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INDUSTRY THEMATIC 08 FEB 2018

Amines

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Profitable, scalable & nicheAmines form a relatively smaller, yet profitable niche, within the Chemicals industry. They are Organic Chemicals (derived from Ammonia) and are used in the synthesis of Pharmaceutical bulk drugs (APIs), Agro-chemicals, Dyestuffs, Oil & Gas (downstream), Water Treatment chemicals, and Rubber Chemicals. Balaji Amines and Alkyl Amines currently account for over 90% of India’s domestic Amines output. End-user industries of Amines are growing at a fast clip in India. Post the environmental clampdown and capacity cuts in China, both companies have added capacities over 50,000 MTPA and will reap volume benefits. They have reported gross margins of 47%+ over FY14-17, helped by an improving mix (tilting towards niche derivatives). We initiate coverage on Balaji Amines (BUY, TP = Rs 725, based on 17x FY20E EPS) and Alkyl Amines (BUY, TP = Rs 710, based on 22x FY20E EPS). Given the persistent run-up in both stocks 300% and 120% in the trailing two years, valuations may not rerate further even as stock performance mimics earnings growth here on.

Other investment highlights

The global manufacturing footprint for Amines is limited to a small clutch of manufacturers and currently dominated by the Chinese. The business has high capital intensity and lower asset turns. Aliphatic Amines form a major chunk of the global Amines market at ~USD 4.1bn.

Meanwhile, Chinese exports of Aliphatic Amines (including Amine derivatives) to India have declined by ~2,000 TPA from 20,563 MTPA in FY16 to 18,672 MTPA in FY17. We expect further reduction in Chinese imports given strict environmental plus scrapping of export subsidies on specialty chemicals (link). This can increase domestic volume growth opportunities for Alkyl and Balaji.

Pharma and Agrochem now contribute ~80% of Balaji and Alkyl Amines’ combined revenues. Both segments offer several new product opportunities beyond first level amine products. We expect margins to remain elevated as the share of value added, niche derivatives increases in the mix.

Valuation summary

MCap (Rs bn)

CMP (Rs) Reco TP

(Rs) EPS (Rs) P/E (x) EV/EBITDA (x) Core RoCE (%)

FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E Balaji Amines 19.9 615 BUY 725 36.4 42.5 47.3 16.9 14.5 13.0 10.6 8.9 7.8 29.6 28.8 29.2

Alkyl Amines 12.3 603 BUY 710 29.4 32.1 36.4 20.5 18.8 16.6 12.6 11.3 9.9 19.7 20.2 21.7

Source:HDFC sec Inst Research

MCap

(Rs bn) CMP (Rs) Reco. TP

(Rs) Balaji Amines 19.9 615 BUY 725

Alkyl Amines 12.3 603 BUY 710

Archit Joshi [email protected] +91-22-6171-7316

Nilesh Ghuge [email protected] +91-22-6171-7342

https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2016/april/-agreement-terminate-export-subsidies-under-China-DB-platform

AMINES : INDUSTRY THEMATIC

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Other investment highlights Manufacturing Amines requires a high degree of

technical expertise. Process control in a high-temperature and high-pressure environment to achieve the desired yield is challenging. The business is capital intensive with low asset turns. Considering the relatively small size of the industry, manufacturing technology is closely guarded and there is virtually no threat from new entrants.

Asia has been driving the growth of the global chemical industry for some time now. As the world’s core manufacturing base tilts towards Asia, India and China are key beneficiaries. However, China, which was way ahead in this transition, declared a war against pollution in 2014. It has been pushing for better environmental compliance and shutting down non-compliant capacities. Indian manufacturers with expertise in complex chemistries such as Amine

manufacturing are natural beneficiaries of this move. While consumption of commodity Amines like Methyl and Ethyl Amines continues to grow in India at 6-8% YoY, niche derivatives like DMF, DMAC, DMA-HCL, DEAU, NMP, NEP are likely to grow at 10-15% CAGR. They are likely to benefit from anti-dumping duties (expected on DMF and DMAC).

Benign threat of new entrants The Amines manufacturing industry is dominated by

Chinese manufacturers and MNCs. Alkyl Amines has adopted technology from Leonard (USA) while Balaji Amines has indigenously developed technology to manufacture Aliphatic Amines.

Balaji Amines and Alkyl amines are key manufacturers of Methyl and Ethyl Amines (~90% market share). Other Amine players like RCF, Indo Amines, Amines & Plasticizers have a low individual market share.

Key CompetitorsRegion Company Product Groups Europe BASF Ethyl Amines, Ethyelene Amines, Chiral Amines Europe Arkema Ethyl Amines, Ethyelene Amines USA Huntsman Ethyl Amines, Ethyelene Amines, Morpholine USA Eastman Ethyl Amines, Ethyelene Amines, Methyl Amines USA DowDuPont Ethyl Amines, Piperazine, Ethyelene Amines Japan Mitsubishi Gas Chemical Company Methyl Amines, Dimethylformamide, Dimethylacetamide Japan Koei Chemical Company Methyl Amines, Ethyl Amines China Hualu Hengsheng Methyl Amines China Feicheng Acid Chemicals Co Ltd Methyl Amines China Luxi Group Methyl Amines, Dimethylformamide Source: HDFC sec Inst Research


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Industry Overview China is the single largest producer and consumer

of Aliphatic Amines, representing 60% of global production in 2017. The top six companies controlled about half of the total global capacity for Aliphatic Amines in 2017. The largest two (Eastman and BASF), are based in the United States and Europe, respectively. However, the remaining major producers operate solely in China.

Post the environmental clampdown in China to cut down non-compliant facilities, multiple capacities have gone off-stream creating a sizeable opportunity for Indian manufacturers.

China is the largest manufacturer of commodity Amines (Methyl and Ethyl Amines). It also dominates the production and consumption of Amine derivatives like DMF, DMAC, GBL, 2-P, NMP, NEP, PVK-30. China has been dumping amine derivatives in India, hurting domestic manufacturers. However, environmental clampdowns, falling export subsidies coupled with higher power and labor costs are hitting the Chinese. Meanwhile, Indian exports of Amines have grown at a steady 5 year CAGR of ~7.0% (Source: www.commerce.nic.in).

Our channel checks suggest that total imports of Methyl and Ethyl Amines in India are ~16% of domestic demand (~60,000 MTPA). This implies ~10,000 TPA import volumes for Amines. An additional ~40,000 TPA of imports is Amine derivatives, of which ~15,000 TPA is imported from China. Falling Chinese exports provide Indian manufacturers an opportunity for import substitution as also to garner incremental export market share.

Methyl and Ethyl Amines are hazardous chemicals. Transportation is thus a cumbersome and a costly affair. This is another reason for lower imports of commodity Amines in India. Freight and related costs as a % of sales for Balaji and Alkyl were 6.1% and 4.5% respectively in FY17.

Freight And Related Costs (% of Sales)

Source : Company, HDFC sec Inst Research Note: We have considered Freight, Packaging and Forwarding expenses as a % of sales in the case of Balaji Amines, while Freight, Export and Processing expenses as a % of sales in Alkyl Amines.

The government of India has initiated preliminary investigation to determine the impact of dumping of Dimethyl Acetamide (DMAC) in Mar-17 and Dimethyl Formamide (DMF) in Jan-18 from China and other countries. The government of India has imposed an Anti-dumping duty on more than 50 chemicals over the last 3 years safeguarding the domestic industry.

50-70% of Methyl and Ethyl Amines are internally consumed by Balaji Amines and Alkyl Amines to produce Amine derivatives. DMA HCL, DMF, DMAC, NEP, NMP, PVK-30 are key Amine derivatives for Balaji Amines. DMA HCL, DMAPA, NEP, NMP are key Amine derivatives for Alkyl Amines.

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Peer Comparison Alkyl Amines Balaji Amines

Product Portfolio

Alkyl Amines has a product basket of more than 100 products. However, as per the management commentary the company is annually selling ~40 products.

Balaji Amines has a product portfolio of 25 products. The company follows a focused approach towards product selection.

Alkyl Amines classifies 18 products under specialty products, however we believe specialty chemicals is a misnomer in this context and only Acetonitrile and DMAPA are products with higher margin contribution

Balaji Amines is a market leader in Morpholine, DMA HCL, NMP, NEP, PVK-30 all of which have a potential of contributing to EBITDA margins higher than 18%.

Size and Scale

Alkyl Amines has the highest capacity of Ethyl Amines (30,000 MTPA) and has expanded Methyl Amines capacity from 16,000 MTPA to 32,000 MTPA.

Balaji Amines is larger in size for Aliphatic Amines than Alkyl Amines, with an existing capacity of 48,000 MTPA for Methyl Amines. Although the company started with Ethyl Amines capacity of 6,000 MTPA, it hasn’t expanded the capacity since inception.

The company will triple its existing Acetonitrile capacity from 12,000 MTPA to 30,000 MTPA by FY20E. The company has presence in NMP, NEP and 2-P albeit with a lower capacity than that of Balaji Amines.

The company has added Acetonitrile to its product kitty with a 9,000 MTPA capacity (clearance of 17,000 MTPA). The company also has debottlenecked DMA HCL capacity from 24,000 MTPA to 31,500 MTPA and taken Morpholine Capacity from 3,000 MTPA to 10,000 MTPA.

Manufacturing Facilities 1.Patalganga, Maharashtra. 2. Kurkumbh, Maharashtra.3.Dahej, Gujarat

1. Unit-1 Solapur, Maharashtra2. Unit-2 Ballaram, Telangana3. Unit-3 Solapur, Maharashtra

Technology Adopted from Leonard Process Company Indigeniously developed

Anti-dumping safeguards Nil Expected anti-dumping duty on Dimethyl

Acetamide and Dimethyl Formamide. Anti-dumping duty on Morpholine removed.

Growth Drivers

Capacity addition from Methyl Amines to help in growth of Methyl Amine derivatives production and sales, capacity addition of Acetonitrile to help capture exports market.

Investment in Mega Project to add ~ Rs 4.5 bn to topline in 4-5 years, capacity expansion of Morpholine, Acetonitrile and DMA HCL to help capture exports market.


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Key Raw Material Prices Indian Spot Prices Of Methanol Indian Spot Prices of Ammonia

Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research

Chinese Spot Prices of Acetic Acid Chinese Spot Prices of Diethylene Glycol

Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research

Average Prices of Methanol (for 3QFY18); a key raw material used in the production of Methyl Amines and its derivatives, have run up by 26% YoY to Rs 23.5/kg. Average Prices of Methanol (for 3QFY18); a key raw material used in the production of Methyl & Ethyl Amines and its derivatives, have run up by 64% YoY to Rs 23.4/kg. Average Prices of Acetic Acid (for 3QFY18); a key raw material used in the production of Acetonitrile and DMAC, have run up by 100% YoY to Rs 37.3/kg. Average Prices of DEG (for 3QFY18); a key raw material used in the production of Morpholine, have run up by 10% YoY to Rs 67.6/kg.

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Peer comparison Gross Margin Comparison EBITDA Margin Comparison

Source: Bloomberg, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research Working Capital Comparison Operating Cash Flow/Capital Employed Comparison

Source: Bloomberg, HDFC sec Inst Research

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Balaji Amines Gross Margins(%)Alkyl Amines Gross Margins (%)

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Balaji Amines - Cash Conversion CycleAlkyl Amines - Cash Conversion Cycle

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Alkyl Amines has shown consistency in maintaining Gross margins and EBITDA margins than Balaji Amines, however Balaji Amines has been making absolute EBITDA margins better than Alkyl Amines due to a better mix. Though Balaji Amines has reported RoCE’s better than that of Alkyl Amines, Alkyl has shown a much better capital allocation strategy. Balaji Amines reported an RoCE of 2.3% in FY17 in hotels business which is not in tandem with its Amines business (reporting RoCE over 45% in FY17).


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Key Financials

Company Mcap (Rs bn)

CMP (Rs) Reco TP

(Rs) EBITDA (Rs bn) APAT (Rs bn) RoIC (%)

FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E BAL 19.9 615 BUY 725 1,985 2,293 2,520 1,140 1,329 1,474 29.6 28.8 29.2 AACL 12.3 603 BUY 710 1,104 1,212 1,350 600 656 743 19.7 20.2 21.7 Source: HDFC sec Inst Research

Import export Data

Indian exports of Aliphatic Amines have grown by a 10 year CAGR of 11.0%, while imports have grew only by a 10 year CAGR of 8.9%. Imports of Aliphatic

Amines from China have declined from 21,016 MTPA in FY15 to 18,672 MTPA in FY17.

Indian Exports of Aliphatic Amines Indian Imports of Aliphatic Amines

Imports from China of Aliphatic Amines Indian Imports of Morpholine

Source: www.commerce.nic.in, HDFC sec Inst Research

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INITIATING COVERAGE 08 FEB 2018

Balaji Amines BUY


Largest Amine Manufacturer in India!Balaji Amines, the largest manufacturer of Aliphatic Amines in India, derives 22% of its revenues from exports. As it broadens its product range to host of Amine derivatives, the company is poised to grow revenues by 12.4% CAGR to Rs 21 bn over FY18-21E.

Amine derivatives like NMP, NEP, 2-P, DMAC, DMF (from ~28% in FY17 to 35% in FY21E) are expected to form a larger chunk of the pie by FY21E.

Balaji Amines is now shifting focus from commodity Amines (Methyl and Ethyl Amines growing at 6-8% YoY) to Amine derivatives and niche products growing at 10-15% YoY.

Balaji reported RoCE/RoIC of 32.3/35.6% in FY17, better than competitor Alkyl Amines (reported RoCE/RoIC of 21.4/22.4% in FY17) owing to a better product mix. With a Mega Project investment of Rs 3.0bn at a greenfield site, we believe Balaji Amines’ strategy of entering new products will help maintain EBITDA margins at 18-20%. We have not built in incremental gross block & CWIP, debt and revenues from the Mega project in our estimates. However, this Greenfield expansion has incremental revenue potential of Rs 4.5 bn (link) (1.5x gross block) which is ~60% of Balaji’s FY17 topline.

Despite this omission, our estimates suggest that Balaji is expected to post Sales/EBITDA/PAT CAGR of

12.4/10.3/12.6% over FY18E-21E. We initiate coverage with a Buy rating and a target price of Rs 725.

Niche products to aid volume growth: The expansion of Morpholine, DMA HCL and Acetonitrile capacity by incurring minimal capex (~Rs 650 mn in FY18E) would aid into volume growth of 10-15% YoY from the previously mentioned products. Also, the investigation to determine the impact of dumping of Dimethyl Acetamide (DMAC) in March’17 and Dimethyl Formamide (DMF) in Jan’18 from China and other countries bodes well for the company. An entry into Ethylene Diamine, piperazine and Diethylenetriamine through an investment in Balaji Specialty Chemicals reiterates our thesis of volume led growth through new product streams

Financial Summary Rs mn FY17 FY18E FY19E FY20E FY21E

Net Sales (in Rs mn) 6,705 8,279 9,416 10,781 11,763

Growth (%) 4.3 23.5 13.7 14.5 9.1

EBIDTA (in Rs mn) 1,527 1,877 1,985 2,293 2,520

EBIDTA Margin (%) 22.8 22.7 21.1 21.3 21.4

APAT (in Rs mn) 816 1,074 1,140 1,329 1,474

EPS (Rs.) 25.2 33.1 36.4 42.5 47.3

P/E (x) 24.4 18.6 16.9 14.5 13.0

EV/EBITDA 13.7 10.9 10.6 8.9 7.8

RoE (%) 23.1 24.2 21.6 20.5 19.0 Source: HDFC sec Inst Research

INDUSTRY CHEMICALS

CMP (as on 07 Feb 2018) Rs 615

Target Price Rs 725 Nifty 10,477

Sensex 34,083

KEY STOCK DATA

Bloomberg BLA IN

No. of Shares (mn) 32

MCap (Rs bn) / ($ mn) 20/310

6m avg traded value (Rs mn) 88

STOCK PERFORMANCE (%)

52 Week high / low Rs 782/271

3M 6M 12M

Absolute (%) 8.0 87.0 72.1

Relative (%) 5.9 81.4 51.8

SHAREHOLDING PATTERN (%)

Promoters 54.49

FIs & Local MFs 1.83

FPIs 1.5

Public & Others 42.18 Source : BSE Archit Joshi [email protected] +91-22-6171-7316


http://www.moneycontrol.com/news/business/earnings/expect-to-do-rs-1000-1050-crore-of-revenue-in-fy19-balaji-amines-2494777.html

BALAJI AMINES : INITIATING COVERAGE

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Financial Summary: After a rapid financial de-leveraging exercise (retired Rs ~1.5bn debt from FY14 to FY17) the company is now ready to re-issue debt for its Mega Project. We believe, the company is likely to generate cumulative operating cash flows of ~Rs 3.5bn over FY19E-21E and would plan its investments via internal accruals, with debt requirement of not more than Rs 1.0 bn. Balaji Amines could have had better RoCE’s (Amines RoCE in FY17 came at 46.5%) overall RoCE’s were at 35.6% owing to lower RoCE from Hotels business of 2.3%. As per the management, the Hotel business has been able to make Cash profits (PAT+Depreciation) in 9MFY18.

Mega Project Status to soon provide visibility: Pursuant to the allotment of a 90 acre land parcel by the government of Maharashtra, Balaji Amines announced an investment of Rs 2.96bn. We expect an opportunity size of Rs 4.5bn from this project (an addition ~60% of current topline in the next 3-4 years).We expect the company to expand its base business (for captive consumption) to cater to the increasing demand of value added amine derivatives. We also believe Balaji Amines is likely to enter new product streams in its Mega Project helping the company maintain EBITDA margins of 18-20%.


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Niche Products to foster growth

Balaji Amines is expanding capacity of Morpholine from 3,000 MTPA to 10,000 MTPA by end of FY18E.

The company has put up a new facility for Acetonitrile and has received environmental clearance for setting up a 17,000 MTPA plant (expected in 1QFY19E).

The company has de-bottlenecked capacity for DMA HCL from 24,000 MTPA to 31,500 MTPA.

Preliminary investigations to determine dumping of Dimethylacetamide in India have commenced.

Preliminary investigations to determine dumping of Dimethyl Formamide in India have commenced.

Morpholine Balaji Amines currently has a capacity of 3,000 MTPA

of Morpholine. The company is adding another 7,000 MTPA of Morpholine capacity with a capex of Rs 300mn which is likely to commence in 4QFY18E. It is used as an intermediate in the production of rubber chemicals and optical brighteners. It is also used extensively as a corrosion inhibitor in steam boiler systems. Raw material required to manufacture Morpholine is mainly Di-Ethylene Glycol (DEG), Reliance Industries and IOCL are the only manufacturers of DEG in India. The company plans to manufacture ~6,000 MTPA in FY19E and is most likely to export 50% of its produce. The Indian consumption of Morpholine is ~6,000 MTPA, the company is already catering to ~45% of the current Indian demand with its current capacity of 3,000 MTPA. Morpholine industry too is a concentrated industry like that of amines with the presence of MNC’s like Sinochem (China), BASF (Germany), Huntsman (USA) etc. Balaji Amines has indigenously developed

technology for Morpholine and is the only producer of Morpholine in India. The company expects growth in the exports market at the back of higher demand in end user industries. In 2015, the government of India removed the Anti-dumping duty on Morpholine which could hurt margins (if in case Diethylene Glycol prices shoot up and the company is unable to pass on the benefits).

Exports of Morpholine

Source: HDFC sec Inst Research

Acetonitrile Acetonitrile finds application in the pharmaceutical

industry for the synthesis of medicines, pesticides, vitamin B1. INEOS in the United States, Asahi Kasei in Japan, and CNPC Jilin Chemical Group in China are the major players in the global Acetonitrile market; together, these three producers account for about 42% of global capacity in 2017. World Acetonitrile consumption has continued to grow at an average annual rate of 5–6% over the last five years, at the back of increasing production of engineered drugs, generic pharmaceuticals, and pesticides. China is the

Balaji Amines is a market leader in Morpholine, NMP, NEP, GBL, PVK-30. The quality of these products is at par with International standards and provides a great potential in import substitution. The company has patented the process of manufacturing of the N-Methyl-2-Pyrrolidone (NMP).

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largest consumer of Acetonitrile followed by India, USA and Europe. Acetonitrile is manufactured using two routes, globally Acetonitrile is obtained as a by-product of Acrylonitrile. While, Indian manufacturers have resorted to production via Acetic acid route. Since globally Acrylonitrile production is under pressure due to environmental tightness in China, we expect Acetonitrile producers through acetic acid route to benefit. Balaji Amines has received an environmental clearance of 17,000 MTPA and has planned to produce ~6,000 MTPA in its first year of operations and increase gradually to ~9,000 MTPA in the coming years. Balaji Amines plans to leverage on its existing customer base for the sale of Acetonitrile which will be split equally in domestic and exports markets. The current consumption of Acetonitrile is 16,000 MTPA in India, Alkyl Amines (a key competitor) currently has a capacity of 12,000 MTPA and will soon add 18,000 MTPA by the end of FY20E. We expect capacity addition from both these players to weigh heavy on margins, Alkyl Amines has been successful in maintaining EBITDA margins for Acetonitrile upwards of 18% despite high fluctuations in realizations.

Dimethyl Amine – Hydrochloric Acid (DMA HCl) DMA HCL is a derivative of Dimethyl Amine, currently

70% of the total production of Dimethyl Amine is used to manufacture DMA HCl and Dimethylformamide. DMA HCL finds applications in anti-diabetic, anti-ulcer, analgesic drugs like Metformin, Rantidine and Tramadol etc. Balaji Amines de-bottlenecked its capacity from 24,000 MTPA to 31,500 MTPA in 1HFY18E.Balaji Amines has ~70% global market share in DMA HCL and claims to be a global market leader in the same. Alkyl Amines too has presence in DMA HCl, albeit currently with a smaller capacity. With the capacity expansion of

Methyl Amines plant in Dahej, Alkyl Amines is poised to increase its share of DMA HCL.

Dimethylformamide (DMF) Balaji Amines is the largest manufacturer of

Dimethylformamide in India with a capacity of 30,000 MTPA. DMF is used in the production of Acrylic fibers, polyeurethane based coatings, epoxy formulations and as a solvent in various other industries. The company has been unable to gain domestic market share due to cheap imports coming in from China, the total imported quantity in India is ~45,000 MTPA while Balaji Amines has been operating at ~20% utilization with a current capacity of 30,000 MTPA. The government of India has recently initiated preliminary investigations to determine dumping of DMF from China, Germany and Saudi Arabia. The management has been pursuing the government to initiate anti-dumping investigations on DMF for last two quarters in the light of growing imports injuring the domestic industry. We thus expect volume growth to rise as capacity utilization ramps up post implementation of an anti-dumping duty.

Dimethylacetamide (DMAC) DMAC is used to manufacture Acrylic Fibres,

Elasthane Fibres, Pharmaceuticals and various Polymers. Balaji Amines has a capacity of 6,000 MTPA. The government of India has initiated an anti-dumping probe on DMAC on 17th March’17 pursuant to an application made by Balaji Amines and RCF who together command a 35% market share in the domestic industry (as per data available till 2015). The rest of the demand is filled through imports, which have grown by 70% from subject countries (China and Turkey) from FY14 to FY15. Assuming implementation of an anti dumping duty in FY19E, we are building in Rs 540mn, Rs 620mn and Rs 660mn for FY19E, FY20E and FY21E respectively.

DMF and DMAC are likely to attract an anti-dumping duty in India. The Indian government has imposed anti-dumping duty on around 50 chemicals in the last two years, most of them have been imported from China.

BALAJI AMINES: INITIATING COVERAGE

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Import data of Dimethyl Acetamide: DMAC FY13 FY14 FY15 Import from Subject Countries (MT) 2,082 2,730 4,629 Import from other Countries (MT) 1,641 1,186 198 Total Imports (MT) 3,723 3,916 4,827 Total Production in India(MT) 3,410 3,149 2,879 Total Demand (MT) 6,992 6,922 7,415 Market Share of Domestic Industry (%) 46.8 43.4 34.9 Total Imports (% of Demand) 53.2 56.6 65.1 Source:www.dgtr.gov.in, HDFC sec Inst Research Key Product Summary

Sr no Product name Capacity

(MTPA) Remarks

Peak Revenue Potential

(Rs mn)

1 Methyl Amines 48,000 Commissioned 30,000 MTPA in 2013. ~70% captive consumption 2,000

2 Ethyl Amines 6,000 Started manufacturing in 1997 800 3 NMP/NEP/2P 18,000 Added in 2011 2,000 4 Morpholine 3,000 Currently adding 7,000 MTPA by end of FY18E 1,500

5 DMF 30,000 Operating at 20% utilization due to cheap dumping, preliminary investigation to determine dumping commenced 1,900

6 PVPK-30 750 Manufacturing as per enquires 30 7 GBL 15,000 ~90% is captively consumed NA 8 DMA HCl 24,000 Adding 7,500 MTPA through de-bottlenecking NA 9 DMAC 6,000 Initiated Anti-dumping duty investigations 700

10 Choline Chloride 6,000 Used in animal feed industry. NA

11 DMU 1,500 Manufacturing as per enquires NA 12 DEAE/DMAE 1,700 Manufacturing as per enquires NA

13 Acetonitrile 17,000 Received clearance for 17,000 MTPA. Commercial production of 6,000 MTPA expected in FY19E 2,000

Source: Company,HDFC sec Inst Research

Balaji Amines will have a capacity of 10,000 MTPA by the end of FY18E and will begin manufacturing 6,000 MTPA in FY19E, of which 50% is targeted to be exported. Acetonitrile is known to have fluctuating realisations due to volatile raw material prices, with capacity addition of 18,000 MTPA over the next two years from the competition we expect some pressure on margins. Balaji Amines is expected to ramp up utilization of derivatives like NMP/NEP/2-P considering high import substitution potential and currently under-utilized capacities.


Page | 13

Mega Project worth Rs 2.96 bn investment takes shape

Balaji Amines announced on 4th December’17 that the company has been allotted 360,000 sq.mtrs (90 acres) of land in MIDC Chincholi, Solapur, Maharashtra for various expansion projects.

Pursuant to this announcement, the company also announced that the Department of Industries, Energy and Labour has conferred “MEGA PROJECT” status to the aforesaid expansion plans. The outlay for the project is expected to be Rs 2.96 bn. Under the Package Scheme of Incentives (PSI) the company is entitled to avail various incentives in the form of interest rate subsidies, power tariff subsidies, and exemption on stamp duties etc upon successfully fulfilling norms mentioned under the PSI.

Though, the expansion plans in terms of Products, investments and capital structure of the project, timelines for the same are not disclosed, we expect revenue potential of Rs 4.5bn at peak utilizations.

With a current Ethyl Amine capacity of only 6,000 MTPA running at ~90% utilization, we believe an expansion in Ethyl Amines is in the offing.

Balaji Amines has been venturing into products which exhibit similar industry characteristics as that of Amines with respect to low competition, niche product offering, and EBITDA margins within the range of 18-20%. We believe the company is likely to foray into Amine derivatives & new product streams by taking advantage of its integrated facility. We are not building in revenues from the Mega Project due to lack of clarity.

Manufacturing plant details

Unit – 1 Unit - 2 Unit – 3 Location Solapur, Maharashtra Bollaram, Telangana Solapur, Maharashtra Area (acres) 30 4.2 40 Capacity (MTPA) 60,000 30,000 100,000

Products

Methyl Amines, Ethyl Amines, Morpholine, Cholin Chloride, Dimethyl Urea, DMA HCl, Dimethylacetamide,deae dmae

DMA HCl Methyl Amines, Dimethylformamide, GBL, NMP, NEP, PVPK-30, Morpholine, Acetonitrile, DMA HCl 2-p

Source : Company, HDFC sec Inst Research

We expect more clarity from the management regarding the capital structure, product profiles, incentive structures and completion timelines. Going by the current run-rate, Balaji Amines should have an asset turnover of 1.5x entailing into a peak revenue potential of ~Rs 4.5bn from the Mega Project.


Page | 14

Investment in Balaji Specialty Chemicals Balaji Amines on 30th October’17 announced of

acquiring 55% stake in Balaji Specialty Chemicals. Balaji Specialty Chemicals will become a subsidiary of the company, with 45% of the stake with the promoters of Balaji Amines. Balaji Specialty Chemicals was earlier named Balaji Benzochem with plans to enter into the Benzene based derivatives. However, with the increasing competition in the Benzene derivative space the company decided to change its strategy and ventured into Ethylene Di-amine, Diethyleneteramine and Piperazine. The company already has received an environmental clearance for the same.

Balaji Amines will acquire 22 mn equity shares of the face value of Rs 10.0/share at a premium of Rs 20.0/share aggregating to Rs 660mn in tranches.

Balaji Specialty Chemicals will invest Rs 1.0bn for coming up with plants for Ethylene Di-amine, Diethyleneteramine and Piperazine. The company has funded the project by raising debt of Rs 1.0 bn from banks. The said investment will reap peak revenues of Rs 1.5bn and is expected to start adding to the topline from FY19E.

Entering into Ethylene Diamine is in line with the company’s strategy to make in-roads in products with a lower competitive intensity, strong technical know-how and with sustainable margins.

Ethyleneamines are used in the production of chelating agents, agricultural compounds (mainly fungicides), lube oil additives, oil field chemicals, and paper wet-strength resins, and in surfactants and fabric softeners. They also have applications in pharmaceuticals, personal care products, and urethane chemicals/catalysts. The United States is the leading consuming region at 26%, followed by China (21%), Other Asia (17%), and Western Europe (13.5%).

The market for Ethylene amines and Piperazine in India is to the tune of 36,000 MTPA and is mostly fulfilled by imports. Balaji Amines has received an Environmental clearance for putting up a 37,350 MTPA of Ethylene Diamine, 4,050 MTPA of Piperzine and 3,150 MTPA Diethyleneteramine.

We are expecting Rs 600mn, Rs 700mn and Rs 900mn in FY19E, FY20E and FY21E respectively at the back of higher scope of import substitution. We are building in EBITDA margins of 18% from FY19E-21E.

Balaji Specialty Chemicals was earlier named Balaji Benzochem and had a line of benzene based derivatives in its pipeline, however with competitive intensity increasing in benzene derivatives; the management decided to stick to its strategy of entering industries with a lower competitive intensity. Entering into Ethylene Diamine is in line with the company’s strategy to make in-roads in products with a lower competitive intensity, strong technical know-how and with sustainable margins.


Page | 15

Core Amines business to register a steady volume growth Balaji Amines has a Methyl Amines capacity of 48,000

MTPA. The output for Mono Methyl Amine, Di Methyl Amine and Tri Methyl Amine is largely fixed in the proportion of 65:30:5 while carrying out the reaction of Methanol and Ammonia, which are the key raw material required to manufacture Methyl Amine. Dimethyl Amines (DMA) has the highest demand among the three amines in the market. The company captively consumes ~70% of DMA for DMA HCL and DMF. Balaji Amines requires 50% of its Mono Methyl Amine captively in the production of N- Methyl Pyrodilne, while the rest is sold in the market. While, Tri Methyl Amine is sold in the market.

Balaji Amines procures ~60% of its Methanol requirement through ICIS West Coast India contract on a formula based pricing to insulate itself from the price volatility in the Methanol markets. India is the most cost competitive market due to lower prices of Methanol, which has helped the company register better gross margins.

The Indian demand (~60,000 MTPA) for Methyl Amine and Ethyl Amines is lesser than that of the capacity installed (~90,000 MTPA) in India and is growing at a steady pace of 6.0%-8.0% YoY on the back of growth in end user industries like Pharmaceuticals and Agro-Chemicals. However, since ~50%-70% of the Methyl Amines and Ethyl Amines are consumed internally for production of Amine derivatives, we expect volume growth of Methyl Amines to be within 6-8% and mimic growth coming through demand from end user industries.

Methyl Amines and Ethyl Amines, being hazardous chemicals are difficult to transport; Imports are ~16% of total demand in India, have not hurt the domestic industry.

We are expecting an average growth of 9.0% YoY in Methyl Amines + DMA HCL and expect revenues of Rs

3.3 bn, Rs 3.6 bn and Rs 3.95 bn in FY19E, FY20E and FY21E respectively.

Balaji Amines started manufacturing Ethyl Amines in 1997 with a total capacity of 6,000 MTPA. Ethanol and Ammonia are key raw materials required for Ethyl Amines production, similar to Methyl Amines; Mono Ethyl Amine, Di Ethyl Amine and Tri Ethyl Amine are obtained in a fixed proportion during the reaction. Demand for Tri Ethyl Amine is the most among the three. Ethyl Amines are relatively easier to transport, having said that they too are hazardous chemicals.

Balaji Amines has a capacity of 18,000 MTPA to produce N-Methyl 2-Pyrrolidine, N- Ethyl 2-Pyrrolidine and 2-Pyrrolidine. Gammabutyrolactone (GBL) is a key raw material required to manufacture NMP and NEP, Balaji Amines has a capacity of 15,000 MTPA to manufacture GBL.

The company has received REACH (Registration, Evaluation, Authorisation and restriction of Chemicals) certificate for Triethylamine, Gammabutyrolactone, N-Ethylamine-2-Pyrrolidone, N-Methylamine-2-Pyrrolidone, Morpholine and DEAE. The REACH certificate helps in kexporting REACH certified products to regulated markets in Europe. The company has also received a Certificate of Sustainability (COS) for its PVP K 30 manufacturing facility, which also enables the company to export its products to regulated markets in Europe.

N-Methyl-2-Pyrrolidone (NMP) and N- Ethyl 2-Pyrrolidine (NEP) find applications in a variety of applications across diverse industries, such as electronics, petrochemical processing. NMP and NEP are Methyl Amine derivatives contributing about 22% of sales with EBITDA margins of 18-20%. We are expecting NMP and NEP contribution to expand from 22% to 24% at the back of better utilization.

Growth within the Amines industry is a proxy to the growth of its end user industries, i.e Pharmaceuticals and Agro-chemicals. Pharmaceutical and Agro-chemicals industry globally is growing at 6-8% year on year, we expect volume growth to mimic the performance of these industries.


Page | 16

Industry Wise Revenue Break Up In FY17

Source: Company, HDFC Sec Inst Research

Subsidiary Details

Balaji Amines has two subsidiaries, Bhagyanagar Chemicals Ltd and Balaji Greentech Products Ltd.

Balaji Amines as well as the subsidiaries have passed the requisite resolutions as per the provisions of Companies Act, 2013 proposing the amalgamations of both the subsidiaries with the Holding company. As per the latest announcement, the petition is fixed for hearing before the NCLT on 25th January’18.before the NCLT on 25th January’18.announcement, the petition is fixed for hearing before the NCLT on 25th January’18.

Bhagyanagar Chemicals Ltd Balaji Greentech Products Ltd Holding of Balaji Amines (%) 100.0 66.0

Business The subsidiary has leased out its land to Balaji Amines and has no commercial business operations.

The company was in the business of manufacturing Compact Fluoroscent lamps and LED lamps under the name ZORA. The company has currently stopped manufacturing and is waiting for a relevant buyer for its assets.

Net Assets (Rs mn) (6) 160 Share in Profit/(Loss) (Rs mn) (0.1) (19.8) Source: Company, HDFC sec Inst Research

Hotel Business

In 2008, the company had bought 3.35 acre of land in Solapur for just Rs 270mn. BAL had set up a 5-star hotel of 129-room for a total investment of Rs 1.1 bn. The property is managed by Sarovar Group. A formal agreement with Sarovar Group of Hotels was made for operating/ managing the hotel property in the name of Balaji Sarovar Premier. The hotel property

was commissioned in Nov 2013. The Hotel business has recorded Rs 1.4 bn revenues and an EBIT loss of Rs 1.35mn for 9MFY18. RoCE from Hotels business of 2.0% in FY17. As per the management, the Hotel business has been able to make Cash profits (PAT+Depreciation) in 9MFY18.

Pharma51%

Agrochem26%

Paints and Resins

4%

Animal Feeds

2%

Oil and Gas3%

Rubber Cleaning

Chemicals4%

Water Treatment Chemicals

3%

Dyes and Textiles

4% Others3%


Page | 17

Key Assumptions FY17 FY18E FY19E FY20E FY21E Methyl Amines Revenues (Rs mn) 2,883 3,043 3,365 3,757 4,016 Growth (%) 5.5 10.6 11.7 6.9 Ethyl Amines Revenues (Rs mn) 594 684 691.2 698.4 705.6 Growth (%) 15.2 1.1 1.0 1.0 Morpholine Volumes(MTPA) 2,500 4,000 5,500 6,300 7,200 Revenues (Rs mn) 375 600 770 882 1,008 Growth (%) 60.0 28.3 14.5 14.3 Acetonitrile Volumes(MTPA) 2,000 5,500 6,500 7,500 Revenues (Rs mn) 220 605 715 825 Growth (%) 175.0 18.2 15.4 Dimethyl Formamide Volumes(MTPA) 5,000 6,000 7,500 9,000 10,500 Revenues (Rs mn) 325 390 488 585 683 Growth (%) 20.0 25.0 20.0 16.7 DMAC Volumes(MTPA) 2,000 2,500 4,500 5,200 5,500 Revenues (Rs mn) 150 300 540 624 660 Growth (%) 100.0 80.0 15.6 5.8 NMP/NEP/2-P Revenues (Rs mn) 1,440 1,800 2,111 2,525 2,732 Growth (%) 25.0 17.3 19.6 8.2 Balaji Specialty Chemicals (55% holding) Revenues (Rs mn) 600 700 900 Growth (%) 16.7 28.6 Source :HDFC sec Inst Research:

Mainly, due to fluctuating commodity prices and cost plus business model of the company; we have assumed flat realisations. Methyl Amines: Assuming Methanol and Ammonia prices at Rs 30.6/kg and Rs 22.4/kg we believe the company is likely to make gross margins of 47.0%. Ethyl Amines: For 1HFY18, the company has been operating its 6,000 MTPA capacity at a utilization of 95% providing little headroom for volume growth. Assuming Ethanol and Ammonia prices at Rs 34.0/kg and Rs 22.4/kg we believe the company is likely to make gross margins of 50.0%. Morpholine:Balaji Amines has incurred a capex of Rs 300mn to expand Morpholine capacity from 3,000 MTPA to 10,000 MTPA. We are assuming steady state realisations of Rs 150/kg.


Page | 18

Financial Analysis Margin Profile Methanol Price Comparison

Power and Freight Costs Return Ratios

Debt Profile Capex vs Asset Turns

Source: Company, HDFC sec Inst Research

Balaji Amines has been reporting EBITDA margins and RoCE’s better than that of Alkyl Amines since FY16 at the back of better revenue mix and higher margins from niche products. Balaji Amines is rapidly reducing is debt to be future ready for additional borrowings required for Mega Project. Note: Calculations are made excluding numbers from Mega Project due to lack of clarity on project details.

10.0

15.0

20.0

25.0

35.0

40.0

45.0

50.0

55.0

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Gross Margins (%) EBITDA Margins (%) - RHS

10.0

15.0

20.0

25.0

30.0

35.0

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India-Rs/kg China-Rs/kgJapan-Rs/kg Taiwan-Rs/kg

2.0

3.0

4.0

5.0

6.0

7.0

7.0

8.0

9.0

10.0

11.0

12.0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Power (% of Sales)Frieght and Packaging (% of Sales) - RHS

0.05.0

10.015.020.025.030.035.0

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

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FY21

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ROE(%) RoCE(%)

-0.5

0.0

0.5

1.0

1.5

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1,0001,5002,0002,5003,000

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

FY21

ETotal Debt (Rs mn) Net D/E - RHS

0.5

1.0

1.5

2.0

0500

1,0001,5002,0002,5003,000

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

FY21

E

Capex(Rs mn) Gross block turnover(x)


Page | 19

The company expanded its gross margins at the back of better product mix and sophisticated integration coming from Methyl Amines to Amine derivatives and from GBL to NMP, NEP and 2-P. However, this we believe has been due to the favorable Methanol prices (9MFY18 average was at Rs 19.2/kg) and may not be sustainable going forward. Also, Balaji Amines has not been as efficient as Alkyl Amines in passing through RM fluctuations (Gross margins for Alkyl Amines over last 5 years have been consistent between 45%-48%, while Balaji has been ranging between 39%-49%)

India has a cost advantage with respect to Methanol than other Asian countries which helps the company post better gross margins and makes pricing of end products competitve. As per news articles, The Niti Aayog is going to propose a road map to achieve its target of increasing the penetration of Methanol as an alternative fuel to petrol and diesel by December end which will help Balaji Amines to procure Methanol domestically at even better prices.

The company has posted an EBITDA margin of 23.5% for 9MFY18 (up 110 bps YoY), We are factoring in EBITDA margin of 21.0% for FY19E-21E.

Power,Freight and Packaging costs account for bulk of the other expenses, Methyl and Ethyl Amines being hazardous chemicals require special packaging in HDPE drums. Packaging and freights costs were at 6.2% of the total revenues, while power costs were at 8.6% of the total revenues in FY17.

Balaji Amines has generated superior return ratios vis-à-vis its peers in FY16 and FY17, the company’s RoCE’s in FY16 and FY17 would have been much better had it not been for the disproportionate capital allocation in the Hotels business. The Amines business made an RoCE of 46.2% while the hotels business made a loss at PBT level and an RoCE of 2.3%.

After reporting superior return ratios for FY16 and FY17, we believe the company may not be able to enjoy superior margins going forward due to the fluctuating raw material prices of Methanol, Ethanol and Ammonia. However, with the company’s focus on niche products and amine derivatives and the nature of the industry, we believe the company is likely to post ROE and RoCE of 20.0% and 26.9% respectively in FY20E.


Page | 20

Management Details Name Designation Experience

Mr. A Prathap Reddy Chairman & Managing Director

He is a Civil Engineer by qualification and the promoter of Balaji Amines.He started his career working for a company manufacturing pipes later went on to incorporate Balaji Amines to manufacture Methyl and Ethyl Amines.

Mr. N Rajeshwar Reddy Joint Managing Director He holds a bachelors degree in commerce and has over 30 years of industrye experience. He has been a part of Balaji Amines since 1988. His is responsible for overall plant activities at Solapur.

Mr. D Ram Reddy Joint Managing Director

He holds a bachelors degree in commerce and is responsible for procurement and logistics. He has played a vital role in building supply relationships and receiving large scale supply contract agreements with multi-national chemical companies.

Mr. G Hemanth Reddy Whole time Director and CFO He is responsible for managing operations, finance and administration in unit-2 at Telangana.

Mr. A Sriniwas Reddy Whole time Director

He has completed his MBA from Indian School of Business, Hyderabad. He has been a management consultant for Capgemini and has been a project manager for various companies like Goodyear, Sprint, Cummins etc.Currently, he is responsible for essential projects at the firm.

Mr. Sayyed Mohammed Aatif R&D Chemist Mr. Sayyed has completed his M.Sc in Biotechnology from Bangalore university.He has been associated with Balaji Amines for over 6 years.

Dr. Sundari Ravi Manager - R&D Dr. Ravi has completed his PhD from ICT, Mumbai and has been associated with Balaji Amines for over 2 years.

Mr. Mohammad Hanif Bendre General Manager - Unit 3

Mr. Mohammad has a wide plant maintenance experience and has been a part of Balaji Amines for over 30 years. He is heading all plant operations at Chincholi, Solapur.

Mr. Govind Menchekare Dep General Manager - Unit 1 Mr. Menchekare is heading plant operations at Unit -1 in Solapur. He has been a part of Balaji Amines over 5 years.


Mr. Ram Reddy and Mr. Rajeshwar Reddy look after the day to day operations in both the units in Solapur, Maharashtra. Mr. A Prathap Reddy operates from Hyderabad. Mr. Ram Reddy has played an instrumental role in winning the Mega Project status and is likely to spearhead the Greenfield expansion.


Page | 21

9MFY18 Performance 3QFY18 3QFY17 YoY(%) 2QFY18 QoQ(%) 9MFY18 9MFY17 YoY(%) FY17 FY18E YoY(%) Net Sales 2,188 1,802 21.4 2,012 8.8 6,201 5,342 16.1 6,705 8,279 23.5 Raw Material Expenses 1,169 831 40.7 1,005 16.3 3,178 2,495 27.4 3,424 4,289 25.3 Employee Costs 129 97 33.0 118 9.1 340 262 29.4 245 323 31.9 Other Expenses 385 509 (24.3) 374 3.0 1,257 1,419 (11.4) 1,510 1,791 18.6 EBITDA 511 372 37.5 528 (3.1) 1,454 1,204 20.8 1,527 1,877 23.0 EBITDA Margin(%) 23.4 20.6 26.2 23.5 22.5 22.8 22.7 Depreciation 44 45 (2.7) 44 (0.0) 131 135 (2.5) 197 230 16.7 EBIT 468 327 43.1 484 (3.4) 1,323 1,069 23.7 1,379 1,707 23.8 Interest 18 27 (34.3) 20 (8.9) 65 92 (29.7) 129 80 (38.2) PBT 450 300 50.1 465 (3.2) 1,258 977 28.8 1,257 1,627 29.4 Tax 175 106 65.3 173 1.1 465 303 53.5 433 553 27.6 APAT 275 194 41.7 292 (5.7) 794 662 19.9 816 1,074 31.6 EPS 8.5 6.0 41.7 9.0 (5.7) 24.5 20.4 19.9 25.2 33.1 31.6 Source: Company, HDFC sec Inst Research Note: 3QFY18 and 9MFY18 numbers are net of GST, while the base is inclusive of excise duty making YoY comparison incomparable.

Balaji Amines reported a strong 9MFY18 vis-à-vis 9MFY17 performance. Sales grew by 16.1% YoY to Rs 6.2bn, indicating a volume growth of over 15% YoY. Gross margins contracted YoY owing to higher raw material prices (average Methanol prices for 9MFY18 were up 26.5% YoY to Rs 19.1/kg, while Ammonia prices are up by 11.0% to Rs 21.3/kg during the same period). Strong growth in EBITDA of 20.8% YoY to Rs 1.45bn came in on the back of a decline in other expenses by 11.4% YoY to Rs 1.25bn.Interest costs

have significantly declined by 29.7% YoY to Rs 65mn due to a rapid de-leveraging exercise (long term+short term borrowings reduced by 43% YoY to Rs 465mn in 2QFY18). A higher tax rate of 36.9% (as against 31.0% in 9MFY17) weighed heavy on PAT, as PAT grew by 19.9% YoY to Rs 794 mn. (numbers for 3QFY18 and 9MFY18 on a YoY basis are not comparable as the base includes excise duty and 3QFY18 numbers are net of GST).

Mr. Ram Reddy and Mr. Rajeshwar Reddy look after the day to day operations in both the units in Solapur, Maharashtra. Mr. A Prathap Reddy operates from Hyderabad. Mr. Ram Reddy has played an instrumental role in winning the Mega Project status and is likely to spearhead the Greenfield expansion.


Page | 22

Valuation The stock is currently trading at a discount to Alkyl

Amines by ~15% due to a concentrated product portfolio and disproportionate capital allocation in the Hotel business. We are valuing the base business of Balaji Amines (excluding Mega Project numbers) on P/E basis. The stock is currently trading at 17.0x FY19E EPS of Rs 35.8 and 14.6x FY20E EPS of Rs 41.0. We introduce estimates for FY19E, FY20E and FY21E and value Balaji Amines at 17x FY20E EPS Of Rs 42.5,

we initiate coverage on Balaji Amines with a target price of Rs 725/share.

Note: We have not built in any investments, debt and revenues from the Mega Project due to lack of clarity about the product profiles, capital structure and timelines. We await clarity on the same from the management to factor in the option value arising from the Mega Project.

1 Year Forward P/E Band 1 Year Forward EV/EBITDA Band

Source: www.commerce.nic.in, HDFC sec Inst Research

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P/E (x) Avg(x) +1 Std -1 Std

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2

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Page | 23

Income Statement (Rs mn) FY16 FY17 FY18E FY19E FY20E FY21E Net Revenues 6,431 6,705 8,279 9,416 10,781 11,763 Growth (%) 3.9 4.3 23.5 13.7 14.5 9.1 Material Expenses 3,305 3,473 4,289 4,990 5,714 6,234 Change In Inventories 257 (50) - - - - Employee Expenses 216 245 323 358 410 447 Other Operating Expenses 1,386 1,510 1,791 2,083 2,365 2,562 EBITDA 1,267 1,527 1,877 1,985 2,293 2,520 EBITDA Margin (%) 19.7 22.8 22.7 21.1 21.3 21.4 EBIDTA Growth (%) 24.5 20.5 23.0 5.8 15.5 9.9 Depreciation 194 197 230 267 299 311 EBIT 1,101 1,379 1,707 1,818 2,134 2,359 Other Income (Including EO Items) 28 50 60 100 140 150

Interest 222 129 80 90 120 125 PBT 880 1,257 1,627 1,728 2,014 2,234 Tax 303 433 553 588 685 760 RPAT 576 824 1,074 1,140 1,329 1,474 Mionority Interest EO (Loss) / Profit (Net Of Tax) - 7 - - - - APAT 576 816 1,074 1,180 1,376 1,534 APAT Growth (%) 73.5 41.7 31.6 9.9 16.6 11.5 AEPS 17.8 25.2 33.1 36.4 42.5 47.3


Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E FY21E SOURCES OF FUNDS Share Capital 65 65 65 65 65 65 Reserves 2,737 3,474 4,367 5,409 6,636 7,993 Total Shareholders Funds 2,802 3,539 4,432 5,474 6,701 8,057 Long-term Debt 464 168 65 900 300 300 Short-term Debt 1,263 881 600 150 150 100 Total Debt 1,727 1,049 665 1,050 450 400 Minority Interest - - - - - - Long-term Provisions & Others 120 58 100 100 100 100 Net Deferred Tax Liability 505 508 608 618 628 633 TOTAL SOURCES OF FUNDS 5,154 5,155 5,806 7,242 7,879 9,191 APPLICATION OF FUNDS Net Block 3,408 3,255 3,703 4,547 4,736 4,836 CWIP 163 251 200 300 300 400 Goodwill Investments 0 0 0 0 0 0 LT Loans & Advances - - - - - - Other Non Current Assets 23 25 25 25 25 25 Total Non-current Assets 3,594 3,531 3,928 4,872

5 061 5 261 Inventories 780 990 1,179 1,341 1,536 1,676 Debtors 1,243 1,243 1,535 1,806 2,068 2,256 Cash & Equivalents 86 35 47 31 60 704 ST Loans & Advances 344 551 454 645 738 967 Other Current Assets - - - - - - Total Current Assets 2,453 2,819 3,215 3,823 4,402 5,603 Creditors 562 677 764 875 1,002 1,076 Other Current Liabilities 331 518 574 578 581 597 Total Current Liabilities 893 1,196 1,337 1,453 1,583 1,673 Net Current Assets 1,560 1,623 1,877 2,370 2,818 3,930 TOTAL APPLICATION OF FUNDS 5,154 5,155 5,806 7,242 7,879 9,191 Source: Company, HDFC sec Inst Research


Page | 24

Cash Flow (Rs mn) FY16 FY17 FY18E FY19E FY20E FY21E Reported PBT 880 1,257 1,627 1,728 2,014 2,234 Non-operating & EO Items Interest Expenses 222 129 80 90 120 125 Depreciation 194 197 230 267 299 311 Working Capital Change 303 (302) (300) (413) (423) (483) Tax Paid (123) (250) (403) (678) (675) (755) OPERATING CASH FLOW ( a ) 1,474 1,032 1,234 995 1,335 1,433 Capex (320) (132) (627) (1,211) (488) (511) Free Cash Flow (FCF) 1,154 900 607 (217) 847 922 Investments - - - - - - Non-operating Income Others (0) (2) - - - - INVESTING CASH FLOW ( b ) (320) (134) (627) (1,211) (488) (511) Debt Issuance/(Repaid) (832) (678) (384) 385 (600) (50) Interest Expenses (222) (129) (80) (90) (120) (125) FCFE 101 93 143 78 127 747 Share Capital Issuance - - - - - - Dividend (47) (78) (86) (94) (98) (101) Other long term liabilities (43) (62) 42 - - - Others 5 (1) (87) (1) (1) (1) FINANCING CASH FLOW ( c ) (1,138) (948) (595) 200 (819) (277) NET CASH FLOW (a+b+c) 16 (51) 12 (16) 29 644 EO Items, Others Closing Cash & Equivalents 86 35 47 31 60 704 Source: Company, HDFC sec Inst Research

Key Ratios FY16 FY17 FY18E FY19E FY20E FY21E PROFITABILITY (%) GPM 44.6 48.9 48.2 47.0 47.0 47.0 EBITDA Margin 19.7 22.8 22.7 21.1 21.3 21.4 EBIT Margin 17.1 20.6 20.6 19.3 19.8 20.1 APAT Margin 9.0 12.2 13.0 12.5 12.8 13.0 RoE 20.6 23.1 24.2 21.6 20.5 19.0 Core RoCE 33.2 35.6 36.6 29.6 28.8 29.2 RoCE 28.3 32.3 32.8 25.6 27.6 25.9 EFFICIENCY Tax Rate (%) 34.5 34.5 34.0 34.0 34.0 34.0 Asset Turnover (x) 1.9 2.1 2.2 2.1 2.3 2.4 Inventory (days) 44 54 52 52 52 52 Debtors (days) 71 68 68 70 70 70 Other Current Assets (days) - - - - - - Payables (days) 58 72 65 64 64 63 Other Current Liab & Prov (days) Cash Conversion Cycle (days) 57 49 55 58 58 59 Net Debt/EBITDA (x) 1.3 0.7 0.3 0.5 0.2 (0.1) Net D/E 0.6 0.3 0.1 0.2 0.1 (0.0) Interest Coverage 0.2 0.1 0.0 0.0 0.1 0.1 PER SHARE DATA EPS (Rs/sh) 17.8 25.2 33.1 36.4 42.5 47.3 CEPS (Rs/sh) 23.8 31.3 40.2 44.7 51.7 56.9 DPS (Rs/sh) 2.0 2.2 2.4 2.5 2.6 3.0 BV (Rs/sh) 86.5 109.2 136.8 168.9 206.8 248.7 VALUATION P/E 34.6 24.4 18.6 16.9 14.5 13.0 P/BV 7.1 5.6 4.5 3.6 3.0 2.5 EV/EBITDA 17.0 13.7 10.9 10.6 8.9 7.8 OCF/EV (%) 6.8 4.9 6.0 4.7 6.6 7.3 FCF/EV (%) 5.3 4.3 3.0 (1.0) 4.2 4.7 FCFE/MCAP (%) 0.5 0.5 0.7 0.4 0.6 3.7 Dividend Yield (%) 0.3 0.4 0.4 0.4 0.4 0.5 Source: Company, HDFC sec Inst Research

INITIATING COVERAGE 08 FEB 2018

Alkyl Amines BUY


Shines within AminesAlkyl Amines is the largest manufacturer of Ethyl Amines in India and is one of the leading manufacturers of Diethyl Hydroxy Amine (DEHA), DMA HCL, Acetonitrile and has a wide array of Amines and Amine derivatives in its product basket. Leaving the capex (~Rs 1.5bn) on Methyl Amines behind, Alkyl Amines is poised to reap benefits of gradual ramp up in Methyl Amines capacity (expansion in Dahej, Gujarat). The company is also set to triple its Acetonitrile capacity (capex of ~Rs 700mn) by FY20E. Alkyl Amines has reported consistent return ratios with ROE/RoCE/ROIC 22.3%/23.0%/23.2% in a capital intensive industry. Backed by a technocrat promoter (a Chemicals Engineer of ICT, Mumbai) with an experience of over 35 years in Amines manufacturing, sustainable gross margins (over 47%) due to an efficient pass through model, presence in more than 100 products and a strong profile of return ratios and the recent capacity expansion (doubled the current capacity) from Methyl Amines and likely addition from Acetonitrile (triple the current capacity); we believe Alkyl Amines is likely to grow its Sales/EBITDA/PAT at a 3 year CAGR of 9.7%/10.9%/10.2% (over FY18E-21E) respectively. We initiate coverage with a Buy rating and a target price of Rs 710/share. Making hay while the sun-shines: Constrained by

limited capacity of Methyl Amines till FY17, the company has recently doubled its Methyl Amines

capacity from 50 TPD to 100 TPD in Dahej, Gujarat. The company consumes 50% of its Methyl Amines production internally for manufacturing Amine derivatives. The capacity expansion comes at the time when Indian imports from China of Amine derivatives have started dwindling pursuant to the war against pollution declared by China and after cutting export subsidies. Thus, Alkyl Amines is expected grow its exports of Amine derivatives (more than 50 Amine derivatives), currently exports contribute 20% of the total revenues. We expect exports to contribute 25% (~Rs 1.9bn) of the total revenues by FY21E. At the current estimated capacity of DMA HCL of ~8,000 MTPA, we are expecting volumes to grow at 14% YoY on the back of higher demand in anti-diabetic, anti-obesity, analgesic drugs.

Financial Summary Rs mn FY17 FY18E FY19E FY20E FY21E

Net Sales (in Rs mn) 5,006 5,746 6,212 6,859 7,589

Growth (%) 3.5 14.8 8.1 10.4 10.6

EBIDTA (in Rs mn) 917 991 1,104 1,212 1,350

EBIDTA Margin (%) 18.3 17.3 17.8 17.7 17.8

APAT (in Rs mn) 496 555 600 656 743

EPS (Rs.) 24.3 27.2 29.4 32.1 36.4

P/E (x) 18.5 22.2 20.5 18.8 16.6

EV/EBITDA 11.3 14.4 12.6 11.3 9.9

RoE (%) 22.3 20.9 19.4 18.4 18.1 Source: HDFC sec Inst Research

INDUSTRY CHEMICALS

CMP (as on 07 Feb 2018) Rs 608

Target Price Rs 710 Nifty 10,477

Sensex 34,083

KEY STOCK DATA

Bloomberg AACL IN

No. of Shares (mn) 20

MCap (Rs bn) / ($ mn) 12/193

6m avg traded value (Rs mn) 15

STOCK PERFORMANCE (%)

52 Week high / low Rs 790/335

3M 6M 12M

Absolute (%) 7.6 55.2 67.7

Relative (%) 5.5 49.6 47.4

SHAREHOLDING PATTERN (%)

Promoters 74.19

FIs & Local MFs 0.1

FPIs 1.38

Public & Others 24.33 Source : BSE

Archit Joshi [email protected] +91-22-6171-7316


ALKYL AMINES : INITIATING COVERAGE

Page | 26

Acetonitrile expansion to aid volume growth: Leaving the expansion of Methyl Amines behind, Alkyl Amines has taken up expansion plan of Acetonitrile with an investment of upto Rs 700mn over the next two years. The company has planned to triple its capacity from 10,000 MTPA to 30,000 MTPA by FY20E. Alkyl Amines has been so far prudent in maintaining EBITDA margins of over 18% (EBITDA margin expansion of 360 bps from FY12 to FY17) owing to higher share of revenues coming from Acetonitrile and Amine derivatives. We thus expect revenue mix to tilt further towards Acetonitrile away from commodity Amines as Alkyl Amines ramps up capacity after expansion.

Dahej advantage: The company currently has 2 manufacturing facilities in Patalganga, Maharashtra and 9 manufacturing facilities in Kurkumb, Maharashtra. The upcoming site in Dahej, Gujarat has been planned to manufacture entire 30,000 MTPA of Methyl Amines (current 15,000 MTPA capacity of Methyl Amine in Patalganga will be used to manufacture other Amine products). Dahej having close proximity of Ports and that of Chlorine manufacturers (RM for DMA HCL), would lead to logistics and raw material cost savings.

Strong technical expertise and experienced management: Alkyl Amines is in the business of

manufacturing Amines since 1982 and has adopted technology from global manufacturers (adopted Ethyl Amine manufacturing technology from Leonard Process company, USA in 1982) and has a strong technical expertise given its wide product basket (maintains an R&D funnel of 8-10 products) whilst maintaining financial discipline. Mr. Yogesh Kothari (CMD), a Chemicals engineer from ICT, Mumbai with a rich experience of over 35 in Chemicals Industry along with a sticky R&D team, exudes confidence in the company’s well being.

Maintaining strict financial discipline: The company has implemented a successful pass through model and maintained steady gross margins within 44%-48% between FY10-FY17. Alkyl Amines has been reporting EBITDA margins over 18.0% from FY14 to FY17 on the back of higher contribution from Amine derivatives and Acetonitrile. The company has generated strong operating cash-flows (Rs 608mn in FY17) consistently over Rs 550 mn since FY14, we expect the same run rate to continue which will help the company plan its forthcoming investment of Rs 700mn for Acetonitrile plant. Net D/E ratio has declined from 1.4x to 0.5x from FY11 to FY17.The company has been rewarding shareholders with a consistent dividend track record (paid dividend of Rs 5/share in FY17).


Page | 27

Investment arguments Making hay while the sunshines: While the Chinese

exports of Amine derivatives have taken a setback, Alkyl Amines, sensing opportunities took up a capex program to double its Methyl Amine capacity. Amine derivative like DMA HCL, DMAPA, NMP, NEP etc are not as hazardous as Methyl and Ethyl Amines making them easier to transport and subsequently export. China, the largest manufacturer of Amines and Amine derivatives is not only cutting down capacities providing a larger impetus to the environment and pollution; but also is discouraging exports by scraping export subsidies.

Alkyl Amines has doubled its capacity of Methyl Amines from 50 TPD to 100 TPD and plans to gradually ramp it up over the next two years. The company internally consumes 50% of its Methyl Amines produce to manufacture Amine Derivatives like DMA HCL and DMAPA. Both finding applications in Pharmaceuticals and Agro-chemicals as a solvent. Alkyl Amines is the second largest manufacturer of DMA HCL in India and will most likely focus on exports. Total Exports of the company have grown at a 5 year CAGR of 9.5% and we expect higher growth from exports than from the domestic sales. The company’s exports to Europe are ~50% of the total exports of Alkyl Amines.

Alkyl Amines, was once less than half the capacity of its competitor in Methyl Amines and faced dire capacity constraints which restricted its volume growth from FY14-17. With the new capacity coming on stream and gradual ramp up in utilization (expected to reach 75% utilization by FY21E) we expect revenue mix to tilt more towards Amine derivatives which are expected to grow in volumes over 10-12% while volume growth for commodity Amines (Methyl and Ethyl Amines) is expected to range bound between 6-8%.

Exports trend

Source: Company, HDFC sec Inst Research Acetonitrile expansion to aid volume growth: Alkyl

Amines is currently implementing engineering stage (elementary stage of project) of its Acetonitrile expansion. The company plans to almost triple its capacity from 12,000 MTPA to 30,000 MTPA which is expected to commence commercial operations in FY20E. As per the management, though the domestic market demand for Acetonitrile is 15,000 MTPA with Alkyl Amines having ~50% market share domestically, there is a large addressable exports market as Chinese manufacturers have cut capacities to remain environmentally compliant.

As per IHS-Markit, World consumption is forecasted to grow at about 4% per year over the next five years. The highest growth rates (about 5–7% YoY) are expected for China and India and Consumption of acetonitrile for pharmaceuticals will continue to grow during the next five years. Acetonitrile demand is driven by higher enquires in Drug recrystallization and from High

(15.0)

(5.0)

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Exports(Rs mn)-LHS Growth (%)Exports(% of Sales)

Exports of Alkyl Amines are expected to ramp up from 20% of total sales to 25% of total sales by FY21E. Alkyl Amines is expected to gradually ramp up capacity for Methyl Amines, we expect 75% utilization by FY21E.


Page | 28

performance liquid chromatography (HPLC) applications. The total demand for Acetonitrile is 100,000 MTPA and is dominated only by 3 players (INEOS, Asahi Kasei and CNPC Jilin Chemical group) contributing 42% of the total global demand. Acetonitrile is manufactured using two routes, globally Acetonitrile is obtained as a by-product of Acrylonitrile. While Indian manufacturers have resorted to production via Acetic acid route. Since globally Acrylonitrile production is under pressure due to environmental tightness in China, we expect Acetonitrile producers through synthetic route to benefit. Also, as Balaji Amines puts up its Acetonitrile capacity there could be some pressure on the margins. However, the management has stated that Alkyl Amines has been consistent in maintaining its margins despite fluctuations in RM prices and expects to continue maintaining margins. The company by putting up a capacity of a larger scale plans to be future ready to capture any incremental demand coming through.

Strong technical expertise and experienced management: The management recently mentioned in a conference call that there are usually 8-10 products on which R&D activities happen as the company maintains a decent product funnel. The company has ~50 employees in the R&D team at Hadapsar in Pune. We believe that Alkyl Amines has kept pace with the changing needs of its Pharmaceutical and Agro-chemical customers by giving a thrust on R&D operations (evident through Alkyl Amines has a product basket of 100+ while Balaji Amines only has 25+ products). Alkyl Amines has gained strong technical expertise in Reductive Amination, Hydrogenation, Cyanoethylation, Oxidation and Amidation with Multi Purpose plants and powder making facilities integrated into its system. Given the sound academic background of the promoters, coupled with rich experience in Amines manufacturing, the company is likely to grow its product basket year on year at the back of a strong R&D team. The company also has received a certificate of RESPONSIBLE CARE company.

Acetonitrile: Alkyl Amines is likely to incur a capex of Rs 700mn to expand Acetonitrile capacity from 12,000 MTPA to 30,000 MTPA. We are assuming steady state realisations of Rs 125/kg. Methyl Amines: Assuming Methanol and Ammonia prices at Rs 30.6/kg and Rs 22.4/kg we believe the company is likely to make gross margins of 47.0%.


Page | 29

Management Background Name Designation Description

Mr.Yogesh Kothari Chairman and Managing Director

Mr. Kothari has completed his Chemical Engineering from ICT (earlier: UDCT) and his Masters from University of Massachussets, Lowell, U.S.A. He has been the Chairman of the Indian Chemical Council and has a rich experience over 35 years in the Chemicals Industry.

Mr.Kirat Patel Executive Director

Mr. Kirat Patel is Executive Director of Alkyl Amines Chemicals Ltd. He has completed Mechanical Engineering from Indian Institute of Technology, Mumbai, and M.M.S. (Finance) from Jamnalal Bajaj Institute of Management, Mumbai, and has been working with the Company since its inception.

Mr. Suneet Kothari Executive Director

Mr. Suneet Kothari has been an integral part of product development at Alkyl Amines. He has also has worked with Diamond Technology Partners, U.S.A. as a Management Strategy Consultant. He is a Chemical Engineer from Cornell University, U.S.A. Mr. Kothari completed MBA from INSEAD at France and Singapore.

Mr. Hemendra Kothari Non Executive Director

Mr. H.M. Kothari, Ex-Chairman of DSP Merril Lynch Limited, Investment Bankers in India, is Chairman of DSP Blackrock Investment Managers Ltd. He is also on the Board of the following companies., Kirloskar Oil Engines Ltd, Exide Industries Ltd, Food World Super Markets Ltd, Health and Glow Retailing Ltd, Shuko Real Estate Private Ltd and more.

Mr. Pravin Tawle CFO Mr. Pravin Tawle serves as the Chief Financial Officer and General Manager of Finance & Accounts at Alkyl Amines Chemicals Ltd.



Page | 30

Subsidiary Details Rs mn) Type Revenue PAT Holding (%) Diamines and Chemicals Ltd Associate 348.1 42.8 30.4 Alkyl Specialty Chemicals Ltd Subsidiary 1.4 0.9 100.0 Source: Company, HDFC sec Inst Research

Alkyl Amines Ltd had applied to the NCLT for the amalgamation of its wholly owned subsidiary Alkyl Specialty Chemicals Ltd with Alkyl Amines Ltd. The company has received an approval from the NCLT on 17th October’17 for the amalgamation of Alkyl Amines Ltd and Alkyl Specialty Chemicals.

Alkyl Amines has a 30.44% stake in Diamines and Chemicals Ltd which is engaged in the manufacturing of Ethylene Amines in India.

Assumptions Revenue Mix : We expect higher contribution from

Methyl Amines FY19E onwards at the back of capacity addition in 2HFY18E. Acetonitrile contribution is expected to touch 25% in FY21E from the current 22% in FY17 levels due to the upcoming capacity addition of 18,000 MTPA.

Revenue Mix


Product Group/Raw Material FY17 FY18E FY19E FY20E FY21E Methyl Chain(Rs mn) 1,218 1,378 1,531 1,702 1,893 Growth (%) 0.0 13.2 11.1 11.2 11.2 Ethyl Chain (Rs mn) 1,977 2,262 2,468 2,591 2,715 Growth (%) (3.6) 14.4 9.1 5.0 4.8 Acetonitrile (Rs mn) 1,165 1,425 1,467 1,760 2,112 Growth (%) 27.4 22.3 2.9 20.0 20.0 Methanol (Rs/kg) 18.5 30.4 30.4 30.4 30.4 Ethanol (Rs/kg) 34.0 34.0 34.0 34.0 34.0 Acetic Acid (Rs/kg) 32.7 32.4 32.4 32.4 32.4 Ammonia (Rs/kg) 23.1 22.4 22.4 22.4 22.4 Source: Company, HDFC sec Inst Research

0%10%20%30%40%50%60%70%80%90%

100%

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

FY21

E

Ethyl Chain Methyl Chain Acetonytrile Others


Page | 31

Financial Analysis Margin Profile Debt Profile

Capex and Asset Turns Return Ratios

EPS and DPS Cash flows


0

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4243444546474849

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Capex (Rs mn) Asset Turnover (x) - RHS

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20

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40

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Operating Cash flows (Rs mn) Investing Cash flows (Rs mn)Financing Cash flows (Rs mn)

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1,500

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FY11

FY12

FY13

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E

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E

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E

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E

Total Debt (Rs mn) Net D/e(x) - RHS


Page | 32

Alkyl Amines has consistently reported gross margins over 44% from FY14 to FY17 due to an efficient pass through model and a de-risked product portfolio than its competitor.

The company has significantly reduced its Net D/E ratio from 1.4x to 0.5x from FY11 to FY17, the reported has Net debt of Rs 822mn at the end of 1HFY18 (down from Rs Rs 1.17bn in FY17).

Alkyl Amines has a much prudent capital allocation strategy than that of Balaji Amines (RoCE from Hotels business came at 2.3% in FY17; Alkyl has been consistently reporting RoCE’s over 23%.

The capex for the year FY17 was Rs 660mn (bulk of it was for expansion of Methyl Amines), the total planned capital expenditure for Methyl Amine

expansion was pegged at Rs 1.5bn is expected to be reflected in FY18 balancesheet. Also, the company has planned an outlay of Rs 700mn for Acetonitrile expansion in the coming two years.

Valuation Alkyl Amines is currently trading at 24.9x FY19E EPS

of Rs 28.6 and 22.5x FY20E EPS of Rs 31.5. Alkyl Amines is likely to trade at a slight premium to Balaji amines due to consistent return ratios upwards of 20%, sustainable EBITDA margins over 18.0% at the back of an efficient pass through model, consistent dividend paying record and a wider array (more than 100 products) of Amine products than Balaji Amines. We value Alkyl Amines at 22x FY20E EPS of Rs 32.1, we initiate coverage with a Buy rating with a target price of Rs 710/share.

PER Band EV/EBITDA Band

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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9MFY18 Performance Particulars 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) 9MFY18 9MFY17 YoY(%) FY17 FY18E YoY(%) Net Sales 1,531 1,477 3.7 1,381 10.9 4,388 3,901 12.5 5,006 5,746 14.8 Raw Material Expenses 852 685 24.4 772 10.4 2,440 1,911 27.7 2,633 3,136 19.1 Employee Expenses 101 98 2.3 103 (2.5) 308 294 4.9 382 420 10.0 Other Expenses 312 395 (21.0) 265 17.8 898 990 (9.2) 1,074 1,199 11.6 EBITDA 267 299 (10.6) 241 10.7 741 706 4.9 917 991 8.1 EBITDA Margin (%) 17.4 20.2 17.5 16.9 18.1 18.3 17.3 Depreciation 39 34 13.2 39 1.1 117 102 14.0 143 161 12.8 EBIT 228 264 (13.7) 203 12.5 653 612 6.8 784 868 10.7 Interest Cost 11.1 14.0 (20.9) 14.6 (24.1) 37.6 45.7 (17.6) 56.2 54.0 (3.8) PBT 228 252 (9.7) 201 13.3 616 566 8.8 728 814 11.8 Tax 77.7 81.7 (4.9) 67.0 16.0 205.6 180.0 14.2 231.9 259.3 11.8 APAT 150 170 (12.0) 134 12.0 410 386 6.2 496 555 11.8 AEPS 6.6 8.3 (21.4) 6.6 - 20.1 18.9 6.2 24.3 27.2 11.8 Source: Company, HDFC sec Inst Research Note: 3QFY18 and 9MFY18 numbers are net of GST, while the base is inclusive of excise duty making YoY comparison incomparable.

9MFY18 performance was mainly affected due to a weak 3QFY18 performance, though there has been a normal volume growth of ~10% YoY in 3QFY18, higher raw material prices resulted into gross margin contraction of ~400 bps YoY for 3QFY18, gross margins stood at 44.4% for 3QFY18 and 9MFY18 both. Tax rate came in at 34.2% (as against 32.4% in 3QFY17) due to an investment allowance reserve benefit derived in 3QFY17. PAT de-grew by 10.0% YoY

to Rs 150 mn in 3QFY18. We believe, the company could not pass on a sharp rally in raw material prices resulting into Gross margin erosion and we should not read too much into this as Alkyl Amines has been efficiently been passing through RM fluctuations. There has been a delay in the commencement of the Methyl Amines capacity in Dahej, Gujarat. The capacity now is expected to commission in February’18 (delayed by 2 months).


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Income Statement (Rs mn) FY16 FY17 FY18E FY19E FY20E FY21E Net Revenues 4,836 5,006 5,746 6,212 6,859 7,589 Growth (%) 1.5 3.5 14.8 8.1 10.4 10.6 Material Expenses 2,604 2,623 3,136 3,280 3,645 4,039 Change In Inventories (85) 10 - - - - Employee Expenses 347 382 420 471 527 585 Other Operating Expenses 1,060 1,074 1,199 1,357 1,475 1,614 EBITDA 910 917 991 1,104 1,212 1,350 EBITDA Margin (%) 18.8 18.3 17.3 17.8 17.7 17.8 EBIDTA Growth (%) 5.1 0.8 8.1 11.4 9.7 11.5 Depreciation 129 143 161 191 212 224 EBIT 781 774 830 913 999 1,127 Other Income (Including EO Items) 24 10 38 42 46 51 Interest 80 56 54 74 83 88 PBT 725 728 814 881 963 1,090 Tax 226 232 259 280 307 347 RPAT 499 496 555 600 656 743 Mionority Interest EO (Loss) / Profit (Net Of Tax) APAT 499 496 555 600 656 743 APAT Growth (%) 9.8 (0.5) 11.8 8.2 9.3 13.2 AEPS 24.4 24.3 27.2 29.4 32.1 36.4 EPS Growth (%) 9.8 (0.5) 11.8 8.2 9.3 13.2

ource: Company, HDFC sec Inst Research

Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E FY21E SOURCES OF FUNDS Share Capital 102 102 102 102 102 102 Reserves 1,893 2,349 2,768 3,220 3,715 4,275 Total Shareholders Funds 1,995 2,451 2,870 3,322 3,818 4,377 Long-term Debt 447 662 1,062 962 712 462 Short-term Debt 652 545 964 764 664 664 Total Debt 1,099 1,207 2,026 1,726 1,376 1,126 Minority Interest Long-term Provisions & Others 27 70 70 70 70 70

Net Deferred Tax Liability 286 327 327 327 327 327 TOTAL SOURCES OF FUNDS 3,406 4,056 5,294 5,446 5,591 5,901 APPLICATION OF FUNDS Net Block 1,871 2,201 2,812 3,361 3,458 3,485 CWIP 161 348 425 135 75 75 Goodwill Investments 23 23 23 23 23 23 LT Loans & Advances 141 282 282 282 282 282 Other Non Current Assets 29 4 4 4 4 4 Total Non-current Assets 2,226 2,858 3,546 3,805 3,843 3,869 Inventories 632 1,114 1,102 1,191 1,315 1,456 Debtors 903 973 1,117 1,208 1,334 1,476 Cash & Equivalents 43 34 107 122 150 231 ST Loans & Advances 246 164 164 164 164 164 Other Current Assets 15 11 11 11 11 11 Total Current Assets 1,838 2,297 2,501 2,696 2,974 3,337 Creditors 438 805 630 681 752 832 Other Current Liabilities 220 293 124 374 474 474 Total Current Liabilities 658 1,098 754 1,055 1,226 1,306 Net Current Assets 1,180 1,199 1,747 1,641 1,749 2,032 TOTAL APPLICATION OF FUNDS 3,406 4,056 5,294 5,446 5,591 5,901



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Cash Flow (Rs mn) FY16 FY17 FY18E FY19E FY20E FY21E Reported PBT 725 728 814 881 963 1,090 Non-operating & EO Items (17) (7) (26) (28) (31) (34) Interest Expenses 80 56 54 74 83 88 Depreciation 129 143 161 191 212 224 Working Capital Change 37 (80) (307) (129) (179) (202) Tax Paid (226) (232) (259) (280) (307) (347) OPERATING CASH FLOW ( a ) 728 608 437 708 741 817 Capex (345) (659) (850) (450) (250) (250) Free Cash Flow (FCF) 382 (51) (413) 258 491 567 Investments (0) - - - - - Non-operating Income - - - - - - Others (141) 85 - - - - INVESTING CASH FLOW ( b ) (486) (574) (850) (450) (250) (250) Debt Issuance/(Repaid) (185) 47 650 (50) (250) (250) Interest Expenses (80) (56) (54) (74) (83) (88) FCFE (266) (10) 596 (124) (333) (338) Share Capital Issuance - - - - - - Dividend (110) (126) (136) (148) (161) (183) Others 99 91 26 28 31 34 FINANCING CASH FLOW ( c ) (277) (44) 486 (244) (462) (486) NET CASH FLOW (a+b+c) (35) (9) 73 15 29 81 EO Items, Others Closing Cash & Equivalents 43 34 107 121 150 231


Key Ratios FY16 FY17 FY18E FY19E FY20E FY21E PROFITABILITY (%) GPM 47.9 47.4 45.4 47.2 46.9 46.8 EBITDA Margin 18.8 18.3 17.3 17.8 17.7 17.8 EBIT Margin 16.6 15.7 15.1 15.4 15.2 15.5 APAT Margin 10.3 9.9 9.7 9.7 9.6 9.8 RoE 26.6 22.3 20.9 19.4 18.4 18.1 Core RoCE 26.9 23.2 20.5 19.7 20.2 21.7 RoCE 26.8 23.0 20.5 19.5 20.1 21.5 EFFICIENCY Tax Rate (%) 31.2 31.9 31.9 31.9 31.9 31.9 Asset Turnover (x) 1.5 1.3 1.2 1.2 1.2 1.3 Inventory (days) 48 81 70 70 70 70 Debtors (days) 68 71 71 71 71 71 Other Current Assets (days) 1 1 1 1 1 1 Payables (days) 26 35 30 28 25 23 Other Current Liab & Prov (days) 26 35 30 28 25 23 Cash Conversion Cycle (days) 58 60 72 74 76 79 Net Debt/EBITDA (x) 1.2 1.3 1.9 1.5 1.1 0.7 Net D/E 0.5 0.5 0.7 0.5 0.3 0.2 Interest Coverage 10.0 14.0 16.1 12.9 12.7 13.4 PER SHARE DATA EPS (Rs/sh) 24.4 24.3 27.2 29.4 32.1 36.4 CEPS (Rs/sh) 30.7 31.3 35.1 38.8 42.5 47.3 DPS (Rs/sh) 4.4 5.0 5.4 5.9 6.4 7.3 BV (Rs/sh) 97.7 120.1 140.6 162.8 187.0 214.4 VALUATION P/E 12.9 18.5 22.2 20.5 18.8 16.6 P/BV 3.2 3.8 4.3 3.7 3.2 2.8 EV/EBITDA 8.2 11.3 14.4 12.6 11.3 9.9 Dividend Yield (%) 1.4 1.1 0.9 1.0 1.1 1.2 Source: Company, HDFC sec Inst Research


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1YR PRICE MOVEMENT

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

300

400

500

600

700

800

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec-

17

Jan-

18

Feb-

18

Alkyl Amines

200

300

400

500

600

700

800

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec-

17

Jan-

18

Feb-

18

Balaji Amines


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Disclosure: We, Archit Joshi, MBA & Nilesh Ghuge, MMS, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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mailto:[email protected]


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