IPO Size: Rs. 808 cr 

• Rs. 627 cr is fresh issue, for greenfield capex (Rs. 163 cr), working cap (Rs. 165 cr), debt repayment (Rs. 138 cr) mainly to HDFC Bank, which is also the lead IPO banker.
• Rs. 181 cr is offer for sale (OFS) by promoter (97% holding to drop to 87%)

Price band: Rs. 610-642 per share

• Raised Rs. 130 cr via pre-IPO placement at Rs. 642 per share on 5^th May 2022 and Rs. 103 cr at the same price in Nov 2021.

M cap: Rs. 8,000 cr, implying 10% dilution

IPO Date: Tue 24^th May to Thu 26^th May 2022, Listing Fri 3^rd June 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Surat-based Speciality Chemical Company

Research focused Aether Industries is India’s sole and the world’s largest producer (by volume) of chemicals like 4MEP, HEEP, NODG, T2E, used in pharmaceutical and agro-chemical sector. Exports account for half of the Rs. 600 cr annual topline. However, a single product accounts for 20% of revenue, with 8 of the total 24 products, contributing to nearly 80% of revenue, indicating product concentration risk on a not-so-large topline.

65% Capacity Increase by Dec 2022

Company is undertaking Rs. 190 cr greenfield capex, to be part funded from IPO proceeds, which will get commissioned by CY22-end. Current installed capacity of 6,100 MTPA will rise by 4,000 MTPA. Since asset turnover is about 2 times, incremental FY24E revenue is about Rs.400 cr i.e nearly 65% of current revenue.  

Company plans further capex for additional 4,500 MTPA capacity by CY23-end, taking total installed capacity to 14,600 MTPA in 18-20 months.

Growing Financials

Since FY19, company has grown well, albeit on a small base, with FY19 revenue of Rs. 200 cr rising at 44% CAGR to Rs. 450 cr in 9MFY22. Margin also strengthened, expanding from 25% in FY19 to 30% in 9MFY22. PAT of Rs. 83 cr in 9MFY22 has already surpassed FY21’s Rs. 72 cr, leading to 19% net margin and EPS of Rs. 7.5 for 9MFY22. However, due to input cost pressures, EBITDA margin slipped to 27.4% in Q3FY22 from 31.3% in H1FY22. Thus, while company’s topline growth visibility is high, margin pressure needs to be monitored in the inflationary environment.     

Aggressive Valuation

Based on FY23E and FY24E earnings, PE multiple works out to 54x and 40x respectively, making the issue more than fully-priced, as 2 year forward growth is being ‘front-loaded’ to present price. Simply put, FY24E earnings are being priced at FY23 PE multiple, making the pricing stretched. Based on FY23E earnings, most speciality stocks are ruling lower, despite a larger size - Vinati at 52x, SRF at 29x (Rs. 12,000 cr topline and 58% YoY PAT growth in FY22), PI Industries at 33x (5,300 cr topline vs 600 cr for Aether). Infact, recently-listed niche product company Supriya Lifescience, although on the API size, is ruling at m cap of Rs. 3,000 cr, despite Rs. 152 cr PAT in FY22 and 28% net margin, while Aether’s asking m cap is Rs. 8,000 cr for FY22E PAT of Rs. 110 cr.

It is important to not get carried away with high growth and assign tall multiples, especially in current market conditions, where secondary markets are extremely volatile with IPO subscriptions and listings even weaker.