Anubhav Sahu Moneycontrol research
Alufluoride (Market cap: Rs 86 crore), one of the key manufacturers of aluminium fluoride, reported its Q3 FY18 results and updated on the capacity expansion plan. Company with its capacity expansion plan and re-negotiation on raw material sourcing seems well positioned to meet incremental demand from the end market - aluminium. Further, company’s current contract renewal cycle is expected to factor in surge in aluminium fluoride prices and can trigger re-rating of the stock.
Q3 update: sequential sales decline
Alufluoride’s Q3 FY18 results witnessed a small dip in the topline numbers, however EBITDA (earnings before interest depreciation and tax) margin exhibited a sharp improvement on YoY basis aided by higher gross profits. Net profit, however, declined 30 percent mainly due to lower Other Income and higher freight expenses. Sequentially, as well, there was decline in net profit due to lower Other Income and higher depreciation cost (Solar power project).
Having said that, company’s current capacity appears fully utilized and the management is awaiting completion of capacity expansion.
Capacity expansion by 60%
Post results, Managing Director of the company, Venkat Akkineni, briefed the capacity expansion plan. New capacity of about 4500 MT would be operational in Q1 FY19, taking Alufluoride's overall capacity to 12,000 MT. New capacity is mainly funded through internal accruals (Rs 25 crore) and expected to scale up operations within one quarter time period of operation.
This would help company to address pickup in demand for the aluminum end market.
Pricing trend positive
Pricing trend for the aluminium fluoride remains elevated due to end market demand as well as rise in fluorspar prices. While company doesn’t produce through the fluorspar method and hence not impacted by surge in fluorspar prices, it benefits from the higher aluminium fluoride price realisation prevalent globally.
The variant of Aluminum fluoride produced by the company had a realized price around RS 61/- per kg last year and can possibly get the pricing around Rs 85/- per kg as the new contract cycle concludes in couple of months. Though this could possibly be at 15-20% discount to variant of Aluminum fluoride produced through fluorspar method, a potential 20% - 40% rise in price is possible.
Raw material sourcing constraints eased
Company has recently concluded 20 year contract agreement for the supply of raw materials from Coromandel, Paradeep Phosphates and IFFCO. This takes into account incremental raw material requirement for capacity expansion. Hence, a major constraint on the raw material supply has eased.
Attractive valuation
Based on the latest update, we have revise our estimates for the company. Current year’s estimates have been revised down to reflect quarterly result takeaways, while FY19 estimates now takes into account expected improved pricing scenario (~20-25%) and 50% capacity utilization for the new capacity in H2 FY19.
Stock is currently trading at 9.8x 2019e earnings, which is attractive in our view.
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