Alkyl Amines: Will the switch from pharma to rubber pay off?
Like last year, FY22 began with pharmaceutical companies in focus as the second wave of Covid unfolded across the country. A company supplying key raw materials to this industry is specialty chemicals maker Alkyl Amines Chemicals (Alkyl Amines). The demand for amine and amine derivatives surged in FY21 due to pharmaceutical and agrochemical companies moving away from the Chinese chemical supply. Amines are chemical compounds made from ammonia and used to purify chemicals. This helped the company’s revenue and net profits grow consistently in FY21 on a sequential basis. While the demand for amine chemicals from these industries did benefit the company, Alkyl Amines also began focusing on an amine derivative - acetonitrile, a colourless liquid used to make rubber. The company’s main focus in FY22 will be to increase this derivative’s capacity. Will this switch to acetonitrile pay off for Alkyl Amine? And with its stock already up by 140% in 2021, will this switch to acetonitrile boost its stock price? Consistent growth in revenues and net profits In Q4FY21, Alkyl Amines’ revenues were Rs 382 crore, a 63% jump YoY as volume growth surpassed pre-Covid levels. Net profits were Rs 93 crore, an 88% growth YoY, because of a 30% reduction in interest expenses to Rs 1.3 crore and debt fell by 55% in FY21. Alkyl Amines’ EBITDA margins rose by 5.3 percentage points YoY to 35.2%. Its margins remain above specialty chemical competitors Deepak Nitrite and Balaji Amines. Pharmaceutical demand for amines will continue Alkyl Amines makes specialty chemicals, specializing in the production of ammonia-based chemical compounds or amines. It produces basic amines like ethylamine and methylamine and amine derivatives like acetonitrile and specialty amines. These chemicals are used by the pharmaceutical industry to make codeine and penicillin, and by the agrochemical industry to make crop protection chemicals. In FY21, the demand for amines and specialty chemicals products rose because of two reasons. First, the Chinese government closed several chemical factories between 2018-2020 due to rising pollution levels. In FY21, many Indian companies which sourced chemicals from China looked for import substitutes. This boosted demand for Indian specialty and commodity chemicals companies’ products. Second, during the lockdown, the consumption of packaged food and health and hygiene products increased. Specialty chemicals are also used to make plastic packaging for packaged food products and a key specialty chemical isopropyl alcohol is used as a base chemical to make sanitizers. This boosted the demand for specialty chemicals in FY21. The management expects demand for amines from pharmaceuticals (50% of its amine demand) to sustain in FY22. In the Q4FY21 earnings call, they said amine production volumes will grow by 10-15% in the next 3-4 years to cater to the demand from pharmaceutical companies. The management expects the PLI scheme for pharmaceuticals and agrochemicals to boost demand in FY22 as well. While specialty chemicals are not part of the PLI scheme, demand from new smaller pharmaceutical companies will rise because of the PLI scheme in FY22. Delayed acetonitrile capacity expansion The management is positive on volume growth, but Alkyl Amines’ core amine production will face some challenges. Its basic amines (ethylamine and methylamine) production is nearing 100% capacity utilisation. The management expects no further growth in the capacity of the plants in Patalganga (Maharashtra) and Dahej (Gujarat) even after the removal of bottlenecks in the production process. With basic amine production not likely to increase in FY22, the company is shifting its focus on acetonitrile, an amine derivative. Acetonitrile is used in the production of rubber products (used by automobile, plastic, and consumer durable manufacturers) and acrylic fibres (used by textile and apparel makers). The price of acetonitrile has doubled in the last three years. Analysts suggest this was the main catalyst for Aklyl Amines’ 26% CAGR revenue growth between FY18-21. Alkyl Amines doubled its capital expenditure (capex) in FY21, spending Rs 156 crore to expand acetonitrile production. In FY22, Alkyl Amines aims to double its capacity of acetonitrile to 25 kilotons per annum (KTPA). It also aims to increase its production capacity of basic amines by 30-40% to 90 KTPA. One kiloton is equal to 1,000 tonnes. For this, the company will spend Rs 400 crore over FY22 and FY23. Alkyl Amines holds a 40% market share in the domestic acetonitrile market. The rest is held by smaller players (including Balaji Amines), and international suppliers. Through this expansion, Alkyl Amines aims to increase its domestic acetonitrile market share as domestic companies look for import substitutes. In Q1FY22, with most states under lockdown, the acetonitrile demand from automobiles, textiles, and consumer durables will be lower than Q4FY21. But Alkyl Amines is looking beyond the domestic market, to export acetonitrile in FY22. However, this is dependent on the severity of the second wave of Covid-19. Last year, the company faced supply chain issues during the nationwide lockdown. In FY22, these issues have cropped up once again due to the second wave. Alkyl Amines expected to complete the acetonitrile capacity expansion by June 2021. However, due to the second wave, the management said the capacity expansion will only be completed by the second half of FY22. The management maintained that all capacity expansions will be financed through internal accruals. That said, the company’s long-term debt dropped by 55% YoY to Rs 21.6 crore in FY21. Stock splits, high valuations, and big investors sell While the company’s financials are healthy, investors should be wary of the rising valuations of its stock. So far in 2021, Alkyl Amines’ stock has doubled. This was because demand for acetonitrile from automobile companies rose in H2FY21 as economic activities revived. Since the price of acetonitrile was already elevated at the time, this helped Alkyl Amines’ topline grow. Base amine demand from pharmaceutical companies was resilient throughout FY21. Brokerages suggest investors’ enthusiasm waned following the stock split, and profit-taking resulted in a 7% drop in the month following the stock split. In a note, HDFC Securities downgraded its rating on Alkyl Amines to ‘Sell’ from ‘Hold,’ citing the run-up in valuations. Analysts’ average target price is Rs 2,600. HDFC Securities rated the stock as “Buy” as recently as September 2020. Alkyl Amines’ acetonitrile production will rise in FY22 with additional capacity, and the demand from pharmaceutical and agrochemical companies will sustain. Even with these positives heading into FY22, brokerages expect growth is already baked into current valuations. Institutional investors have also decreased their holding in Alkyl Amines’ stock. In Q4FY21, foreign institutional investors (FIIs) and mutual funds lowered their stake by 0.36% and 0.05% respectively from the previous quarter. In fact, as recently as April 2021, mutual funds sold nearly 60,000 shares of Alkyl Amines, constituting 21% of their stake. Alkyl Amines’ core amine chemicals’ future growth potential is limited as current capacities are already exhausted. Acetonitrile capacity, which is its key focus, will only expand in the second half of FY22. The demand for basic amines is elevated from the pharmaceutical industry due to the production of vaccines. Analysts expect the amine demand to decrease by Q2FY22 as the second wave subsides. Once economic activity resumes, the acetonitrile demand will revive from automobile, textile, consumer durables, and paint companies. Since Alkyl Amines has a 40% share in the Indian acetonitrile market and is vying for more, it will ramp up production to cater to higher demand. But its sky-high valuations suggest the market has priced in these positives.07-06-2021
