Alkyl Amines is into the business of manufacture and supply of amines, amine derivatives and other specialty chemicals. The company's products are used in industries like pharmaceuticals, agro-chemicals, rubber, etc. Incorporated in 1979, the company has manufacturing plants in Raigad, Bharuch and Pune. The Kothari family led by Yogesh Kothari hold ~ 74.19% of the company.
Business Overview
Amines are a class of nitrogen containing organic compounds derived from ammonia. The size of the aliphatic amines industry is touted to be $4 Billion. India's amine industry is duopolistic in nature with Alkyl amines and Balaji amines being the major players. Globally, BASF and Eastman Chemicals are the major players. The top 6 players control 50% of the industry. 61% of aliphatic amines are used in the pharmaceutical industry. Due to the hazardous nature of the chemical, long distance transport is challenge and thus most customers prefer to source these chemicals locally.
Alkyl Amines derives ~ 80% its revenues from amines & amines derivatives. The compy gets ~ 78% of its raw materials from the domestic market and alcohol products constitute ~ 67% of the raw material consumption.
The company supplies its products to API manufacturers. Over the last few quarters API manufacturers in India have been expanding capacity. This is primarily because of stricter pollution norms in China which pushed several specialty chemical and API manufacturers towards plant closures.
Financial Overview
The company has seen a rapid growth in revenues post FY18 because of higher demand from API units in India. The company has been able to convert its profits to cash and re-deployed it towards expanding capacities thereby increasing the turnover. The company has earned a cumulative 10 year PAT of Rs 410 Crores against which the cash flow from operations is at Rs 643 Crores.
The average tax rate is ~ 33% and the company stands to benefit from the lower corporate tax regime. The interest coverage ratio has gone up from 4.53 in FY14 to 6.83 in FY19. The company has sustained a ROE of > 20% since FY14. The working capital to revenue ratio has fallen from 29.8% in FY14 to 12.9% in FY19 as the debtor days (73 in FY14 vs 66 in FY19) and inventory days (68 in FY14 vs 46 in FY19) have both improved.
Peer Analysis
Balaji Amines is the other listed company from the Amines space. A deeper look at the numbers show that both the companies have grown at a similar pace and have generated similar cash flows.
Alkyl Amines has grown at a faster pace over the last 4 years. Balaji Amines operates a hotel called Balaji Sarovar in Solapur and these numbers are included in the standalone numbers. (I have stayed in this hotel for few days during my audit days, I was auditing a listed company). Both the companies have similar operating margins but Alkyl Amines has grown faster than Balaji Amines. In FY20, the revenues of Alkyl Amines outgrew those of Balaji Amines.
While both companies are similar in fixed assets turnover and margins, Balaji Amines has a working capital to revenue ratio of 22.5% against the 12.5% of Alkyl Amines. Over the last 5 years, the companies have made similar capital expenditures but Alkyl has been a better performer, as reflected in its share price. What has put investors off-guard in case of Balaji Amines is that in 2018, the company purchased 55% of Balaji Speciality Chemicals Pvt. Ltd. from the promoter group for Rs 66 Crores. This company had no operations at the time of purchase. Further more, the Balaji Amines also gave a loan of Rs 32 Crores to the subsidiary company as per the FY19 annual report. The market hasn't taken well to this subsidiary hoopla. BAL expected Rs 100-200 Crores contribution to the topline by FY20 from this subsidiary. Maybe not of significance but Balaji Amines annual reports have errors such as - trade payable movement shown under financing activity in the cash flow statement, different shareholding patterns on different pages, etc.
Alkyl Amines spends ~ 1.3% of its revenues on R&D while Balaji Amines spends less than 0.1% of its revenues on R&D.
Valuations
Alkyl Amines commands double the valuation of Balaji Amines despite similar fundamentals. The current market capitalization of the company is Rs 2,742 Crores.
Adjusted for an extra-ordinary income in FY20, the stock trades at a PE of ~ 18.3 and a Sales to M.Cap of 2.75. The company has delivered excellent results over the last few years because of the structural change in the specialty chemicals and API space. Till when this momentum survives is not predictable but the recent expansion in the API sector in India indicates that tailwinds exist for the immediate future for Alkyl Amines.
Alkyl Amines has sustained a high ROCE for the last decade and the management has made wise capital allocation decisions. Over the next 3 years the company plans a capex of Rs 100 Crores per annum with an asset turnover of ~ 1.5 to 1.8. There is a risk that despite rising volumes, the revenue doesn't increase because of pressure on the selling price. We have a positive view on the stock but would recommend investors to have a limited exposure to the stock because the pharmaceutical space is way too technical and unpredictable.
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