Ami Organics: Multiple growth catalysts taking shape

Highlights

• Electrolyte business takes shape with the MoU with a global player


• Expanded Fermion contract & Ankleshwar facility strengthen pharma intermediates business


• Foray into high-margin products for semiconductor industry is a key watch


• Strong balance sheet provides headroom to raise funds


• Stock moving out of consolidation zone.

Ami Organics (CMP: Rs 1,195; Market cap: Rs 4,333 crore, Rating: Over-weight) in recent times has not only strengthened the legacy business of pharma intermediates but has also opened up new frontiers of growth. In the last 13 months, the company has inked three agreements with Fermion to expand the multiyear contract. At the same time, the company is making its mark in other niche segments of chemicals having applications in lithium-ion batteries and semiconductors.

Fermion opportunity from Q4 FY24

The CDMO contract with Fermion includes supplying multiple intermediates for the API – Darolutamide. Fermion and its parent company Orion and Bayer have the approval from various regulatory agencies for this molecule – Darolutamide,  a key oncology drug for prostate cancer. Fermion manufactures the relevant API and Orion manufactures the related drug products. Under the recent agreement, Ami Organics will be manufacturing two additional advanced pharmaceutical intermediates which will be used for the manufacture of the earlier contracted advanced pharmaceutical intermediates.

In a follow-up, the company’s new pharma intermediates facility in Ankleshwar is getting commissioned in phases. A new production block got ready in Dec’23 which will be used to execute the contract with Fermion from Q4 FY24 onwards.

In addition, the Ankleshwar facility is envisaged to have 436 KL capacity -- nearly three times the existing facility in Sachin. Hence, it is expected to take care of medium-term opportunities.

Electrolyte additives business taking shape

In another recent development, the company has signed an MoU with a global client to manufacture electrolytes for battery cells. The company will also be investing about Rs 300 crore to set up a dedicated manufacturing facility in Gujarat for the electrolytes business.

The opportunity in this space is backed by a change in the supply-chain policies of the US and European countries. We believe the supply-chain shift from China is benefiting Indian companies which have the technical capability and capacity.

High-margin photo-resistant chemicals adds to the quality of earnings

Another medium- to long-term factor to be watched is the traction for the products from subsidiary Baba Fine Chemicals, as it deals with high entry-barrier products (photo-resistant chemicals), having applications in the semiconductor industry.

In the first half of FY24, net profit of Baba Fine Chemicals was Rs 14 crore, translating into a 70 percent net profit margin.

Outlook

Ami Organics is anticipated to bounce back in FY25, backed by a ramp-up in the Ankleshwar facility, a pick-up in supplies for Fermion, and a foray into the electrolyte additive business.

We maintain that as the company moves into multiple frontiers it may require growth capital other than the outlay assigned for the Ankleshwar plant (Rs 200 crore) and the initial investment in the electrolyte business. As the company’s balance sheet is strong (Debt/Equity: 0.16x), it certainly has room to raise funds for the same.

The stock appears to be coming out of the recent consolidation and trading at 23x EV/EBITDA for FY25e. We believe this valuation is reasonable, given the expectation that it will go back to the top-line CAGR trend of close to 25 percent. Overall, we see the business as a good proxy for China- and Europe-plus trends.

Financials

The key risk to watch is the project execution of new products and the longer-than-expected pricing pressure due to China.