Alkyl Amines – The good gets better

The good gets better

Our BUY recommendation on AACL with a TP of INR 2,500 is premised on (1) Robust demand from pharmaceutical and agrochemical industry that form 70% of revenue mix, (2) Rising market share in Methyl Amines, and (3) Impending capacity expansion for multiple products, including the high-margin Acetonitrile.  View on the result: EBITDA/APAT were 53/86% above expectations, largely owing to (1) 4% lower raw material cost (2) Higher EBITDA margins than anticipated (28.8% vs. est. 20.3%), particularly led by Acetonitrile.

 Value and volume led growth: For FY20, sales jumped 17% to INR 10bn, led by 18%+ increase in volume. Tight supply of Acetonitrile in the global market bumped up EBITDA to INR 2,590mnn (+59% YoY) and margins to 26.1% (19.3% in FY19). We expect the current elevated prices of Acetonitrile to sustain in the near term.

 Gross margins improve: Backed by Acetonitrile, AACL reported its highest ever gross margins of 51.2% for FY20 which is ~500 bps above its long term average gross margin. GM in 4Q jumped to 54.0% vs. 40.3% YoY. We expect GM to correct to 51.1/49.5% in FY21/22 in tandem with increase in RMC with increase in crude oil prices (methanol, and ammonia prices). Similarly, EBITDAM should cool off to 24.3/25.1% as demand reduces given Covid-19 and product prices come off.

 Impending capacity expansion: AACL is executing projects worth INR 3bn to expand its Methyl Amines (by 15kTPA), its derivatives and Acetonitrile (by 15kTPA) capacity at their Dahej and Kurkumbh facilities.

 Outlook on EBITDA: We expect EBITDA to dip by 4% YoY to INR 2,476mn in FY21 (impacted by the pandemic) and jump 23% YoY thereafter to INR 3,048mn backed by (1) Capacity augmentation for Acetonitrile and ramp up in production of Methyl Amines (2) Anticipation of sustainability of the current elevated prices of Acetonitrile that will continue to push EBITDA.  View on the consolidated balance sheet: AACL’s cash jumped 60% YoY to INR 323mn leading to a 89% YoY dip in Net debt to INR 157mn. Net Debt/Equity and Net Debt/EBITDA reduced to zero vs. 0.4x/0.9x in FY19. RoIC improved further to 32.6% vs. 18.2/15.9/15.9% in FY19/FY18/FY17.

 Change in estimates: We raise our FY22 EPS estimate by 13% to INR 109.0 due to a 22% tax rate guidance by the management vs. our earlier estimated 25%, and in anticipation of (1) Faster recovery in demand, and (2) Sustainability of elevated Acetonitrile prices given global supply constraints.  DCF based valuation: Our TP is INR 2,500 based on Sep-21E cash flows (WACC 10%, Terminal growth rate 3.0%). The stock is trading at 18.7x FY22 EPS.