Balaji Amines Research Reports By Edelweiss & GEPL

Research report by Edelweiss

High growth rider in the oligopolistic aliphatic amines industry

Strong demand-led volume growth coupled with steady margins

BAL has steadily built up capacity in methylamines and other specialty chemicals between FY10-FY14 riding on the strong demand potential from its key end-user industries — pharmaceuticals and agrochemicals. With limited competition (duopoly) and ability to substitute imports via competitive pricing, BAL is rapidly increasing utilisation levels and gaining operating efficiencies. While its methylamines and derivatives capacity is operating at blended 80% utilisation levels, its remaining portfolio is operating at near 65-70% levels. Methanol being a key raw material for methylamines, a substantial portion of revenues is from price-linked contracts that allow BAL to pass on the methanol price volatility without significantly impacting its gross margins.

Brownfield capacity expansion to add substantially to shareholders’ returns and cash flows

The company is adding production capacity for DMA HCL, morpholine and acetonitrile in its existing facility, Unit III, from internal accruals. Whilst BAL’s existing capacities in DMA HCL and morpholine are nearly fully utilised, the expansion is on account of strong: i) domestic demand for DMA HCL, and ii) potential for import substitution in morpholine. Further, acetonitrile will be a new addition to BAL’s portfolio with healthy demand potential from exports and domestic markets. The additional infusion of INR 60 crore for the three products should add nearly INR 170 crore in incremental revenues by FY19 and up to INR 280 crore at the peak utilisation level. Resultantly, the company is expected to generate cumulative free cash flows of nearly INR 180 crore in FY18 and FY19 with higher asset turns and profitability sans any new investment allocation.

Inexpensive valuation makes it a compelling BUY

In our view, BAL is all set to benefit immensely from its capacities and client base built up historically coupled with incremental expansions. Ergo, we expect strong growth in revenues, improving margins with higher utilisation levels and product expansions. Our earnings estimates per share for FY18 and FY19 are INR35.1 and INR42.4 respectively. We value the company at 18x FY19 earnings estimate of INR42.4/share and initiate our ‘BUY’ recommendation with a target of INR764/share.

Research report by GEPL

Unique business structure provides an edge over its peer

Balaji Amines has unique business structure. It is one of the leading manufacturers of Aliphatic Amines. It specialized in manufacturing Methylamines, Ethylamines and derivatives of them. The company enjoys leadership position in many of its products like Monomethylamine (MMA), Dimethyl amine (DMA), Trimethylamine (TMA), Dimethyl Amino Ethanol (DMAE), Mono Methyl Amino Ethanol etc. It caters to host of industries like Pharma (51% of revenues), Agro Chemicals (26%), Paint Stripping & Resins, Rubber cleaning etc. The company has three state of the art units – two near Solapur and one near Hyderabad. In addition Balaji possess a fully furnished Laboratory which helps the company in development of newer products. It also operates a 5 start hotel in Solapur – Balaji Sarovar, the only 5 star properties in the city.

Niche play provides high growth momentum in the upcoming period

Worldwide Amines technology is a closely guarded process with only few handful companies having access to such technology. For the first time in India, Balaji tests on a indigenously developed products and over the years has become a leading player in the segment and commands healthy market share of 60-70% in domestic region for various products. Balaji has mastered the complex process which we believe, would act as a major entry barrier for domestic competitors and would provide revenue visibility and stable profitability.

Robust Financials makes Balaji Amines lucrative

Consistent growth in the top line also backed by operating margin improvement makes Balaji Amines more lucrative. Consolidated EBITDA margins have improved to 20.9% in FY17 from 16.4% in FY13. This shows that company has improved in operating efficiency. A net profit margin has also improved to 12.8% in FY17 from 6.1% in FY13. Return on equity has improved from 18.3% in FY13 to 23% in FY 17. ROCE has shown strong growth of 9.6% in FY13 to 19.1% in FY17. This makes Balaji Amines a safer bet as compared to others. We believe that this will create a great opportunity for the investor for longer term horizon.

Valuation

At CMP of Rs. 574, Balaji Amines Ltd. is trading at 22.5x at its FY17 earnings of Rs. 25.4. With strong margin improvement and strong Business perspectives; We expect stock to trade at 21.4x its FY19E earnings of Rs. 33.9. We assign a BUY rating on the stock with a price target of Rs. 725 which is more than 26% upside from current levels.