Thanks for your comment. To start off, both Deepak Nitrite and Alkyl Amines are good quality picks. You cannot go wrong with them in the long term. However, the drawdown in stock prices in the entire speciality chemicals basket was due to 3 key reasons: 1. FIIs Exit ; 2. COVID-19 inventory de-stocking and 3. Mean Reversion of margins due to raw material price inflation.
Poor policy in China and its divide with the west is indicating that the 200 billion dollar Speciality Chemical market will move to India (albeit over years). The FIIs have returned and this shift in manufacturing preference from China to India will bolster the flows of foreign investors. A major reason for a few poor quarters reported by Alkyl and Deepak was due to excess inventory as a result of overestimation of COVID-19 pandemic. Most companies have been trying to get the redundant COVID-19 inventory off their balance sheets which is taking time and hence the valuations (due to short term quarterly performance) have about halved from their peaks. Now that the international commodity cycle has peaked out, raw material has gotten cheaper and it has slowly started to show in the Q4FY23 results reported by these companies. So in my personal humble opinion, both these are good businesses in a large market that’s about to grow rapidly.
Now addressing my holding Alkyl in my portfolio: It is one of the 2 players in the country producing aliphatic amines. It is a leader in Ethyl Amines chemistry – a space that is moated due to regulation, licenses and the complex know-how. To understand the product they make practically, think of medicine syrups that we consume. The sticky solution in the syrup is due to ethyl amine derivatives produced by Alkyl amines. The valuation gap between Balaji and Alkyl is easily addressable- just look at the CFO/EBITDA conversion ratio of both, you’ll get your answer. Also it is worth noting that the CWIP/Fixed assets ratio currently suggests aggressive expansion plans. A professionally managed firm such as Alkyl (as opposed to family structure at Balaji) would not mindlessly increase capacity if near future did not look bright. The prudence in capital allocation decisions is in evidence from their previous cash deployment and capex success track record. The superior cash flows (as a result of high ROCEs), sheer dominance in the aliphatic amines space, near monopoly market share and an able management makes me a confident shareholder.
While Deepak Nitrite’s recent efforts into full backward integration seems laudable, I have not been able to build the same level of conviction in it yet to displace an existing holding in my portfolio with it.
I hope I could answer your question.
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