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 2nd
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)
