Alkyl Amines Chemicals Ltd – Stock Analysis

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Alkyl Amines Chemicals Ltd today made an 18% jump after the stock split. Let’s dive deep into its stock analysis. First, let’s start with the overview.

Overview

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 environmental norms were set in China as they launched their Clear Sky Policy to beat pollution. This has led to many chemical plants getting shut in 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 Ltd (AACL) is one of such stocks that 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.

Background of Alkyl Amines Chemicals Ltd

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:

Alkyl Amines Chemicals Ltd

Management

Managing Director of Alkyl Amines Chemicals Ltd is Mr.Yogesh Kothari. He is a Chemical Engineer from U.D.C.T., Mumbai which is one of the best engineering colleges for Chemical Engineering Master of Management Science and Master of Science (Chemical Engineering) from the University of Massachusetts, U.S.A.

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Promoters own 74% of shareholding with no share pledge

Business Model

(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 is 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

Pharma + Agro =~70%

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 are expected to grow.

(C) Products

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

Aliphatic Amine (Ethyl Amine)

Indian market size: 21,000 tons per annum. Alkyl Amines Chemicals Ltd 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 a limited  10-15% import

Derivatives (DMA HCL)

AACL has 12,000-ton capacity. Alkyl Amines and Balaji Amines control 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

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Specialty Chemicals(Acetonitrile)

Indian market size is 17,000 tons. Alkyl Amines is the market leader with a 10,000-ton capacity (40% Market share)

There are 2 industrial methods to make Acetonitrile:

(1) From Acrylonitrile  (Auto industry )

(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

Financials

Sales

10-year Sales CAGR of Alkyl Amines Chemicals Ltd is 17 %

10-year Sales CAGR of Alkyl Amines Chemicals Ltd is 17 %

EBITDA Margin

Consistently Growing EBITDA Margin of Alkyl Amines Chemicals Ltd
Consistently Growing EBITDA Margin of Alkyl Amines Chemicals Ltd

Leverage

Leverage Position of Alkyl Amines Chemicals Ltd

Leverage Position of Alkyl Amines Chemicals Ltd

In spite of being in a capital-intensive industry, the leverage is low and indicates sound discipline as Debt-to-Equity improved from 0.54 in FY16 to 0.16 in FY20.

Cash Flow from Operations

CFO Status of Alkyl Amines Chemicals Ltd

CFO Status of AACL

Is the Profit Real (Cash)??

Let us check the CFO/EBITDA of the company

4 out of 10 times above 0.8 indicating moderate cash management and a fair amount of profit is real i.e. flowing as cash to the company

Working Capital Cycle

Working Capital Cycle of Alkyl Amines Chemicals Ltd

The Working Capital cycle of Alkyl Amines Chemicals Ltdis improving with all 3 parameters improving so business quality is improving.

ROCE

ROCE of Alkyl Amines Chemicals Ltd is high and above 15% in 9 out of 10 years
ROCE of Alkyl Amines is high and above 15% in 9 out of 10 years

Valuation

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

Profits & Stock Price Movement of Alkyl Amines Chemicals Ltd
Profits & Stock Price Movement of Alkyl Amines Chemicals Ltd

Why the Market has Valued Alkyl Amines so high?

Let us check out a few parameters :

Valuation of Alkyl Amines Chemicals Ltd

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

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Few Thoughts on Valuation

  • Stock is fairly valued. Next, PE Rerating seems unlikely
  • Earnings growth will lead to price growth, so watching the earning growth quarterly is recommended
  • There is a 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 the Specialty Chemical growth story should invest
  • Invest at the Right time, right price and accumulate at the drop

Watch: Alkyl Amines Chemicals Ltd Stock Analysis

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Amitabh Vatsya

Amitabh Vatsya

Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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