In recent past, Indian Speciality Chemical sector has outperformed the market . There are various reason for the same , few of them are mentioned below:
China Factor :Stringent environment norms were set in China as they launched their Clear Sky Policy to beat pollution. This has led to many chemical plants getting shut at China. Further due to Pandemic of Covid 19 the China supply chain has further got adversely impacted.
Global opportunity :Export potential due to low cost labor availability and specialized knowledge base for chemical industry in India
Domestic Opportunity: Policy initiatives such as Import substitution, Atmnirbhar Bharat, Make In India & time to time Anti Dumping Duty on certain chemical produce
Shift from Unorganized to Organized: GST & Demonetization have helped large size Listed players against unorganized smaller ones and increasing their market shares
Alkyl Amine Chemical Limited (AACL) is one of such stocks which has given 3.5X return in past 1 year. AACL is one of the market leaders in duopolistic Aliphatic Amine segment in India commanding almost 40% of the market share. To learn about the stock in detail watch the video below:
Background
Started in 1979 with Aliphatic Amine in technical collaboration with a US firm. Later on, they started making Derivatives ,then they started making Specialty Chemicals. Current revenue mix is as below:
Management
Managing Director is Mr.Yogesh Kothari . He is a Chemical Engineer from U.D.C.T., Mumbai which is one of the best engineering college for Chemical Engineering Master of Management Science and Master of Science (Chemical Engineering) from University of Massachusetts, U.S.A.
•Promoters own 74% of shareholding with No share pledge
Business Model
(A) Raw Material
3 key RMs are Methanol ,Ammonia & Denatured Ethyl Alcohol.
Methanol:Import from Saudi Arabia, Oman, Qatar etc, especially post the US sanctions on Iran, which is one of the major manufacturers of methanol in the world. Methanol price are linked to crude prices
Ammonia:Difficult to transport, it is largely sourced indigenously.
Denatured Ethyl Alcohol:Mainly sourced from Indian local sugar factories and distilleries besides being imported from the US and Latin American countries
(B) Customer Mix
Aliphatic amines and other AACL produces are largely used as Solvent .The main customers i.e. Pharmaceuticals and Agro firms are poised for demand growth hence the sales is expected to grow .
(C) Products
- Aliphatic Amine (Methyl Amine)
Indian market size:85,000 ton. AACL has 30,000 ton capacity (40% market Share).Others are Balaji & RCF.
AACL is further enhancing capacity by 15,000 ton over next 2 years. Methyl amine is volatile & difficult to carry so Indian demand is captive
2.Aliphatic Amine (Ethyl Amine)
Indian market size:21,000 ton per annum .AACL is market leader with 15,000 ton capacity.Other is Balaji Amine
Ethyl amine is dangerous & difficult to transport so Indian demand is mostly captive with limited 10-15% import
3. Derivatives (DMA HCL)
AACL have 12,000 ton capacity. AACL+ Balaji controls 60-70% market. There is a moderatly competitive market Not dangerous & easy to carry .It is used in Ranitidine which is used in treatment of Peptic & Gastric ulcer and also in Metformin which is used in Type 2 Diabetes treatment.
4. Speciality Chemicals(Acetonitrile)
Indian market size:17,000 ton .AACL is market leader with 10,000 ton capacity (40% Market share)
There are 2 industrial methods to make Acetonitrile : (1) From Acrylonitrile (Auto industry ) and (2) From Ascetic Acid+ Ammonia (which AACL uses). Method 2 produces Pharm grade Acetonitrile.The increased pharma demand has widened margins for the product.
Prices have increased by 3X due to shortage of supply as automotive industry method production are low. Export market and increase in domestic demand would be met by the expanded capacity of 15,000 ton per annum.
Financials
Sales
EBITDA Margin
Leverage
In spite of being in a capital intensive industry the leverage is low and indicates sound discipline as D:E improved from 0.54 in FY16 to 0.16 in FY20.
Cash Flow from Operation
Is the Profit real (Cash)??
Let us check CFO/EBITDA of the company
Working Capital Cycle
Working Capital cycle is improving with all 3 parameters improving so business quality is improving.
ROCE
Valuation
Stock Price have increased dramatically in last 6 month . The company moved in Rs 100 cr PAT club during the same period. Both the below chart resemble
Why the market has valued AACL so high?
Let us check out few parameters :
The Company is clearly a Growth Stock . It’s PE Expansion (Rerating from 12 -17 to 29 ) happened due to (a)moving to next orbit (Rs 100 cr + Club) (b) Consistent growth in PAT & Sales (c) Growing ROCE indicating good capital allocation
Few Thoughts on Valuation
•Stock is fairly valued.Next PE Rerating seems unlikely
•Earning growth will lead to price growth, so watching the earning growth quarterly is recommended
•There is huge sectoral tailwind supporting the buoyant price of its key product (Acetonitrile price is key monitorable)
•Institution holding (MF ) is still low at 2%, there is room for institution to increase holding (Aarti Industries , Atul Ltd had similar trajectory )
•The Stock has great potential so people with conviction in Specialty Chemical growth story should invest
•Invest at Right time, Right price and Accumulate at drop
Disclaimer: Invested.
This blog is my personal opinion and is not a recommendation.Please subscribe to a video blog here:https://www.youtube.com/channel/UCH1CbIdTzFSVq788pIVKljg?sub_confirmation=1
Sadhan 