Aether Industries, a manufacturer of speciality chemicals, opened its initial public offer on May 24. The company makes advanced intermediates and speciality chemicals involving complex and differentiated chemistry and technical core competencies.
In 2020, Aether Industries was the biggest manufacturer globally of 4-(2-Methoxyethyl) Phenol (4MEP), a key intermediate in the production of Metoprolol, used for hypertension, the company said in its prospectus.
It is the sole Indian manufacturer of seven products including 4MEP that were previously imported from China, Aether said, citing a Frost & Sullivan research report.
Aether, based in Surat, is one of the fastest-growing specialty chemical companies in India. It is known to have strong market positioning in complex intermediates, where global competition is intense.
The average selling price of all its products was Rs 1,440.85 a kg in FY21. The focus on developing high-value products has resulted in the average selling price of all its products increasing at a compounded annual growth rate of 6.8 percent from fiscal 2016 to fiscal 2021.
Features of the offer
The Rs 808-crore IPO consists of a fresh issue of equity shares aggregating up to Rs 627 crore and an offer for sale of 2.8 million shares aggregating up to Rs 181 crore by shareholders and promoters.
The offer closes on May 26. The price band has been set at Rs 610-642 for each equity share with a face value of Rs 10.
Half of the net offer is reserved for qualified institutional buyers, 35 percent for retail investors, and the remaining 15 percent for non-institutional investors.
The minimum lot size is 23 shares and multiples thereof.
After the issue, the promoter shareholding will decline to 61.65 percent from 81.01 percent.
Brokerage recommendations
Brokerages are confident about the company’s prospects, given its inherent strengths and the likely growth of the Indian chemical industry. They have rated the issue a “subscribe” or “subscribe with caution.”
“Aether Industries is expected to continue to maintain its leadership position in a few of its products due to continuous focus on R&D, enhanced capacity post-expansion plans (from 6,096 million tonnes per annum to 6,500 mtpa), synergistic business models, differentiated product portfolios of market-leading products and long-standing relationships with a diversified customer base,” Anand Rathi Research said in a report.
At the upper end of the price band, Aether Industries is valued at 72.3 times annualised FY22 earnings, which looks fair, considering the growth opportunities for speciality chemicals in pharma, agrochemicals and FMCG and improving prospects for contractual manufacturing, Anand Rathi said while recommending a "subscribe-for-long-term" rating for this IPO.
According to Choice Broking, the company faces risks from unfavourable government policies and regulations, unfavourable sales-mix, and forex movements. Any adverse movement in prices of key raw materials and crude oil and delays in capacity expansion pose a risk to the company’s business, apart from the competition it faces.
“At a higher price band of Rs 642, Aether is demanding an EV/sales multiple of 13.1x, which is in-line to peer average of 15.2x,” Choice Broking said in a report.
Buoyant outlook
Considering its dominant position in select specialty chemicals and its growth prospects from end-use applications, the company has a buoyant outlook.
“However, a stretched valuation is a concern, thus we assign a ‘subscribe with caution’ rating for the issue,” Choice said.
Marwadi Financial Services assigned a “subscribe with caution” rating to the IPO as “the company has low and declining operating cashflow to EBITDA (earnings before interest, tax, depreciation and amortization) ratio, which keeps us cautious from a long-term perspective.”
According to Marwadi Financial Services, the company has high exposure to the pharmaceutical industry, which contributed 62.60 percent and 67.62 percent of gross revenue for the nine-month period ended December 31, 2021, and FY21, respectively. A drop in demand from the pharma sector can have a big impact on the company.
“At the IPO price of Rs 642, Aether is valued at 32.2x FY24 P/E,” Ventura Securities said in a report.
Considering the growth opportunities for speciality chemicals in pharma, agrochemicals and the FMCG space, and improving prospects for contractual manufacturing, it recommends a “subscribe” rating with a price target of Rs 797, which represents an upside of 24 percent over the IPO price in 18 months.
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