The profit advisory of Balaji Amines was partly because of the global trade standoff. The depth of sales guidance downgrade reflects pricing erosion across the chemical value chain
Balaji Amines management has issued a profit warning for FY20, according to management commentary on CNBC TV18. Revenue expectation for FY20 has come down to about Rs 1,000 crore (earlier Rs 1,200 crore) and operating margin range expectation is also down to 18-20 percent, from 20.2 percent in Q4 FY19.
This is because of several moving parts, including global slowdown echoed by profit warning from global chemical majors, weaker traction in select end markets, key raw material (methanol) sourcing and environment clearance for new projects. While a large part of the concerns were widely anticipated and there has been some progress on that front, quantum of sales guidance downgrade reflects pricing erosion across the chemical value chain.
Global chemicals slowdown
Profit warning from Balaji Amines is not entirely surprising, given the ongoing global trade slowdown and a softness in the growth outlook for few end markets for specialty chemicals. BASF, earlier this month, warned that CY19 sales could “slightly” decline compared to CY18 vis-à-vis earlier guidance of 1- 5 percent growth. Furthermore, operating profit (EBIT) could plunge by 30 percent due to weaker end markets such as automobiles (20 percent of BASF sales) and US agro-chemicals (adverse weather conditions and trade conflicts). Few chemical value chains such as those of isocyanate (implications for GNFC), polyethylene (adverse impact on polymer majors such as RIL) are witnessing pricing pressure due to oversupply.
ADAMA, a leading crop protection chemicals company, expects decline in sales for H1 CY19 due to dry weather in Europe and flooding in parts of North America. However, sales from the Latin American, Indian and Middle Eastern markets are likely to remain robust.
Balaji Amines has a significant presence in this end market with about 26 percent sales coming from agro-chem end market. Further, the company’s 21 percent of sales total comes through exports.
Weakness in Indian market
Some signs of sluggishness in domestic chemical value chain is visible in macro data in terms of moderation in recent chemical export/import data. Global slowdown, along with resumption in some of the commodities production in China, could have had an impact here. Additionally, slowdown in select domestic end markets – auto and consumption -- are also factors to watch.
The WPI component of chemicals has also tapered, which we think is a combination of weaker demand and a pass through impact of lower feedstock, particularly crude oil.Key concerns for Balaji Amines
- Global chemical slowdown’s impact is varied depending on the end market. One of the weakest end markets in this regard is automobile to which the company does not seem to have direct exposure. However, agro-chem and pharma are the end- markets where one needs to keep a watch. As of now, the company’s volume guidance appears stable for the existing business.
- Price volatility in methanol remains the key concern for the industry as bulk of it is sourced from the crisis-ridden Iran. As of now, there are no orders from the Government of India to reduce imports from Iran. In our opinion, for the Balaji Amines, methanol sourcing is the biggest concern, which of late has been highlighted in its recent analyst calls.
Last quarter, the company has pitched an alternative arrangement. It sees Qatar, Saudi Arabia and Malaysia as alternative sources for methanol sourcing for India. As the alternative sourcing route is expected to be expensive, current margin guidance of 18-20 percent is as per our expectations.
Recent environment clearances – Key positive
Key near-term positives for the company include environment clearance for its subsidiary Balaji Speciality Chemicals (with 55 percent stake). The earlier guidance included ramp-up in its production in FY20 itself. We await better understanding on this front from the management. It is noteworthy that through the subsidiary, Balaji Amines gets an exposure to specialty chemicals like ethylene diamine (EDA) of 22,000 tonnes. Key application for EDA is for fungicide Mancozeb.
The company has got the environmental clearance for the capacity expansion of key products - Aceto Nitrile, Morpholine and Di Methylamines HCI (DMA HCL), along with other offerings.
Aceto Nitrile and Morpholine, which are used for end-market antibiotic drugs and rubber chemicals, respectively, are the two key products that would add to incremental sales in FY20. DMA HCL is used as a pharma ingredient for Ranitidine and Metformin (diabetic drug). However, new capacity of DMA HCL would be utilised later when the market situation improves.
Chart: Product capacities which got environmental clearance
Taking these inputs into account, we cut down our revenue estimates for FY20 and continue to keep the EBITDA margin guidance of 19 percent. The stock after correcting 45 percent from its 52-week high is trading at 12.5x FY20 estimated earnings. This is trading at a sharp discount to its peer Alkyl Amines and hence, investors should keep a close watch on it for staggered accumulation. Please watch for this space as we get further clarity from management on the growth outlook.Follow @anubhavsays