In the recent past, the Indian Speciality Chemical sector has outperformed the market. There are various reasons for the same, few of them are below:
•China Factor : Stringent environment norms were set in China as they launched their Clear Sky Policy to beat pollution. This has led to many chemical plants getting shut at China. Further due to the Pandemic of Covid 19 the China supply chain has further got adversely impacted.
•Global opportunity: Export potential due to low-cost labor availability and specialized knowledge base for the chemical industry in India
•Domestic Opportunity: Policy initiatives such as Import substitution, Atmnirbhar Bharat, Make In India & time to time Anti Dumping Duty on certain chemical produce
•Shift from Unorganized to Organized: GST & Demonetization has helped large size Listed players against unorganized smaller ones and increasing their market shares
Alkyl Amine Chemical Limited (AACL) is one of such stocks which has given 3.5X return in past 1 year. AACL is one of the market leaders in the duopolistic Aliphatic Amine segment in India commanding almost 40% of the market share.
Started in 1979 with Aliphatic Amine in technical collaboration with a US firm. Later on, they started making Derivatives, then they started making Specialty Chemicals. The current revenue mix is as below:
Managing Director is Mr.Yogesh Kothari . He is a Chemical Engineer from U.D.C.T., Mumbai which is one of the best engineering college for Chemical Engineering Master of Management Science and Master of Science (Chemical Engineering) from University of Massachusetts, U.S.A.
•Promoters own 74% of shareholding with No share pledge
(A) Raw Material
3 key RMs are Methanol ,Ammonia & Denatured Ethyl Alcohol.
Methanol:Import from Saudi Arabia, Oman, Qatar etc, especially post the US sanctions on Iran, which is one of the major manufacturers of methanol in the world. Methanol price are linked to crude prices
Ammonia:Difficult to transport, it is largely sourced indigenously.
Denatured Ethyl Alcohol:Mainly sourced from Indian local sugar factories and distilleries besides being imported from the US and Latin American countries
(B) Customer Mix
Aliphatic amines and other AACL produces are largely used as Solvent .The main customers i.e. Pharmaceuticals and Agro firms are poised for demand growth hence the sales is expected to grow .
- Aliphatic Amine (Methyl Amine)
Indian market size:85,000 ton. AACL has 30,000 ton capacity (40% market Share).Others are Balaji & RCF.
AACL is further enhancing capacity by 15,000 tons over the next 2 years. Methylamine is dangerous & difficult to carry so Indian demand is captive
2.Aliphatic Amine (Ethyl Amine)
Indian market size:21,000 tons per annum. AACL is the market leader with a 15,000-ton capacity. Other is Balaji Amine
Ethylamine is dangerous & difficult to transport so Indian demand is mostly captive with limited 10-15% import
3. Derivatives (DMA HCL)
AACL has 12,000-ton capacity. AACL+ Balaji controls 60-70% market. Competitive market
Not dangerous & easy to carry. It is used in Ranitidine which is used in the treatment of Peptic & Gastric ulcer and also in Metformin which is used in Type 2 Diabetes treatment
4. Specialty Chemicals(Acetonitrile)
Indian market size is 17,000 tons. AACL is the market leader with 10,000-ton capacity (40% Market share)
There are 2 industrial methods to make Acetonitrile : (1) From Acrylonitrile (Auto industry ) and (2) From Acetic Acid+ Ammonia (which AACL uses). Method 2 produces Pharm grade Acetonitrile. The increased pharma demand has widened margins for the product.
Prices have increased by 3X due to a shortage of supply as automotive industry method production is low. Export market and increase in domestic demand would be met by the expanded capacity of 15,000 ton
In spite of being in a capital intensive industry, the leverage is low and indicates sound discipline as D:E improved from 0.54 in FY16 to 0.16 in FY20.
Cash Flow from Operation
Is the Profit real (Cash)??
Let us check CFO/EBITDA of the company
Working Capital Cycle
The Working Capital cycle is improving with all 3 parameters improving so business quality is improving.
Stock prices have increased dramatically in the last 6 months. The company moved to Rs 100 cr PAT club during the same period. Both the below chart resemble
Why the market has valued AACL so high?
Let us check out a few parameters :
The Company is clearly a Growth Stock. It’s PE Expansion (Rerating from 12 -17 to 29 ) happened due to (a)moving to next orbit (Rs 100 cr + Club) (b) Consistent growth in PAT & Sales (c) Growing ROCE indicating the good capital allocation
Few Thoughts on Valuation
•Stock is fairly valued. Next PE Rerating seems unlikely
•Earning growth will lead to price growth, so watching the earning growth quarterly is recommended
•There is huge sectoral tailwind supporting the buoyant price of its key product (Acetonitrile price is key monitorable)
•Institution holding (MF ) is still low at 2%, there is room for the institution to increase holding (Aarti Industries, Atul Ltd had a similar trajectory )
•The Stock has great potential so people with conviction in Specialty Chemical growth story should invest
•Invest at Right time, right price and accumulate at the drop
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