Grignards, organolithium and other organometallic chemistry, ethylene oxide and isobutylene chemistry, hydrogenation, catalysis (homogeneous /heterogeneous), cross coupling chemistry and metathesis/polymerization chemistry. Examples of its technology core competencies include continuous reaction technology, high pressure reaction technology, fixed bed reaction technology, distributed control system (DCS) process automation and high vacuum distillation technology (wiped film/short path). By its focus on core competencies, it has have developed a chemistry and technology oriented sales vision, as compared to a product and industry oriented sales vision.
Proceed is being used for:
Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company.
Funding capital expenditure requirements for its manufacturing facility (Proposed Greenfield Project).
Funding working capital requirements of the company.
General corporate purposes.
Industry overview
The Indian chemicals industry was valued at $186 billion, representing approximately 4% of the value of the global chemicals industry. According to the F&S Report, the value of the Indian chemicals industry is expected to grow at a CAGR of 12.2% from $186 billion in 2020 to $330 billion in 2025. According to the F&S Report, in fiscal 2020, the Indian chemical industry contributed approximately 6.6% of the national gross domestic product and accounted for 15-17% of value of the India’s manufacturing sector. The value of the commodity chemicals segment and the specialty chemicals segment accounted for approximately 46% and 47% of the Indian chemicals industry, respectively. The growth rate of the Indian specialty chemicals segment in 2015-2020 was higher than the growth rate of the Indian commodity chemicals (10.4% vs. 8.7%). From 2020 to 2015, the Indian specialty chemicals segment is expected to grow at a CAGR of 11.2%.
The Indian chemicals industry has increased its capital expenditure over the past decade in order to be well equipped to capture future opportunities. According to the F&S Report, Rs 95 billion was spent in fiscal 2020 by the 30 leading chemical companies in India on capital expenditure, as compared to Rs 39 billion in fiscal 2010. In calendar year 2018, India’s chemicals sector attributed 23.3% of its profit after tax to capital expenditure, whereas China’s chemicals sector attributed 32.6 %. All other countries in the world attributed less than one-fifth of its profit after tax to capital expenditure in calendar year 2018. Capital expenditures are spent for capacity augmentation and/or product development by these leading chemicals companies.
Pros and strengths
Differentiated portfolio of market-leading products: The company is focused on producing advanced intermediates and speciality chemicals involving complex and differentiated chemistry and technology core competencies. Its products have applications across a wide spectrum of uses in the pharmaceutical, agrochemicals, material science, coatings, high performance photography, additives and oil & gas industries. As of March 31, 2022, its product portfolio comprised over 25 products which were marketed to 34 global customers in 18 countries and to 154 domestic customers. It have achieved market positions by developing differentiated processes with the use of its core competencies of chemistry and technology, which helped it to optimize the use of conventional raw materials, improve atom economy, enhance yields, reduce effluent discharge, and increase cost competitiveness. It was the sole manufacturer in India of 4MEP, MMBC, T2E, OTBN, NODG, DVL and Bifenthrin Alcohol.
Focused R&D to leverage core competencies of chemistry and technology: The foundation of the company is its in-house research and development capabilities. Its strategic investments in R&D have been critical to its success and a differentiating factor for it to attain leading market positions for certain products. Based on the technical expertise it has developed over the years, it is able to carry out innovative processes at global scale, which is difficult to replicate, and creates significant barriers for new entrants. Its chemistry and technology core competencies and all of its products have been developed by its own R&D team, scaled up in its Pilot Plant, and launched into production with in-house design and engineering. Its in-house development (without the support from any clients for R&D) showcases its innovation and research strength, and its expertise in a large range of chemistries and technologies has allowed it to support a number of end use industries. Its R&D Facilities are dedicated to the development of its pipeline and next generation products as well as to its CRAMS customers. As of March 31, 2022, it had a specialized R&D team of 164 scientists and engineers including 92 scientists (with PhDs or Master of Science degrees) and 72 chemical engineers. Its R&D laboratories are fitted with modern synthesis equipment including fume hoods, lab scale continuous and flow reactors and advanced separation equipment.
Long standing relationships with diversified customer base: Of the company’s revenue from operations in the nine months ended December 31, 2021 and Fiscal 2021, its largest customer contributed approximately 13.52% and 19.38%, respectively; its top 10 customers contributed approximately 55.76% and 56.23%, respectively; and its top 20 customers contributed 72.93% and 73.50%, respectively. It enjoy relationships in excess of 5 years with 7 out of its top ten customers. Its long-term relationships and ongoing active engagements with customers also allow it to plan its capital expenditure, enhance its ability to benefit from increasing economies of scale with stronger purchasing power for raw materials and a lower cost base. These enduring customer relationships also have helped it expand its product offerings and geographic reach. Its customer engagements are dependent on it delivering quality products consistently. Its potential customers may require considerable amounts of time to approve it as suppliers to ensure that all their quality controls are met and that it meet all their requirements across a variety of jurisdictions and multiple regulators.
Focus on quality, environment, health and safety: Maintaining a high standard of quality for its products is critical to its brand and continued growth. Across its manufacturing facilities, it has put in place quality systems that cover all areas of its business processes from manufacturing, supply chain to product delivery to ensure consistent quality, efficacy and safety of products. Its products adhere to global quality standards. Its products go through various quality checks at various stages including random sampling check and quality check internally. Many of its key customers have audited and approved its facilities and manufacturing processes in the past, which ensures that the regulator and its customers are able to confirm the continuance of quality of facility and processes. In the past three fiscal years, its facilities were audited 57 times by 43 customers or their external consultants. In addition, its facilities have received certificate of ISO 14001 for Environment and ISO 45001 for Occupational Safety and ISO 27000 certification. As of March 31, 2022, it had an environmental team of 43 employees (constituting 5.98% of its workforce) and a safety team of 30 employees (constituting 4.17% of its workforce).
Risks and concerns
Dependent on R&D activities for future success: The company is dependent on its R&D activities and scientists at its R&D facilities for its future success. Its future results of operations depend, to a significant degree, on its ability to successfully develop new products and continue its product portfolio expansion in a timely and cost-effective manner. Its future results of operations depend, to a significant degree, on its ability to successfully develop new products and continue its product portfolio expansion in a timely and cost-effective manner. In addition, its CRAMs business is dependent its R&D capabilities to assist its customers on their projects including development of their products. Further, as part of its business strategies, it intend to further diversify its product portfolio by entering into new product value chains. In addition, it intend to expand its capacities in existing products as well as expanding and strengthening its research capabilities in order to ensure rapid product innovation. Innovation continues to be the key determinant for its success.
Rely on combination of trade mark, trade secret, copyright law: The protection of the company’s intellectual property is crucial to the success of its business. It rely on a combination of trademark, trade secret, and copyright law and contractual restrictions to protect its intellectual property. It does not own any patents. While its agreements with its employees and consultants who develop its intellectual property including its proprietary intermediates and specialty chemical products, technology, systems and processes on its behalf include confidentiality provisions and provisions on ownership of intellectual property developed during employment or specific assignments, as applicable, these agreements may not effectively prevent unauthorized use or disclosure of its confidential information, its intellectual property including its proprietary products, technology, systems and processes and may not provide an adequate remedy in the event of unauthorized use or disclosure of its confidential information or infringement of its intellectual property.
The company does not have long-term agreements with suppliers for raw materials: The company source a significant amount of the raw materials that it use in its business from India, Japan, Europe, Taiwan and China. In addition, it usually does not enter into long-term supply contracts with any of its raw material suppliers and typically source raw materials from third-party suppliers under contracts of shorter period or the open market. The absence of long-term contracts at fixed prices exposes it to volatility in the prices of raw materials that it require and it may be unable to pass these costs onto its customers, which may reduce its profit margins. It face a risk that one or more of its existing suppliers may discontinue their supplies to it, and any inability on its part to procure raw materials from alternate suppliers in a timely fashion, or on commercially acceptable terms, may adversely affect its business, financial condition and results of operations.
Face competition: Although the specialty chemicals industry provides for significant entry barriers, competition in company’s business is based on pricing, relationships with customers, research and development, product registration, product quality, customisation, and innovation. It face pricing pressures from companies, principally in China, that are able to produce chemicals at competitive costs and consequently, may supply their products at cheaper prices. Moreover, Indian chemical companies are faced with poor infrastructure and lack of adequate facilities at ports and railway terminals as well as poor pipeline connectivity, which imposes difficulties in raw material procurement and at a cost competitive price with global peers. It is unable to assure that it shall be able to meet the pricing pressures imposed by such multinational competitors which would adversely affect its business, financial condition and results of operations. Additionally, some of its competitors in the intermediates and speciality chemicals business may have greater financial, research and technological resources, larger sales and marketing teams and more established reputation.
Outlook
Aether Industries, based out of Surat (Gujarat, India), focuses on producing advanced intermediates and speciality chemicals involving complex and differentiated chemistry and technology core competencies. Its products find application in the pharmaceutical, agrochemical, material science, coating, high performance photography, additive, and oil and gas segments of the chemical industry. 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. It has three business models: Large scale manufacturing of intermediates and speciality chemicals, CRAMS (contract research and manufacturing services) and Contract manufacturing. It specialize in products based on an intricate marriage of complex chemistry and technology core competencies. On the concern side, the concentration of all of company’s operations in Gujarat heightens its exposure to adverse developments related to regulation, as well as political or economic, demographic and other changes in Gujarat as well as the occurrence of natural and man-made disasters in Gujarat, which may adversely affect business, financial condition and results of operations. Besides, expansion into new export markets subjects it to various challenges, including those relating to its lack of familiarity with the culture and economic conditions of these new regions, language barriers, difficulties in staffing and managing such operations, and the lack of brand recognition and reputation in such regions.
The issue has been offered in a price band of Rs 610-642 per equity share. The aggregate size of the offer is around Rs 791.87 crore to Rs 833.41 crore based on lower and upper price band respectively. On the performance front, the company’s revenue from operations increased by 49.04% from Rs 301.80 crore in Fiscal 2020 to Rs 4,49.81 crore in Fiscal 2021. It recorded an increase of 77.99% in its profit for the year from Rs 39.95 crore in Fiscal 2020 to Rs 71.11 crore in Fiscal 2021. Meanwhile, the company plans to continue to expand its product portfolio both in line with its existing new competencies but also by adding new competencies. In the next three years, it planning to invest approximately Rs 125 million towards R&D in the first year with an increasing trend of 30% to 35% in the next two years. In addition, it intend to continue to add new core chemistry and technology competencies, which will lead to additional product line developments. To cater to the growing demand from existing customers and to meet requirements of new customers, it intends to, and are in the process of, expanding its manufacturing capacities for existing products including 4MEP and BFA.
