Strong capex led volume surge to drive long-term growth of Balaji Amines Ltd, Maintain BUY: Edelweiss

Strong capex led volume surge to drive long-term growth, Maintain BUY

• Balaji Amines Ltd. (BAL) posted robust growth on YoY basis, however performance on sequential basis was muted. Top line came slightly below expectations, primairly due to underperformance by the standalone business, while gross profit margin was under pressure despite stable raw material prices impacting profitability. Balaji Specialty Chemicals (BSC) contined its robust performance on strong realisations.

• Consolidated revenue came in at INR628cr, up +19% YoY but down -6% QoQ. EBITDA stood at INR173cr, rising +33% YoY but falling -19% QoQ. For the quarter, EBITDA margin expanded +286 bps YoY but contracted -447 bps QoQ to 28%, with sequential compression mainly due to gross profit margin pressure. Consolidated PAT (after MI) grew +16% YoY but fell -25% QoQ to INR93cr.

• The standalone business recorded soft performance on sequential basis, largely on account of normalisation in realisations (sequentially) and lower contribution from the Dimethyl Carbonat (DMC)/ Propylene Carbonate (PC) and Propylene Glycol (PG) plant. However, we expect commencement of production at DMC / PG facility should lead to volume uptick and realisation improvement in the coming quarters.

• We expect BAL earnings to register robust 22% CAGR over FY23–25e owing to a strong pipeline of capacity additions under Phase II greenfield expansion plans and ramp-up of capacities added under Phase I. We maintain our ‘BUY’ rating with a revised TP of INR4,250.

Volume uptick allays demand concerns; normalised realisations impact profitability

The standalone amines business recorded +4% rise in volume offtake sequentially to 23,253 MT (-1% YoY) amid a challenging environment across Pharma and API industries in the global market. It was driven by +21% QoQ growth in Specialty Chemicals’ segmental volumes to 9,174 MT (-3% YoY). DMF utilisation during the quarter stood at 68– 70% and is on track to achieve the 75% utilisation target by FY23-end. However, realisations stood at INR192/kg (+5% YoY / -16% QoQ), correcting from the all-time high realisations reported in the previous quarter(INR227/kg). This resulted in muted top-line growth, which stood at INR446cr up +3% YoY but down -13% QoQ.

Subsidiary continues to outperform; strong realisation aids performance

In Q2FY23, subisidiary Balaji Specialty Chemicals Ltd. (BSC) posted robust performance, with top line coming in at INR178cr, up +89% YoY / +13% QoQ. This growth was driven by strong realisation during the quarter at INR340/kg, up +71% YoY / +6% QoQ, while volume stood at 5,245 MT, up +10% YoY / +6% QoQ. Strong realisation, along with volume uptick, indicates a healthy demand environment for its products. The management is looking for independent listing of BSC and filled DRHP for the same, update on which is expected soon.

Strong capex pipeline to drive long-term growth

Under Phase 2 of the greenfield project, BAL annouced a strong pipeline of capex for setting up the following capacities: (i) n-Butylamine capacity (15,000 MTPA), (ii) Acetonitrile plant (15,000 MTPA) based on new technology, which will aid in absorbing acetic acid price volatiity, (iii) separate DMF plant with 30,000 MTPA additional capacity to cater to growing demand from the Pharma and API industries and (iv) 40,000 MTPA capacity addition of Methylamines to satisfy rising demand from the Agrochemical and Pharma industries. Construction activity of the Methylamine plant is progressing well and completion is expected in the next 7–8 months.

Volume surge on the back of capacity addition to accelerate earnings growth; maintain ‘BUY’

While 2QFY23 BAL performance came slightly below our estimates, we expect better performance in 2HFY23. The DMC/PC and PG plant started operations by the end of September; though slightly delayed, it is expected to see a quick ramp-up to optimum capacity by FY23-end with a revenue potential of INR250–300cr. Over FY23–25, we expect robust BAL performance to be chiefly driven by volume growth coming from (i) DMC and PG plant, (ii) nButyl amine, (iii) Dimethyl Formamide, (iv) Acetonitrile and (v) Methylamine plants. With the operationalisation of these plants, the management aims to achieve the INR4,000cr mark in top line. We expect Balaji Amines earnings to register 22% CAGR over FY23–25e. We remain positive on BAL due to: (i) operationalisation of the DMC and propylene glycol plant (September 2022), (ii) ramp-up in recently added DMF and acetonitrile capacities, (iii) continuation of strong realisation of BSC products and (iv) strong capex pipeline spread over the next two years. We have revised our earnings estimates downwards by ~10% for FY23–25e. We have introduced estimates for FY25 and roll forward our valuation to FY25e EPS. We maintain TP of INR4,250 and the stock is trading at 25x average FY24 and FY25 price-to-earnings multiple.