Advanced Enzyme Technologies Ltd IPO: This Enzyme has Life!!

Enzymes are not alive. This is quite contrary to what most people believe…Living Enzymes never lived at all. My first contact with Advanced Enzyme Technologies Ltd was when I was trying to prove “Non-living Enzymes” to one of my aspiring doctor friend some years back. Like so many others, he was also doctoring his mind with this fascination that enzymes are living beings...fascination which was and still is the strongest pillar of Vegetarianism (with much emphasis on raw food for getting living enzymes). However, as explained in following paragraphs, most of plant Enzymes can't survive in the "Foreign environment" of human stomach and so they are not available to us. Raw food is not the panacea as there are some foods which are most beneficial when eaten after cooking like Spinach and Tomatoes as cooking enhance the absorption rate of some of the minerals and vitamins of these.

Enzymes: Nature, Working and Role in the growth of Humanity

Enzymes actually are the Nano machines of Mother Nature, created, to accomplish what our bodies are not capable of doing on their own. Enzymes are basically proteins, made of amino acids, wherein amino acids (in 100’s or 1000’s) string together in unique ways to form 3D structure. These are produced by the cells of all living beings (Humans, plants, bacteria, fungi) to accomplish basic tasks which are critical for their survival. Living beings have characteristics like they eat, excrete and reproduce…and Enzymes don’t do these. They are Organic biochemicals and just act as Catalysts to increase the rate of chemical reactions which can’t take place otherwise in our low body temperatures. At the most basic level, a cell is really a little bag full of chemical reactions that are made possible by enzymes!

If we really want to make sense of the business of Advanced Enzyme Technologies Ltd (AETL) than we have no other option but to understand this complex thing “Enzymes”. Only by this we can comprehend the strength of the AETL and premium that it should enjoy.

Our body does so many things to keep us conscious…it is working all the time without stop. But we have never thought about the actual working of our body. Like how it digests the food we eat. We are thinking that some living Bacteria and Chemicals do the game for us. But this is not the full picture…almost all the basic tasks of our bodies are done by Enzymes. Enzymes are making us breathe, think…some Enzymes are for our immune system. They are everywhere in our body. Like when we eat rice, the starch in the rice is the main sugar which our body needs for energy. But starch is a long chain (Hard) sugar, So the moment, you eat rice, body starts it work in the mouth itself. First of all, Enzyme Amylase (it is always in our saliva) breaks down the starch in rice in our mouth itself into smaller sugars. Then after reaching the intestine, other digestive Enzymes take the work load.

Every Enzyme has distinct shape (3D) and actually it is this shape that makes every Enzyme individual and capable to do only the assigned task. As they are made of proteins arranged in strings, so they have one “Active side” and this “Active Side” is responsible for breaking the molecules for releasing sugar etc. For example Enzyme Amylase breaks down the starch into simple sugars like Maltose. Although maltose is a small sugar, it is actually made of two smaller glucose sugars. Maltose is a bit too big for people to absorb, so your body must break it down into glucose in order to transport it to other parts of the body for use as fuel and for storing energy. So now our Body needs to break the bond between two glucose molecules and to do the same it has Enzyme Maltase. The working of Maltase is shown in the picture below:

 Maltose is made of two glucose molecules bonded together (1). The maltase enzyme is a protein that is perfectly shaped to accept a maltose molecule and break the bond (2). The two glucose molecules are released (3). A single maltase enzyme can break in excess of 1,000 maltose bonds per second, and will only accept maltose molecules.

So our body has Enzymes for every type of food; it has Protease for protein, Lipases for Fat, Lactase for lactose etc. Every Enzyme has distinct active side to perform only the specific task assigned to it. I have explained the mystery regarding Lactose from Milk in our body in the post related to Parag Milk Foods (link: Click here). In order to break the Lactose sugar in milk, Lactase Enzyme is required…Maltase Enzyme is not required here as Lactose has different molecules bonded together. But the cells of some human beings don’t produce Lactase; so if they consume milk they will be in big trouble. For these people, lactase fortified milk is produced.

Think of this like if I ask you to unfasten a nut of the wheel of your punctured car with your hands only. You can think of the energy required to do the same. But you can do the same with a tool effortlessly. Same is the thing with our bodily functions, without Enzymes the energy requirements will be tremendous. Just think if we need to boil the starch to break it…the boiling temperature inside you will kill you. So our body has to function within the boundaries of body like temperature, Acid or alkaline environment (ph). But chemical bonding of most of things we eat can’t be broken by this environment…hence we have Enzymes. They are Nano machines.

I was reading one scientist Dr. Richard Wolfenden, who has invested great deal in understanding the working of Enzymes in our body. He has found that some functions inside our bodies may take years to complete if not for Enzymes. His workings shows the catalytic power of phosphatase enzymes which help regulate the molecular cross-talk within human cells, the cell signalling pathways and biochemical switches involved in health and disease. If not for these phosphatase enzymes, these harmonic level reactions could have taken 1 trillion years, 100 times longer than the lifetime of the universe. Enzymes can make this reaction happen in 10 milliseconds. His research also has influenced rational drug design; findings from his laboratory helped spur development of ACE inhibitor drugs, now widely used to treat hypertension and stroke.

Critical factor for Humanity: Commercial and Industry Scale production of Enzymes 

We can see the power of Enzymes…without them nothing can survive here. Even a single cell Bacteria has 1000’s of Enzymes to carry out the reactions in bacteria. But humanity hasn’t been benefitted from the knowledge of working of these enzymes alone. They have gone far ahead with this knowledge and designed their own Enzyme powered Nano machines.

Human beings are using Enzymes for thousands of years….in the making of Cheese and wine…although earlier they weren’t aware that these products were due to the services of Enzymes. Like as we know, Lactase Enzyme is required for milk sugar but milk has protein (Casein) also which is dissolved in the water. So if a calf needs to digest that protein it needs to bind this otherwise it will flow out of stomach. So stomach of calves has Rennet which has some enzymes like Protease which helps in the digestion of milk in calves. This enzyme coagulates the milk into curd which can be digested by calves. As humans understood the working of these Enzymes, they extracted the rennet from the stomach of Calves and use the same for making Cheese. Production of Wine, Beer, Whisky etc is done by different types of yeast on different types of materials like Barley, rice, Hops, fruits etc. This is called fermentation which is used for the industry level production of Enzymes in the factories of Enzyme producers.

Overtime humans began to isolate the Enzymes from living cells which led to their commercial scale production and then wider use of Enzymes into various industries like Food, Detergents, textiles, leather , Agriculture, animal feeds etc. Detergents are treated with Enzymes Protease/Lipase/Amylase to break out the food (protein/carbs/fat) particles on our clothes. Just think about the need of hot water, chemicals required otherwise. But Enzymes in detergents do the job even in cold water.

Industrial Enzymes are Everywhere in Our Life

So Enzymes are taking the place of chemicals albeit much faster in western countries where awareness about the environmental damage is more than India. As Enzymes are organic chemicals, so they degrade much faster than synthetic chemicals. Also Enzymes, when used in food and health products, don’t have side effects like chemicals because Enzymes work only on their specific substrata (base material). If their substrata is not available then they will just stay neutral and don’t inflict any damage to us and environment and slowly they degrade when they are kept in unfriendly environment (remember their specific working temperature, acidity). They result in the huge savings of energy and resources. Like for the production of Ammonia from Nitrogen; if Iron (Chemical) is used as catalyst then it needs a temperature of 500°C and pressure of 300 N2. However the same work can be done by enzymes at 25°C and at a pressure of just 1N2. In textile, by using Enzymes, we can save around 90000 litre of water for every tonne of Knitwear produced.

In animal feed; stomach of animals can’t break down the hard feeds like corn, soybean…hence Enzymes are added into feed to get the full benefit of feeds and it results in early weight gain by animal with lesser feed. In the field of medical diagnostic, medicine, nutrition, the benefits of Enzymes are unmatched. Ethanol from corn and Sugar is produced by Enzymes. But these days, hunt is there for 2^nd generation Ethanol which can break the hard Cellulose of wood etc. Breaking of starch from Cellulose is much difficult as it is very long chained and hard. Enzyme Cellulase (which was discovered in WW2 when it attacked the tents and uniform of soldiers) which can do the same for us but the same is not commercially viable at present. But the success can come in the near future. Our Praj Industries is also doing big research for the same.

Enzymes Production: Current and Future scenario

So today, we are producing Enzymes at large commercial scale in our Laboratories by using Micro-organisms, plants Fungi etc. But we are still only in the beginning with regard to technological prowess for producing Enzymes. As at present around 4000 Enzymes are known to us, but only 200 are used commercially and only 20 are produced at industrial scale.so just see the scale for the future. Novazymes (Denmark), Dupont (USA) and BASF (Germany) are the giants in Enzymes; producing around 75% of global production. BASF India is one of my favourite due to its unmatched prowess in chemical world. USA is the largest market in the world with around 15000 cr business, while China and Japan has markets of around 4000-5000 cr.

But in India, Enzymes industry is just 700-800 cr. So just see the scope of scale in India itself. India is now focusing on environment and Industries like Textiles are turning towards greener materials. I think, Nutrition and Diagnostic Enzymes are the biggest market for Enzymes in india and this is going to change in the near future when Indians will demand quality foods treated with Enzymes than harmful chemicals, Animal feed is another big area along with Textiles.

Advanced Enzymes Technologies Ltd: Growth Catalyst is yet to Happen

AETL is just doing a business of 200 cr (just 100 cr in India ) which is just a peanut as compared to the possible scale in India alone. It has strong R&D focus with 13 patents while 4 are under approval. It spends around 7% of its turnover for R&D….has manufacturing facilities in USA also. It derives around 65% of turnover from exports which points toward the big vacuum in India.

Enzymes industry has strong entry barrier as it requires sophisticated technology along with high capital costs, quality controls are very strict, reputation takes long to come, and customer loyalty is very strong. AETL is one of the few in the world to manufacture Enzymes from all sources like Bacteria, Plant, Fungi, Animal etc.

Cash flows are strong and company was very wise in bringing down the debt from 175 cr in 2012 to the levels of just 67 cr in 2016. From a turnover of 294 cr in 2016 its NP is 78 cr; indicating strong Operating and net profit margins. Return over Net Worth is high at 28%. So these factors like high margins, high RONW, strong entry barriers, huge scope of scale in the future should enable AETL to command high PE ratio of 35-40. At the upper price band of 896, it is trading at a PE ratio of 25 (EPS is 36) which is low. Global giant Novozymes is trading at a PE of 35, although it is much bigger. However another listed specialty chemicals company SH Kelker, which is into fragrance, is trading at a PE ratio of 45 which shows the valuation gap for AETL. Most of it, its capacity utilization levels are just 40-45% due to recent capacity additions; so future growth will come without any need for capital investments and growth will come surely especially from India.

Strong entry barriers and future scope of scale are the factors which I look for while valuing a stock (assigning PE ratio) as these are the factors which provide the certainty to the future earnings and PE ratio is always about future earnings. So some times, a stock can be expensive at a PE ratio of 6 while other may be cheap at PE ratio of 40…it’s all about future. There is not any fixed interpretation of fixation of PE ratio. In fact it is the most liquid thing in stock markets.

I am not saying that at the time of listing, it will gain to take its PE ratio to 40. As explained earlier posts also that listing gains are an outcome of so many variable forces which most of the times have no link with the underlying strength of the business like in the case of Quick Heal which is languishing at PE ratio of 25 although it should command at least 40.

But AETL is something which I am more than willing to buy at every fall (the fall which mayn’t come). I think it will get good response and we mayn’t get any allocation at all, so in that case getting the same at 30% higher can also be considered.Good thing about Enzymes is that they never change their behavior and always do the task assigned to them, they are perfect; and good thing about stock markets is that they are never perfect and this imperfection is the biggest CATALYST in finding the quantum stocks.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and applied for the IPO of the share discussed in this Post)