Ami Organics - IPO Update

Ami Organics has already filed the draft red herring prospectus with SEBI for its proposed public issue of shares. The company is into the fast growing and lucrative specialty chemicals space and has seen rapid growth in the last few years. Also, globally, there is a shift towards India for specialty chemicals. Most global users of specialty chemicals are counting on India as an alternative source of specialty chemicals for an array of uses.

What exactly is the business model of Ami Organics?

Ami Organics is a focused manufacturer of specialty chemicals with varied end usage. Speciality chemicals account for 20% of the $4 trillion chemicals industry globally, and India's market for specialty chemicals is projected to grow at a CAGR of 12% to $64 billion by CY25.

In India, the domestic speciality chemicals industry is expected to clock double the global CAGR of 11.7% in the next five years. That was the outperformance that we had seen in Indian specialty chemicals segment even in the CY15-20 period. Indian specialty chemicals industry is valued at $32 billion and expected to grow to $64 billion in the next five years.

Some of the advantages for specialty chemical companies in India are strong domestic consumption, favourable labour cost and government impetus under the PLI scheme. IN fact, on the market share front, China is the largest player with an 18% share. However, with most consumers looking away from China post the pandemic, it opens a huge opportunity for India. Here, the labour costs are nearly one-third of China and half of Vietnam, so cost-wise it is a big advantage. That is where the big edge for India lies.

However, this is a capital intensive industry and capex will be constant work in progress in an industry that will have to consistently scale up capacity to meet global needs. That will be the challenge.

Nature of the proposed issue by Ami organics

Ami Organics had first got approval from SEBI for the issue in the year 2018 but had to put off after the markets went into a tailspin and the market was not ripe for a smaller sized specialty chemicals company. However, post the pandemic the conditions are ripe for specialty chemicals to gain larger market share from China and that is why the Ami Organics IPO has been timed now. 

The initial public offer or IPO will be a combination of a fresh issue and an offer for sale. The company will raise fresh funds of Rs.300 crore through the IPO and in addition will also offer a total of 60,59,600 shares by promoter and existing shareholders as part of the offer for sale or OFS. Of course, these are subject to modifications at the time of final RHP approval of the issue. 

The company is not expanding capacity at this point of time and will look at that option in the future. For now, it will utilise Rs.140 crore from the IPO proceeds for repayment of certain high cost debt so as to improve its solvency ratios and reduce financial risk to enable future leveraging to expand capacity. In addition, the company will also allocate Rs.90 crore out of the issue proceeds for funding working capital requirements.

The big challenge for Ami Organics will be to keep the capital expenditure flows steady to enable the company to meet demand enhancement. Its ratio of capex to operating cash flows is likely to be constantly under pressure.