Key tailwinds favouring the sector are lowered competitive intensity from China, capacity expansion plans, improving end markets, pricing scenario and higher share of high margin Amine derivatives.
In the nearly duopoly market of aliphatic amines, both Balaji Amines and Alkyl Amines continue to post robust topline growth, incrementally benefitting from the lower Chinese imports and improving end markets. Additionally, anti-dumping investigations by the central government for select amine products is also improving earnings growth scenario. However, recent pick up in raw material cost is likely to keep a cap on margin expansion.
Quarterly result: Sequential impact of higher cost of raw material
Balaji Amines exhibited 21 percent YoY growth (9 percent QoQ) in sales mainly led by Amines division (98 percent of sales) and aided by volume growth of about 18 percent. Volume growth has revived in Q3 (vs. 8-10% in Q2 FY18) leading to management expectation of clocking 15 percent volume growth in FY18.
EBITDA margin improved by 281 bps despite surge in raw material cost (+37 percent YoY) on account of lower other expense (partly accounting effect of excise duty clubbed last year).
Sequentially (more like for like basis), however, margins deteriorated due to cost inflation.
Alkyl Amines reported 12 percent YoY growth (11 percent QoQ) in sales with a good mix of volume and price. YoY basis, gross margins were impacted here as well.
Table: Balaji Amines
Table: Alkyl Amines
Capacity expansion on the anvil
*Environmental clearance for 17,000 MT
# MA: Methylamine
Both the companies are at the verge of major capacity expansion. Alkyl Amine’s Dahej facility is expected to be commissioned in current quarter, wherein Methylamine capacity of 33,000 MT would be available which would more than double its existing capacity. This would bring some cost savings due to proximity to major raw materials sources.
Further, this enhanced capacity is expected to free its Patalganga facility for value added products.
The company also has a plan to increase its Acetonitrile capacity (~17% of FY17 sales). However, in this case capacity might come on stream in 2020 and potentially move to the range of ~ 30,000 MT (from 10,000 MT).
In case of Balaji Amines, company is waiting for a NOC (no objection certificate) from government to kick start its acetonitrile and morpholine plants. Management expects by the end of Feb’18 those two plants would come on stream.
With respect to DMA HCL (Di Methyl Amine HCL), operations are expected to start in Q1 FY19. It is noteworthy that DMA HCL is used as pharma ingredient for ranitidine and metformin (diabetic drug) and the company already has a significant capacity of about 25,000 MT.
Balaji Amines is expecting minimum revenue addition Rs. 150 crore in FY19 due to above initiatives as the new capacities would be running at about 50-70 percent in the first year.
Other expansion and acquisition projects
Balaji Amines’s recent investment (55 percent stake, Rs 66 crore) in Balaji Speciality chemicals provides exposure to specialty chemicals like ethylene diamine (EDA), piperazine and diethyleneteramine (DETA) specialty chemicals having applications such as agri-end market, fuel additives, rubber additives and pharma industry. Operations are expected to start in Oct FY19 with revenue of approximately Rs 120 expected in the first year itself and Rs 300 crore in the following year.
Additionally, company is working on its mega project for which 90 acres land has been given by the Maharashtra government.
By 2021, revenue of Rs. 300-400 crore is expected from this project where the company is targeting products like Mono Isopropyl amine, Methyl iso butyl ketone (MIBK) and Di phenyl amine wherein end markets like pharma, agro, rubber cleaning chemical, dyes and textiles would be catered.
Anti-dumping duty triggers positive for Balaji Amines
Balaji Amines, in particular, has been pitching for anti-dumping duty for a couple of products. Recently, Commerce Ministry recommended anti-dumping duty on Di-Methyl Acetamide (DMAC), where the company has a capacity of 6000 MT. Currently, Balaji has a capacity utilisation of about 60-70 percent (Rs 60 crore revenue) which can now potentially move to 100 percent. Here, company would majorly benefit on the margin front.
In case of Di methyl formaldehyde (DMF), anti-dumping investigation is going on and company expects a clarification in one to two months. Here, things could be interesting if antidumping goes through and would benefit both topline and bottomline. Balaji has an installed capacity of 30,000 MT and capacity utilization of 33 percent, which recently benefitted from the environmental issues in China as well. Company expects capacity utilisation can go up to ~70 percent if anti-dumping goes through.
Key trends in offing
Another related trend due to strict compliance in China with respect to environmental concerns and lowering of export subsidies, is that Chinese exports of specialty chemicals (including Amines) have reduced.
Chart: Methylamine & derivatives import to India
Source: Trademap.org
Further on the raw material front, Niti Aayog is expected to announce a roadmap for increasing methanol production, to be used as an alternative fuel. If the domestic availability of methanol is increased, not only it would cut down Amine manufacturers dependence on Middle-East but also help them in procuring it at a lower cost.
Stock price to mimic the earnings growth led by volumes
Based on near-term capacity expansion plans, improving end markets, pricing scenario and higher share of specialty chemicals, both Balaji Amines (19.4x 2019e earnings) and Alkyl Amines ( 20.4x 2019e earnings) are trading at reasonable valuations. However, we see limited scope for further re-rating but consider that stock price can mimic volume led earnings growth in medium term.
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