Aether Industries

Niche specialty chemical producer

Competitive advantage due to being the only large-scale manufacturer of many key products in India

Incorporated in 2013 by individual promoters Mr. Ashwin Jayantilal Desai, Ms. Purnima Ashwin Desai, Mr. Rohan Ashwin Desai and Dr. Aman Ashvin Desai along with AJD Family Trust, PAD Family Trust, RAD Family Trust, AAD Family Trust and AAD Business Trust, 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. 

In the first phase of its development through fiscal 2017, it focused on building team and infrastructure and its R&D was centred around building 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 (compounded annual growth rate) of nearly 49.5% between FY 2019 and FY2021.

The company has eight chemistry competencies to use for its wide array of products, which enables it to cater to niche and advanced intermediate requirements of a wider range of end-products and applications. All these competencies have been developed in-house, which is one of the core strengths of its R&D team.

As of March 31, 2022, product portfolio of the company comprised over 25 products. According to Frost & Sullivan, in CY2020, it is the sole manufacturer in India of 4MEP (4-(2-Methoxyethyl) Phenol), MMBC (3-Methoxy-2-Methylbenzoyl Chloride), T2E (Thiophene-2-Ethanol), OTBN (Ortho Tolyl Benzo Nitrile / 4-Methyl-2-Cyanobiphynyl), NODG (N-Octyl-D-Glucamine / 1-Deoxy-1-(Octylamino)-D-Glucitol), DVL (Delta-Valerolactone) and Bifenthrin Alcohol.

The company has been focused on developing high value products, which has resulted in the average selling price of all its products to grow by a CAGR of 6.8% between fiscal 2016 and fiscal 2021. Its products find application in many therapeutic segments in the pharmaceuticals industry including hypertension, anti-platelet, anti-psychotic, antihistamines, and nonsteroidal anti-inflammatory drugs (NSAIDs). Its products also find application in various other industries like agrochemicals, material science, coatings, high performance photography, additives, and oil & gas.

The company has two manufacturing sites at Sachin in Surat (Gujarat, India). Its manufacturing facility 1 is an approximately 3,500 square meters facility including its R&D facilities, analytical sciences laboratories, pilot plant, CRAMS facility and hydrogenation facility. Manufacturing facility 2 spans approximately 10,500 square meters and acts as a large-scale manufacturing facility with an installed capacity of 6,096 tonne per annum (for its solvent recovery plant 13,140 tonne) distributed among three buildings that host 16 production streams (and one solvent recovery plantstream). Capacity utilization was 77.47% (for solvent recovery plant 77.64%) in the nine months ended December 31, 2021, and 73.75% (for solvent recovery plant 72.99%) in fiscal 2021. Both the facilities are in proximity to the Hazira Port and JNPT Port, which helps it save freight costs for its exports.

The company operations at manufacturing facility 2 have ISO 9001:2015, ISO 14001:2015, ISO 45001:2018, ISMS 27001:2013 and Indian GMP certification. In August 2021, it commenced construction of a new manufacturing facility (manufacturing facility 3) at Sachin, and it is in discussions with relevant authorities for acquiring land for the fourth manufacturing facility (manufacturing facility 4) at Sachin. Both these new manufacturing facilities (3 and 4) will be within a short distance from manufacturing facility 2.

The company has a dedicated in-house R&D facilities and pilot plant at its manufacturing facility 1 at Sachin in Surat, Gujarat. Its R&D facilities are dedicated to the development of its pipeline and next generation products as well as to 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&Dfacilities are equipped with laboratories engaged in process development, process innovation and technology development, which assists it in pursuing efficiencies from the initial conceptualization up to commercialization of a product.

The company has a state-of-art pilot plant, which is a vital link between R&D and large-scale production. It has one of the largest pilot plants in the world with 106 reactors installed, for both batch as well as continuous reaction technology. Pilot plant has a dual functionality: it functions to generate critical scale-up data in the transition from R&D to production to help eliminate issues at full production scale and it also functions as a stand-alone manufacturing facility for low volume, high value products for CRAMS customers.

The company has three business models under which it operates - large scale manufacturing of its own intermediates and speciality chemicals, CRAMS (contract research and manufacturing services) and contract or exclusive manufacturing

The company engage in contract research and manufacturing services (CRAMS,second business model), which are the research and technology services that customers outsource to it and include contract research, pilot scale-up services, contract manufacturing, technology development and process development and optimisation. Its CRAMS customers work jointly with its scientists and engineers, and it execute their projects in its R&D facilities, analytical sciences laboratories, and pilot plant. Molecules developed in CRAMS business for customers have the potential to convert into regular commercial supplies and become large scale manufacturing products for the company. The CRAMS business model also enables its dialogue and discussions with the top technical teams and leadership (CTOs), technical directors and technical vice presidents) of customers, opening future contract manufacturing opportunities.

Examples of its CRAMS customers include Adama Group (Israel), Altana AG (Germany), Aramco Performance Materials LLC (US/Saudi Arabia), Austin Chemical Company, Inc. (USA), Avient Corporation (UK), BYK Chemie GmbH (Germany), Connect Chemicals (Germany), Milliken & Co. (USA), Polaroid Film BV (Netherlands), and Tosoh FineChem Corporation (Japan). In the nine months ended December 31, 2021, and FYs 2021, 2020 and 2019, revenues from CRAMS business constituted 7.44%, 7.98%, 9.10% and 10.02%, respectively, of revenues from operations.

The company also manufacture customers products under contractual/exclusive supply agreements (third business model). These customer contracts are both short-term and long-term and involve both exclusive and non-exclusive arrangements. In the nine months ended December 31, 2021, and FYs 2021, 2020 and 2019, revenues from contract manufacturing business constituted 21.85%, 19.38%, 7.39% and 16.09%, respectively, of revenues from operations.

Examples of contractual / exclusive manufacturing customers include Adama Group (Israel), Altana AG (Germany), BYK Chemie GmbH (Germany), Divis Laboratories Limited (India), Dr. Reddy’s Laboratories Limited (India), Moehs Iberica SL (Spain) and UPL Limited (India).

The raw materials used in the manufacturing process are primarily sourced from third party suppliers globally and in India. During the nine months ended December 31, 2021, fiscal 2021, fiscal 2020 and fiscal 2019, cost of materials consumed as a percentage of revenue from operations was 48.55%, 51.28%, 51.74% and 54.47%, respectively. Raw materials include crude oil derivatives such as phenol and other commodities such as hydrogen, ethylene oxide and Isobutylene gas. Other important raw materials include chlorobenzonitrile, methanol, toluene, methylene dichloride tetrahydrofuran, dichlorotoluene and thiophene, amongst others.

The company sales of advanced intermediates and speciality chemicals products are predominantly conducted on a business-to-business basis both in India and internationally. The company export its products to more than 18 countries. Some of the key geographies to which it exports products include Italy, Spain, Germany, and the United States. During the nine months ended December 31, 2021, FYs2021, 2020 and 2019, export sales (excluding deemed exports), as a percentage of revenue from operations were 48.87%, 50.65%, 42.94% and 45.64%, respectively

The Offer and the Objects 

The offer comprises fresh issue of 9766355 equity shares at upper price band of Rs 642 and 10278689 equity shares at lower price band of Rs 610 aggregating up to Rs 627 crore by the company and an offer for sale by Purnima Ashwin Desai, promoter selling shareholder of up to 2820000 equity shares aggregating to Rs 181 crore at the upper price band of Rs 642 and Rs 172 crore at lower price band of Rs 610. The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders, net of its proportion of offer related expenses and the relevant taxes thereon.

The company has undertaken a pre-IPO placement of 2024921 equity shares aggregating to Rs 130 crore. The size of the fresh isssue of equity shares aggregating up to Rs 757 crore has been reduced by Rs 130 crore pursuant to the pre-IPO placement and accordingly, the fresh issue comprises aggregating up to Rs 627 crore.

Promoter Purnima Ashwin Desai post-issue shareholding shall decrease to 25.75% from 30.4% pre issue shareholding.

The company proposes to utilize the net proceeds of the fresh issue towards prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company amounting to Rs 137.9 crore, funding capital expenditure requirements for proposed greenfield project amounting to Rs 163 crore, funding working capital requirements of the company amounting to Rs 165 crore and balance towards general corporate purposes. As on March 31, 2022, the aggregate outstanding borrowing of the company is Rs 141.328 crore.

The total estimated cost for the proposed Greenfield project is Rs 190 crore out of which Rs 163 crore would be met through net proceeds and Rs 27 crore from internal accruals. The company expects commercial production of the proposed Greenfield project to start by November 1, 2022.

Strengths 

According to Frost & Sullivan, the global chemicals market is expected to grow at a CAGR of 6.2% from CY 2020 to CY 2025 and the India speciality chemical market at a CAGR of 11.2%. This growth is expected to be led by sustained demand in the end-use customer segments for its intermediate and speciality chemical products or business, which are experiencing consumption-led growth in India and key global markets.

According to Frost & Sullivan, in CY2020, the company is the sole manufacturer in India of 4MEP, MMBC, T2E, OTBN, NODG, DVL and bifenthrin alcohol. It is the biggest manufacturer of 4MEP globally in terms of production volume and the only manufacturer of this product in India, the largest manufacturer of HEEP (1-2-(2Hydroxyethoxy) Ethyl Piperazine) in India and globally in terms of production volume, the largest manufacturer of NODG globally in terms of production volume and the only manufacturer of this product in India and the biggest manufacturer of T2E globally in terms of production volume and the only manufacturer of this product in India.

The speciality chemicals industry presents significant entry barriers, including customer validation and approvals, expectation fromcustomers for process innovation and cost reduction, high quality standards and stringent specifications

The company investments in R&D have been critical to its success and a differentiating factor for it to attain leading market positions for certainproducts. 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

Most of the companys advanced intermediates and speciality chemicals product portfolio was developed for the first time in India and constitutes 100% import substitution, thus furthering the make in India or atma -Nirbharta campaigns of the Government of India. For example, 4MEP, T2E, MMBC, NODG, BFA, OTBN and DVL were 100% imported into India from China four years ago and now it is selling these products to Chinese customers. DVL were 100% imported into India from China four years ago and now the company is selling these products to Chinese customers.

The company chemistry and technology core competencies and all of its products have been developed by its own R&D team, scaled up in its own pilot plant, and launched into production employing in-house design and engineering.

The company has long standing relationships with a diversified customer base. Its customers include over 160 multinational, global, regional, and local companies. As of March 31, 2022, its product portfolio was sold to 34 global customers in 18 countries and to 154 domestic customers.

The company has nuanced criteria for choosing products based on their chemical complexity, niche applications, limited competition, scalability, and commercial potential. Using these criteria, it developed, and continues 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.

The company products are advanced intermediates and speciality chemicals that occupy a position in the chemical industry value chain between commodity chemicals and final actives and formulations with its products more closely aligned to the higher value range, further away from the commodities and closer towards the final active part of the value chain. According to Frost & Sullivan, the company is known to have strong market positioning in complex intermediates where global competition is intense. The average selling price of all its products in fiscal 2021 was Rs 1,440.85 per kg compared to Rs 200-300 per kg for commodity chemicals and Rs 400-700 per kg for regular speciality chemicals.

Weaknesses 

The company manufacturing processes involve manufacturing, storage and transportation of various hazardous substances such as phenol, hydrogen, ethylene oxide, isobutylene gas, tetrahydrofuran, methanol, toluene and methylene dichloride amongst others, and it is required to obtain approvals from various authorities for storing hazardous substances. The company is subject to operating risks associated with handling of such hazardous materials such as possibility for leakages and ruptures from containers, explosions, and the discharge or release of toxic or hazardous substances, which in turn may cause personal injury, property damage and environmental contamination.

The company require various licenses and approvals for undertaking businesses and the failure to obtain or retain such licenses or approvals in a timely manner, or at all, may adversely affect operations

Although the specialty chemicals industry provides for significant entry barriers, the company faces competition in business based on pricing, relationships with customers, research and development, product registration, product quality, customisation, and innovation.

The company manufacturing facilities (which include R&D facilities and pilot plant) are located at Sachin in Surat, Gujarat. Additionally, its proposed Greenfield project is situated in the same area. The concentration of all 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 conditions, and results of operations.

Prices of some of raw materials that it uses are closely linked to crude oil prices. Crude prices globally have been volatile. Any inability to pass on increase in prices of such raw materials to customers would adversely affect business, financial condition, and results of operations.

Top 20 customers contributed to 72.93% of total revenue from operations in 9MFY22.

Some of raw material imports are regulated by the manufacture, storage and import of hazardous chemical rules, 1989 that, inter alia, allows the concerned authority to stop any import if it is deemed that the chemicals proposed to be imported may cause major accidents. Restrictions on import of raw materials and an increase in shipment cost may adversely impact business, financial conditions, and results of operations

Valuation 

For FY 2021, consolidated sales were up by 49% to Rs 449.82 crore. OPM rose110 bps to 24.9% which led to 56% increase in operating profit to Rs 112.16 crore. Other income increased 101% to Rs 3.97 crore while interest cost rose 21% to Rs 11.32 crore and depreciation increased 40% to Rs 11.01 crore. PBT increased 66% to Rs 93.81 crore. Tax expenses were 37% higher at Rs 22.69 crore. Net profit increased 78% to Rs 71.12 crore.

For 9M FY2022, consolidated sales were up by 32% to Rs 442.54 crore compared to 9M FY2021. OPM increased by 560 bps to 28.5% which led to 65% increase in operating profit to Rs 126 crore. Other income increased 108% to Rs 6.77 crore, while interest cost rose 26% to Rs 10.04 crore and depreciation increased 36% to Rs 11.42 crore. PBT increased 75% to Rs 111.31 crore. Tax expenses for 9MFY2022 rose 87% to Rs 28.41 crore. Net profit rose 72% to Rs 82.91 crore.

The TTM EPS on post-issue equity works out to Rs 8.5. At the upper price band of Rs 642, P/E works out to 76.

As of 20 May 2022, its listed peers such as Clean Science and Technology trades at TTM P/E of 121, Navin Fluorine International trades at TTM P/E of 77, Vinati Organics trades at TTM P/E of 58, PI Industries trades at TTM P/E of 51 and Fine Organic Industries trades at TTM P/E of 67. 

For FY2021, Aether Industries OPM and ROE stood at 24.9% and 40.8% respectively, compared to 55.6% and 45% for Clean Science and Technology, 34.2% and 16.1% for Navin Fluorine International, 39.7% and 19.1% for Vinati Organics, 25.1% and 18.6% for PI Industries and 19% and 17.8% for Fine Organic Industries, respectively.