Balaji Amines: Green clearance sets up the right pitch

Highlights
- Environment nod for the mega project in Solapur
- Sanctioned project capacity of 874 tonnes per day
- First phase capex of Rs 200 crore
- Project likely to start in Q4 FY21
- Hunt for import substitution a key positive

The green clearance for Balaji Amines (mcap – Rs 1,141 crore) for its Solapur mega project spread across 36 hectares has come as a shot in the arm for the company. This adds to our conviction for the stock in the medium term as it potentially removes capacity constraint for about 8-10 years.

The go-ahead allows the firm to set up an organic and specialty chemicals manufacturing unit with a sanctioned capacity of 874.2 tonnes per day and an estimated project cost of Rs 400 crore. It also allows installation of captive power plant of total capacity of 10 MWh (megawatt hours).

Also read: Balaji Amines Q2: Strong uptick in volumes

The management expects the chemical firm to double its capacity from the current nearly 1 lakh tonnes over the next 6-7 years.

In the first phase, the company is adding capacity for ethyl amines (18,250 tonnes). It’s also ramping up capacity for either Mono Isopropyl Amine or Isopropyl Amine (20,000 tonnes). India has a heavy import dependency for Isopropyl Amine, which is used for herbicides/pesticides and pharma drugs for the treatment of cardiovascular aliments.

The first phase would incur a capex of Rs 200 crore, of which 60 percent is debt funded. A capex of Rs 80-90 crore is planned for FY20 and the rest will be deployed in H1 FY21. According to its earlier guidance, production is likely to start 15 months after the land digging work. Since the land development and digging work has started, we expect the project to get commissioned in Q4 FY21. And hence, it is likely to contribute meaningfully from FY22 onwards. The project is expected to add about Rs 400 crore to sales in FY23.

 Outlook

We are enthused by this update of the environment clearance for the company’s greenfield project. Considering its earlier challenges, the green nod comes as a relief and offers execution and earnings visibility for the medium term.

Additionally, we remain positive on Balaji’s strategy of targeting new product capacities and focus on import substitution opportunities. In this context, Q2 results stood out with higher volume growth and a sequential improvement in margins. In FY20, new capacities of acetonitrile, morpholine and higher utilization of DMF (dimethylformamide) is expected to add 7-8 percent volume growth. In FY21, acetonitrile and morpholine capacity utilization is expected to reach optimum levels.

As for its subsidiary, Balaji Speciality Chemicals, production of specialty chemicals such as ethylene diamine (EDA), piperazine (PIP) and diethylenetriamine (DETA) has started. Key end users such as Coromandel and UPL are already taking EDA orders from Balaji. The company’s subsidiary is expected to break even in Q4 FY20 and may ramp up production in FY21, which can possibly bring in Rs 350-400 crore in revenue.

Furthermore, it should benefit from its new raw material procurement strategy. The company is purchasing on a spot basis, which should also help it avoid inventory losses in the near future. We expect Balaji to report 18-20 percent EBITDA (earnings before interest, taxes, depreciation, and amortization) margin in the medium term.

The stock is trading at 8.8x FY21 estimated earnings after keeping a conservative estimate for the ramp-up in operations of its subsidiary. While it has recovered from its 52-week lows, we believe that the recent environment clearance, new products and stable sourcing of raw materials are still not fully priced in.

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