Alkyl Amines: A Wealth compounding machine!

Alkyl Amines

Alkyl Amines is the 2nd largest player in the Indian Aliphatic amines industry with close to 45% market share.

Mr. Yogesh Kothari (Chemical Engineer, MBA) established Alkyl Amines in 1979, who is currently the Chairman and MD of Alkyl Amines and has 40+ years of experience in the Chemical industry. The company mainly deals in Aliphatic amines, Amine derivatives, and Specialty chemicals.

Read Amines Industry analysis here.

Products

Since we don’t have information about all the products, we will cover only those products which have a very high contribution to the topline.

Product category 1: Aliphatic amines

Alkyl Amines internally consumes 50% of Methylamine and Ethylamine for the production of Amine derivatives. A similar strategy is adopted by Balaji Amines.

As per management, 80-85% is the optimum capacity that a Methylamine plant can achieve. And a 90% utilization is very rare. So management needs to re-invest to keep growing once they reach 85% capacity utilization in Methylamine. Alkyl is running short on Methylamines.  Availability is an issue. Any new capacity in the industry gets absorbed in 2 years because the demand is high and the product can’t be imported. Expanding from 30k tons to 45k tons at Dahej (Investment: 10 Cr)

Lots of Import of Ethylamine is coming from Europe and China. Balaji and Alkyl are putting up capacity and this capacity will take care of the import demand. In 2-3 years, the capacity will be at an optimal level.

Aliphatic amines usually have Low realizations and low margins in comparison to their derivatives and specialty chemicals.

Product category 2: Amine derivatives

As amine derivatives are complex products, they command higher margins in comparison to Aliphatic amines.

Product category 3: Specialty chemicals

Acetonitrile

Acetonitrile is one of the primary reasons that has led to an increase in profitability of Alkylamines in the last 2 years. The company started this product to substitute the imports. It took them 3 years to develop Acetonitrile from pilot stage to commercial stage. As per management, it’s easy to put up Acetonitrile capacity but the key thing is to reach a specific quality that Alkyl has been able to reach after so many years.

Acetonitrile is not an amine or a derivative of amine or even a Specialty chemical. It is an ordinary chemical that used to have ordinary gross margins like other chemicals ranging from 10% to 15% to 40%.

But upward trend in the price of this product has led to sharp improvements in the gross margins. And a sign of this can be seen at the gross margins at the company level as well.

At 120-140/kg this product had a contribution margin of Rs. 30/kg, So at Rs. 280/kg Alkyl is doing significantly higher margins. Currently, Acetonitrile has way higher margins than Amines and Its derivatives.

There are two methods to produce Acetonitrile

1) Synthetic route (direct route)

  • Acetonitrile can be produced through Acetic acid and Ammonia. Balaji amines and Alkylamines use this method.

2) By-product of Acrylonitrile

  • Acetonitrile is derived as a by-product during the production of Acrylonitrile.
  • Acrylonitrile is used in ABS (Anti-lock braking system), which is used in the Auto Industry.

So when the Auto Industry performs, demand for Acrylonitrile increases, and this results in more production of Acetonitrile. Therefore, the higher the supply of Acetonitrile, the lower the price.

Due to the slowdown in Auto Industry in the last 2 years, the production of Acrylonitrile has declined and this has, in turn, resulted in the lower production of Acetonitrile. Now, this is 8th standard Economics, what happens when the supply falls and the demand is constant? Prices rise

Earlier this mismatch used to sustain only for a couple of months, but this is the first time that the mismatch has sustained for such a long period. Also, a big foreign company (Ineos) closed its Acrylotrile plant which also pushed up the Acetonitrile prices.

In short, the reason for this upward trend in Acetonitrile is its tight supply in the global market. This tight supply resulted from  1) Slow-down in Auto and 2) A plant getting shut down in the global market.

Pharmaceutical companies have started preferring Acetonitrile that is manufactured via the direct route, due to its superior quality which enables smoother production without disturbances.

Capacity:

  • The company is putting up the 2nd plant for Acetonitrile because many of their customers asked them to put another plant. The reason for the 2nd plant is that customers want the comfort that Alkyl can supply from two different plants.
  • As per Q2 FY-21 concall, Alkyl was facing some capacity constraints. A new plant will help them in catering to demand. (Current capacity: 40-50 tons/day, New capacity: 60 tons/day)
  • So this new capacity can do another 300-350 Cr at current prices.

Competition:

  • Alkyl is the second or third-largest producer in the world with a Market share of 40% in India.
  • In India, 4 players manufacture this product. Balaji Amines, Alkyl Amines, Deepak Nova, and IOLCP. Balaji capacity: 9000 tons, and they plan further expand it by 9000 tons.
  • India imports from Europe, China, Taiwan, and to some extent from Korea.

Increasing local sourcing

As per management, there is no under-capacity of Aliphatic Amines in the global market, in fact, there is excess capacity in most of the products. Success in this industry also depends on where you are located. Your customers want you to be near them. The customers who are in India prefer to purchase from local suppliers because the products are hazardous in nature, they don’t like to store large quantities or import large quantities. And now the customers have got used to the Just-in-time kind of delivery.

Methylamine is difficult to handle during transport that is why it has a very low import in India. Only 3-5% of Methylamine quantity is imported in India.

Ethylamine is also difficult to handle during transport but less difficult than methylamines. India imports 10% to 15% of the ethylamine quantity.

Derivatives are much easier to transport than amines, but there are some exceptions.

End-user Industry

Alkyl is in the intermediate business, so its growth comes from the growth of its clients. Alkyl doesn’t drive the growth, its client’s growth helps Alkyl grow and its clients are mainly in the Pharma.

Pharma:

  • Alkyl Amines Chemicals Ltd. has a large and reputed client base of over 600 clients.
  • Alkyl is a preferred supplier to marquee clients like Reddy’s, Biocon, and Aurobindo Pharma, with ties of >30 years.
  • Some of the top customers of the Company include names like Aurobindo Pharma, Dr. Reddy’s Laboratories, Ipca Laboratories, Biocon Limited, Divi’s Laboratories, and many more.
  • Almost 60% of Alkyl’s sales come from the Pharmaceuticals Industry. They must be supplying at least 10 different products to the Pharma Industry which goes into at least 20 different API.
  • Supplies products of the production of Metformin, Penicillin, Cephalosporin, Statins, Blood pressure medicines, Atenolol,
  • They are actually following their customers. When customers are launching new APIs, they contact Alkyl for the Amine requirements. Amine being a molecule is very versatile and is used in a large number of these medicines. So whenever they are launching new APIs, if there is a requirement for Amine and Amine Derivatives, Alkyl Amines is among the first ones to be in the queue to be asked to supply the Amines. So Alkyl gets its name registered and becomes ready for growth.

Agrochemical:

  • It is the 2nd largest segment for Alkyl Amines.
  • It supplies Methylamine, Ethylamine, Isopropyl amine and their derivatives to the agrochemical industry.

Other industries:

  • 20% of the market of amines is in the Specialty usage (Shampoos, Cosmetics, etc) which is growing and it will continue to grow because there is more money in the hands of the people.

Raw material

Ammonia, methanol (natural gas derivative ), and denatured ethyl alcohol ( sugar derivative ) are the key raw materials used to manufacture Aliphatic amines such as methylamine and ethylamine.

Of the three raw materials, while prices of ethyl alcohol are relatively more stable, both ammonia and methanol have historically been volatile. The company passes on any volatility in raw material prices to the end customers.

Methanol: purchase is monthly, based on international pricing. Alkyl buys from local shippers. Methanol is imported in India.

Ethanol: Now they have started importing as it’s cheaper. Ethanol is made from sugar cane in India, the government fixes the prices. In foreign countries, ethanol is made from corn and the prices are also low.

Pricing/Contract

Contracts are signed on a monthly or quarterly basis.

A contract is based on the global prices and Alkyl gets a small premium on all their products. Indian customers will always pay 1-2% more because of the convenience they get such as

  • No opening of LCs,
  • Products will arrive as per their requirement, i.e. smaller lots,
  • No clearing from the docks

 

Revenue drivers

  • Growth in the End-user industry. This will lead to an increase in volumes.
  • Producing those products locally which are still being imported.
  • Shift from Amines to derivatives and specialty chemicals which have higher realizations.

Cost drivers

  • Also, contracts are pass through in nature, So changes in costs have a temporary effect on the absolute margins.

Capacity

  • Company operates 12 plants at Kurukumbh, Patalganga and Dahej. As per their February 2021 corporate announcement.

  • At 80-85% is the optimum capacity utilization at which they need to take up new expansion plans to grow.
  • They have enough land at the Dahej plant to increase capacity up to 1,00,000 tons from the current 30,000 tons (Methylamine capacity). The expansion will take place over the years with 5 plants.
  • As per their last concall they were putting up an Acetonitrile plant at Dahej with a Capacity of 60 tons/day. Revenue at current prices of Rs. 280/kg is 300-350 Cr. And an Ethylamine plant with upwards of 25,000 tons per annum capacity.
  • Expect 1.5x asset turns from the new capacity. (Derivatives business can do a 2x asset turns)
  • Management commentary: Sales target of 2000 Cr in the next 4 years.

China

China is not an issue for Alkyl Amines, in fact when a customer faces supply issues for some raw materials (not necessarily amines) from China, Alkyl gets affected as until the customer doesn’t get the rest of the raw material it needs for the production, it will not buy Amines.

Alkylamines face some competition from China in acetonitrile and ethylamine. In 2018, there not a significant shutdown in factories in China, but the customers want to diversify their source of procurement, and this indirectly benefitted Alkyl.

Financials

Balance sheet structure

The above is a standalone balance sheet structure as of 2020. Out of the total assets, 85% (675 Cr) is invested in the Core business (Chemical business) at the standalone level and these assets generate revenue of 1095 Cr (1.62 Asset turns) and spit out a 20-22% EBITDA margin on a sustainable basis. So, this is a capital-intensive business with high margins.

Performance

There has been an amazing transformation in the company in the past 23 years.

Initially, they took huge amounts of debt to set up the plant. Till 2013 their D/E ratio has averaged 1.59x. But since 2013 the proportion of debt started reducing as profitability started picking up.

The reason for the increase in profitability is higher volumes on a y.o.y basis (Reason: continuous expansions) and increasing spreads at gross and EBITDA level (Reason: higher sale of specialty chemicals and amine derivatives).

Significant growth in Operating assets and Product selection over the years has helped them sustain the growth in profitability. And this has resulted in a 17% compounding in PBT and a 14% compounding in Networth. Initially, debt was used for the CAPEX but over the years the higher earnings power has enabled the company to fund its expansions through internal accruals.

Working capital

Further, the improvement in working capital also helped them reduce the short-term debt requirement. Notice the reduction in inventory days in the above table since 2011.

Price and Volumes

Revenue is price*quantity. Since the price of a product is dependent on the market forces, the only thing a company can have some control over is its ability to introduce more products and sell more. In the last 3 years, the volume and price have increased at a CAGR of 19.6% and 5.1% respectively. The reason for volume growth is the expansion that they have taken over the years. Pricing growth is driven by 1) the recent price uptick in Acetonitrile and 2) more focus on Amine derivatives.

Alkyl’s sluggish revenue growth over FY14-17 was partly led by capacity constraints and partly by underperformance in Pharma. (Alkyl has 60% exposure to the pharma industry). Also, the Price/kg was falling as the crude prices were falling. Margins did not drop as much because the raw material prices also dropped. Currently, Pharma is on a different wicket, and this situation is helping the amine players grow.

Specialty chemical which was 3% of the topline in 2011 now constitutes more than 25% of the topline.

The majority of the sales in specialty chemicals are from Acetonitrile, which is at peak margins and realizations (from Rs. 140/Kg in 2019 to Rs. 280/kg currently). And the effect of margin expansion can also be seen in the gross margins at the company level.

Margins

More focus on Derivatives and specialty chemicals has led to margin expansion. As these derivatives and chemicals are complex products and command higher margins.

Improvement in gross margin and reduction in Power cost as a % of the topline (Operating leverage) lead to improvement in EBITDA margins. As per management, when the capacity utilization increases the energy cost per ton reduces. Over 10 years they have reduced power, fuel, and water consumption per ton. Power & Fuel are not totally variable in nature.

Export

  • Alkylamines derive 20-22% of the topline from exports. Acetonitrile is the major contributor to export revenue.
  • Europe has always been in the range of 45% to 55% of total exports followed by the US and Japan.
  • Excess supply by China to Europe affects Alkyl’s realization. In 2015, large exports took place from China at rates that were lower than Alkyl’s rates. This resulted in reducing Alkyl’s prices to meet competition from China, thereby reducing their margins to some extent.

DuPont Analysis

Net profit margin: In the last 2 years the margin expansion in Acetonitrile drove net margins. The margins of 2020 and TTM might not be sustainable going ahead.

ATR:  Asset turns have increased due to higher volumes and pricing growth in the last 3 years. And due to a reduction in inventory days.

Leverage:  Due to higher earnings power the company has been able to reduce its debt and increase its equity over the years. And this has resulted in a lower leverage ratio.

ROE has improved due to better product mix and higher capacity utilization over the years. But the ROEs of 2020 and 2021 might not be sustainable as the Acetonitrile prices (Significant contributor to margin expansion) can plunge.

Management quality

Succession Plans:

Mr. Suneet Kothari, aged is the son of Mr. Yogesh M. Kothari, who is the Promoter of the Company. Mr. Suneet Kothari, an Executive Director, and promoter, is working with Alkyl since January 15, 2001. He is in charge of Marketing and Procurement. Mr.Suneet Kothari is a Chemical Engineer and Chemistry / Biochemistry Graduate from Cornell University, U.S.A. Also has completed one year MBA (Masters in Business Administration) course at INSEAD, France / Singapore.

Very conservative management as they don’t disclose much information about their products and are very reluctant to give short-term guidance. No major misallocation of capital in the past. They always under-promise and over-deliver.

They have successfully grown this business through continuous expansions and have over the years reduced their debt. The company currently generates 25x more profits compared to 2010 and the stock is up 100x since 2010.

Promoter holding: 74.14%

Balaji Amines vs. Alkyl Amines

Working capital: There was a lot of improvement in Alkyl Amines working capital management in 2019 and 2020. This is due to a reduction in receivables and inventory days. Unfortunately, we don’t know the reason for this reduction.

Volume growth: Alkyl’s volume growth has been superior to Balaji. The reason is continuous capacity expansions over the years. Balaji didn’t do major capacity expansion till 2019, but they have come up with new capacities in 2020 which is yet to deliver and have a plan to expand capacities by 60% in the next 4 years.

Revenue: Again due to higher growth in volumes the revenue growth was higher in Alkylamines. But so far in 2021, Balaji’s performance has been better due to higher capacity utilization for some of their products.

EBIT: The superior growth in Alkyl is due to higher volumes, also they have benefited from a sharp surge in Acetonitrile prices in 2020 and 2021.

ROE: The Hotel division of Balaji Amines has been a drag on its ROE.

CFO/PAT: Alkyl has efficient working capital management which results in good cash generation.

Valuation: Alkyl trades at premium valuation due to a very good history of superior performance, no misallocation of capital, superior return ratios, efficient working capital management, and higher cash generation ability.

In the last 3 quarters, Balaji has turned around their business. Balaji is doing massive capacity expansion (60% in the next 3-4 years), its subsidiary might reach 80-85% capacity utilization in 2022 (Current CU is 45%). Management has assured the investors that their focus will only be on the core business.

Alkyl is also expanding its capacities by 30-40% in the next 2 years.

Guidance:

  • Management is confident of delivering a 10-15% volume growth on a y.o.y basis and can also exceed this guidance.
  • Sustainable EBITDA margins at 19-22%.
  • If all projects are completed and run at optimum capacity then the company can add 1000 Cr in revenue in the next 3-4 years. The optimum product mix is the key to reach 2000 Cr in revenue. Management is quite confident to reach the target.

Conclusion

Alkyl is a part of a duopoly industry, which has pass-through contracts and high barriers to entry. Also, customers prefer to source locally, so there is a low threat of imports.

Alkyl has a 45% market share in a small industry which itself will grow at lower double digits in the coming years. (Big fish small pond). They have a very clear strategy of finding those products which are not available in India and which they can manufacture In-house. One can expect 20-22% EBITDA margins as sustainable.

Management’s focus is on volumes. Realization is not in their hands and is based on international level. They have been doing continuous expansions since 2016 and these expansions have delivered topline growth. Again they are expanding their capacities by 30-40% within 2 years and can generate an additional 400-500 Cr in revenue from the new capacities.

A strong correlation between the revenue growth of Aliphatic Amines and that of end-user industries. This can be a proxy play on Pharma and Agrochemical industry. If you believe that Agrochemical and Pharmaceuticals will grow, then Alkyl can be a good proxy play.

Competition is also very low with high barriers to entry. Also, there are only 3 players, when these 2 industries (Pharma and Agrochemical) are growing, they won’t go out and hunt for new suppliers which have just entered the Amine industry.

Also, the end-users will not backward integrate. Pharma and Agrochemical use majority (80%) of Amines. Pharma industry size globally is $1200 bn, Agrochemical: $50 bn,  Amines global size: $5 bn. Amines are a very small industry in comparison to the end-user industry. No point for Pharma and Agrochemical to backward integrate. (No/low backward integration risk)

Alkyl has a superior performance in comparison to Balaji but also trades at an expensive valuation.

According to us,

The major risk is the current situation of Acetonitrile. Acetonitrile is already at peak margins and the company is trading at peak valuations of 40x earnings. If the margins of Acetonitrile fall then this situation can lead to huge destruction of wealth. Also in the existing product basket, they have no products like Acetonitrile. So one needs to be very careful about making an investment decision.

The risk of Acetonitrile is not there in Balaji Amines as it constitutes a very small percentage of their topline.

Disclaimer: We are not SEBI registered research analysts. Views may be biased.

Read us more on Amine Industry and Balaji Amines.

Read us more on Acrysil here.

 

 

 

7 thoughts on “Alkyl Amines: A Wealth compounding machine!”

  1. Pingback: Balaji Amines: A Big fish in a small pond! - Financialmonk

    1. I completely agree with you regarding the DMF. If the price momentum of DMF sustains, then Balaji can be a huge beneficiary of it.

      Thank you for sharing the DMF link. It helped me get some more clarity.

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