BUY on Alkyl Amines - Exponential rise in margins! - HDFC Securities

Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

Our BUY recommendation on AACL with a TP of INR 3,355 is premised on (1) robust demand from pharmaceutical and agrochemical customers that form ~70% of AACL's revenue mix, (2) rising domestic market share in Methyl Amines, (3) impending capacity expansion for (high-margin) Acetonitrile, and (4) production linked incentive scheme that provides the right tailwinds for long-term volume growth. 1Q EBITDA/APAT was 95%/2.2x above estimates, owing to the lower-than-anticipated impact of COVID-19 on sales volumes and higher-than-anticipated margins. Margins were largely driven by three products, viz. pharma grade-Acetonitrile, DMA-HCL and Isopropyl amine.

Margins surprise positively: Sales growth of 4% QoQ to INR 2.5bn was primarily realisation-led, as volume remained flat. Volume dip dragged sales by 8% YoY. Yet, gross margins rose to 55.9% (+185/1115bps QoQ/YoY) given a better product mix and higher margins courtesy the robust pharma demand. Backed by operating leverage and the high margin Acetonitrile, EBITDA margins grew to 31.6% (+278/935bps QoQ/YoY). Tight supply of Acetonitrile in the global market continues to drive realisation and we expect the currently elevated prices to sustain in the near to mid-term. However, the current EBITDA margin does not seem sustainable and should cool off to 28.6/28.0% in FY21/22E as COVID-induced pharma demand and, in turn, product prices come off. Opex dipped 6/8% QoQ/YoY with lower volume, travel and admin expenses and should recover subsequently.

Call takeaways: (1) Capex guidance for FY21 is revised to INR 1.5-1.8bn from INR 2.5bn as commissioning of the Acetonitrile capacity has been pushed to 2QFY22 (earlier, 4QFY21). The Amines derivatives plant should commission in 2HFY21. At peak utilisation, both plants put together should contribute INR 4-5bn to the topline at current prices. (2) AACL has 40% of the domestic Acetonitrile market share, and the increased pharma demand has widened margins for the product. Export market and increase in domestic demand would be met by the expanded capacity of 15ktpa. (3) Demand across products is back at pre-COVID levels from July. (4) DMA-HCL capacity to be doubled by Dec-20, given the current pharma demand.

Change in estimates: We raise our FY21/FY22E EPS estimates by 23/10% to INR 107/124 in lieu of (1) lower-than-anticipated impact on volumes and product prices in 1HFY21, and (2) higher-margin guidance from the management due to operating leverage and change in product mix.

DCF-based valuation: Our price target is INR 3,355, basis Jun-22E cash flows (WACC 10%, terminal growth 3%). The stock is trading at 20.4x FY23E EPS.

Shares of ALKYL AMINES CHEMICALS LTD. was last trading in BSE at Rs.2890 as compared to the previous close of Rs. 2829.85. The total number of shares traded during the day was 8549 in over 1608 trades.

The stock hit an intraday high of Rs. 2950 and intraday low of 2830. The net turnover during the day was Rs. 24622095.

Source : Equity Bulls

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