Balaji Amines Q2FY19 review: Volume growth hit by transitory issues; accumulate

Black Rose Industries has gained 677 percent in the last 5 years. As of June 10, 2015, the share price was Rs 16.75 per share and now the current share price is Rs 130.10 with a market cap of Rs 664 crore.

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Anubhav SahuMoneycontrol Research

Balaji Amines' Q2 results were impacted by logistics-related challenges because of a port strike. While this event is transitory in nature, the management is hopeful of a revival in sales volume in H2 and hence, has maintained its sales guidance for FY19.

In our assessment, growth levers for Balaji Amines are intact and we remain positive on the stock, primarily because of its strategy of capitalising on import substitution opportunities.

Quarterly result: Surge in methanol, acetic acid prices

The company's Q2 results was impacted by a port strike, which was partially responsible for lower volume growth of about 4 percent YoY (year on year). The loss in sales on account of port/transport strike and disturbances is around Rs 20 crore.

As a result, the company's revenue growth was 8 percent in Q2. However, revenue growth for the first half of FY19 still came in at 19 percent. EBITDA margin for the quarter under review moderated to 20.7 percent because of an increase in input cost (methanol, acetic acid and ethanol).

While the company's operating margin is still within a comfortable range, we have seen over the last few quarters amid volatility in raw material prices, that input cost can be passed through with a lag of one quarter.

Derivative products roll out

Balaji Amines has already started morpholine production (end market: rubber chemicals) and expects 60 percent utilization of its current capacity of 10,000 tonne.

In case of acetonitrile (end market: antibiotic drugs), the company has started production at a pilot level but is waiting for some process value addition and wildlife authority permissions (expected to come through in December) before it ramps up production.

Also, the company recently enhanced its capacity to manufacture DMA HCL (Di Methyl Amine Hydrochloride), which would help it consolidate its global position (70 percent market share). Balaji Amines is already utilizing its earlier capacity (22,000 tonne) at an optimum level. It is noteworthy that DMA HCL is used as a pharma ingredient for ranitidine and metformin (diabetic drug).

Subsidiary – Balaji Specialty Chemicals to commission soon

With regard to the company's subsidiary Balaji Speciality Chemicals, in which it has a 55 percent stake, MD Ram Reddy told Moneycontrol Research that operations are expected to start in 3-4 weeks. The management is hopeful of earning around Rs 80 crore of revenue in the current fiscal itself.

In the next fiscal year, the subsidiary is expected to generate Rs 300-400 crore of revenue.

Through this subsidiary, Balaji Amines gets an exposure to specialty chemicals like ethylene diamine (22,000 tonne), piperazine (4,000 tonne) and diethylenetriamine (DETA, 2,500 tonne), all specialty chemicals having applications in the agriculture end-market, fuel additives, rubber additives and the pharma industry.

A key application of ethylene diamine is in the field of fungicide like Mancozeb. It is noteworthy that India imports about 29,000 tonne ethylene diamine (EDA) every year.

Mega greenfield project

Construction work on the company's mega greenfield project in Solapur is expected to start by the end of the current quarter. The capital expenditure outlay for the first phase is around Rs 300 crore (through internal accruals), and will be focused on four products (50,000 tonne) -- Mono Isopropyl Amine, Isopropyl Amine (agri-end markets) and additional capacities for methyl and ethyl amines.

Currently, there is heavy import dependency in India for mono isopropyl amine and isopropyl amine (agri end-market: herbicides/pesticides, and pharma drugs for the heart). The new plant is expected to contribute to the company's revenue from FY21 onward and is expected to bring in around Rs 350-450 crore a year in revenue by the FY23.

In the phase-2 of the expansion, the company plans to look at products like methyl isobutyl ketone (used as a solvent in paints, etc.) and diphenylamine (used as an industrial antioxidant).

Anti-dumping duty protection for few products aids pricing scenario

Anti-dumping duty imposed on mono iso-propyl amine in March 2018 is a positive for the company since it plans to start manufacturing it at the new plant.

Also, on account of anti-dumping duty on di-methyl acetamide (DMAC, 6,000 tonne capacity), capacity utilisation has improved to over 70 percent and margins have normalised.

In the case of di-methyl formaldehyde (DMF), anti-dumping investigation has not been favorable as far as DGTR findings are concerned and therefore, capacity utilization is expected to remain at low levels. However, here improved pricing environment is positive for the company.

Attractive pricing levels to consider entry

We believe the recent impact on Balaji Amines' sales performance is temporary and see it reviving with time. The management has maintained a sales guidance of Rs 1,000-1,050 crore for FY19.

Also, the company expects that its operating margin range of 18-20 percent would be maintained in the medium term. Its inventory has almost doubled since March 2018 to Rs 162 crore on account of advance sourcing of a key raw material, and provides a cover till March 2019.

Further, methanol prices have also dropped by about $50, which provides additional margin comfort.

On account of recent market turmoil, the stock is trading 38 percent below 52-week high at a reasonable multiple of 11 times the company's expected earnings for FY20. Going forward, we expect it to benefit from new product capacities, improving product-pricing scenario, import substitution strategy and strong technical execution capabilities.

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