Alkyl Amines (MCap – Rs 2,058 crore) reported yet another strong quarter led by volume growth, with utilization reaching near optimum levels except for the effect on plants due to incidents of fire and floods. Additionally, what is encouraging is that the company remains positive on volume growth outlook in the near term and continues to focus on adding capacity across the amine value chain.
Its shares have surged in the past few months, helped by strong operational execution leading to strong margins. This raises a question of how one should look at Alkyl Amines at its current levels. Read on to know more.
Chart: Q2 financials
Source: Alkyl Amines
Its Q2 FY20 standalone sales increased by 8 percent YoY (year on year) mainly led by volumes. For H1 FY20, growth was impressive at 26 percent aided by volume growth of 15 percent. Part of the growth in volume was on account of higher utilization (85 percent vs. 70 percent in H1 FY19) of the methyl amine plant in Dahej. Sequentially, sales contracted by 12 percent, primarily due to a fire incident at Kurkumbh plant and flooding at Patalganga plant in Q2.
Its EBITDA (Earnings before interest, tax, depreciation and amortization) margin improved by a substantial 198 bps, primarily led by better gross margins that was partially offset by higher employee costs and other expenses. Higher margins were also attributed to better realization for the product acetonitrile (usage in pharma industry) which is facing a global shortage.
On capex, the company has lowered its near term allocation. In FY20, capex allocation is down to Rs 80 crore from the earlier plan of Rs 100 crore. Similarly in FY21, allocation has been trimmed to Rs 100 crore against the earlier Rs 150 crore. This capex would be utilized for increasing amine derivative capacity in Dahej and debottlenecking methyl amine and Amine Hydrochloride capacity.
One product where the company has a positive outlook and plans to increase capacity in the next two years is acetonitrile. Also, a debottlenecking initiative will see company increase methyl amine capacity from 30,000 tonne to 45,000 tonne by Q1 FY21. This would bring it at par with Balaji Amines as far as methyl amine capacity is concerned.
Among India’s amines’ producers, the duopoly of Alkyl Amines and Balaji Amines has sufficient capacity to meet methyl amine demand of around 70,000 tonnes per annum.
Another highlight of the quarter was that Alkyl Amines is selling its share in associate company – Diamine and Chemicals. Alkyl Amines stake of 30.44 percent in Diamine and Chemicals translates to a consideration of about Rs 29 crore. Rationale given for the divestment is that Alkyl Amines management wants to focus on the standalone business. Management thinks that after a successful turnaround of associate company, the subsequent run up in stock price offers a good opportunity to cash in.
Company remains upbeat on demand trends and expect around 15 percent volume growth in FY20 and around 10 percent volume growth in FY21. Encouraged by a quick ramp up of methyl amine capacity, the company is focused on further enhancing it, along with increasing focus on high derivative products.
While in the quarter, EBITDA margin was an outlier, the company believes it would be able to execute EBITDA margin within the range of 18-22 percent.
Chart: Alkyl Amines vs. Balaji Amines
Source: Moneycontrol Research
When we look at the past couple of years, company has benefitted from the scale-up and utilization of methyl amine capacity, leading to a stage where the company posts similar quarterly sales numbers as that of Balaji Amines. Additionally, company has been ahead of its peer in managing product price volatility and has been able to post superior margins in recent times. Admittedly this aspect has been handsomely rewarded by the market. The stock is up around 25 percent in this calendar year. Given its strong execution capability and positive industry outlook, Alkyl Amines remains a candidate for an ‘accumulate on declines’ strategy.
Chart: Return ratios and Valuation metrics
Source: Moneycontrol Research
Having said that, for investors looking to rejig their chemicals’ holdings, we believe there are better investment opportunities. In this context, we find the risk-reward ratio tilting in favour of its peer Balaji Amines, where we believe recent developments such as getting various environment clearances, rising output from new products and stable sourcing of raw materials are not fully priced in.