CRISIL maintains valuation grade of 3/5 to Diamines

Diamines and Chemicals Ltd’s (Diamines’) Q4FY12 result was below CRISIL Research’s expectations. Revenue declined 41% y-o-y due to weak demand for ethyleneamines and piperazine and decline in price realisations. Demand off-take for piperazine from domestic pharma companies continued to be low because of sluggish demand for ciprofloxacin during Q4FY12. EBITDA margin declined to (13.6%) from 10.5% in Q3FY12 because of lower production of ethyleneamines amid a weak demand environment and decline in realisations. In addition, the company is expected to complete its capacity debottlenecking in Q2FY13 which, we expect, will marginally lower utility costs. We maintain our fundamental grade of 2/5.

Q4FY12 result analysis
• Revenue declined 41% y-o-y and 2.7% q-o-q to Rs 129 mn. Domestic demand for ethyelenamines continued to be sluggish amid a weak macro environment. In addition, realisations of ethyleneamines declined by nearly 10% during the quarter, which incrementally affected sales.

• EBITDA margin declined to (13.6%) from 10.5% in Q3FY12. Decline in sales realisations of piperazine and other products in addition to lower production because of weak demand negatively impacted profitability.

• PAT margin declined to 16.1% in tandem with EBITDA margin contraction. PAT declined 172% y-o-y to Rs (31.0) mn.

Estimates lowered to reflect slowdown in business momentum
We lower our FY13 estimates to reflect the continued slowdown in business momentum, decline in sales realisations and delay in capacity debottlenecking (we expected debottlenecking to be completed by February 2012). We lower FY13 revenue estimate from Rs 802 mn to Rs 603 mn as we don’t expect a significant revival in demand for ciprofloxacin during the year. FY13 EBITDA margin estimate is slashed from 18.6% to 6.1% as we believe that off-take of piperazine will be lower than expected and due to further decline in sales realisations. FY13 EPS estimate is lowered from Rs 6.4 to Rs (1.5).

Valuations: Current market price is aligned
We continue to use the discounted cash flow method to value Diamines. Based on lowering of earnings estimates and increase in cost of equity, our fair value has been revised from Rs 55 to Rs 36 per share. At the current market price of Rs 33, the valuation grade is 3/5.

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