Balaji Amines Opportunity


(Ayush Mittal) #1

Summary about the company is available Balaji Amines Stock Story

Over last few weeks I have been reading on this company. I received the latest Annual Report a few days back and the outlooks seems to be quite positive.

The company is going to expand capacities and is also building a 100 room - 4 Star hotel at its surplus land in Solhapur.

Other interesting points:

  • Co claims to be making products which are 100% importsubstitutes. The company has been developing these products from in-house research.
  • The co has been doing a lot of expenditure on R&D. In FY10, they expended almost 8 Cr on R&D - this is almost 3-4% of turnover. It is rare to find small sized chemical companies doing such high R&D expenditures.

If these R&D expenses are genuine and on things of future, then this company has a great potential. The stock seems under-valued at these levels.

Concerns:

  • The depreciation % is on the lower side
  • 80% of the R&D expenditure is being capitalized - is it right?

Views Invited.


(Abhishek Basumallick) #2

Balaji Amines looks to be a good company. They have specialized in the amines area and is a supplier to most of the big names in the Indian Pharma space. Also, they have a long term supply contract with BASF.

They have also started a 2.5MW co-generation power plant for captive power to further reduce costs.

Need to understand: In 2010, both operating and net margins have improved.

What were the drivers for the margin expansion.


(Ayush Mittal) #3

The margins are expanding due to softening of raw material prices. At the same time, the end product prices have also softened hence the turnover growth is not as high as production growth.

So in actual the company is growing at a greater pace than we are seeing.


(Hitesh Patel) #4

I also had a look at balaji amines and found it interesting on valuation parameters. As mentioned earlier, most of its products are import substitutes and demand seems to be strong. debt seems to be on the higher side for the company but i think that is the trend with most chemical companies.

There has been good sales growth in last two quarters. Only thing is margins at net level are quite volatile ranging from around around 6 to 12% in last five quarters. Since market participants are looking at quarterly results very closely these days, a bad quarter may provide a good entry point.

Even at current market price, the stock seems to be attractively valued.

Regarding the hotel at solapur, when is it slated to commence operations?


(Abhishek Basumallick) #5

The construction for the hotel is just beginning, so I think it will not get completed before 2012-2013.


(Donald Francis) #6

The R&D spends (see excerpts from AR below) seem to have a distinct pattern and have resulted in both backward & forward integration, and as claimed important import substitutes. Does show a clear intent from Management on R&D as an important differentiator by launching new products and cost efficiencies. There is also mention of capacity de-bottlenecking through these initiatives.

We can check out two things:

a) Have margins improved significantly on account of backward integration

b) Have capacity expansions been minimal due to de-bottlenecking but registered increased production & sales

Reproducing R&D details from Annual reports

2009-10

RESEARCH AND DEVELOPMENT

1). Specific Areas in which the company carries out R&D.

Plant design & development of globally competitive process for manufacture of PVP for the first timein India.

Process fine tuning in R & D plant for Morpholine and NMP, which enhance the plant capacity.

2). Benefits Derived

Sucessfully produced pharma grade PVPK-30

Scaling up of NMP, GBL, Morpholine Plants.

International competitive prices and product quality.

Safe and environmental friendly process.

2008-9

R & D PRODUCTS LAUNCHED

NMP, SOLANESOL (2005-06) MORPHOLINE (2006-07) CO Q10(2007-08) 2P,GBL,PVP (2008-09)

RESEARCH AND DEVELOPMENT

1). Specific Areas in which the company carries out R&D.

Plant design & development of globally competitive process for manufacture of GBL for the first timein India.

Plant design & development of globally competitive process for manufacture of PVP for the first timein India.

Process fine tuning in R & D plant for Morpholine and NMP which enhance the plant capacity.

2). Benefits Derived

➠Strategic backward integration of GBL for NMP

➠Strategic forward integration of 2P for manufacture of PVP

➠Scale up of R & D pilot plant of Morpholine

➠International competitive prices and product Quality

➠Safe and environmental friendly process

2007-8

RESEARCH AND DEVELPOMENT

1). Specific Areas in which the company carried out R&D

The company has carried out R & D in process improvement of existing plants like Ethylamines,Methylamines, N-Methyl-2-Pyrolidone, Morphline and DMAHCL.

The company has carried out R& D for process development for production of Natural Products.

2). Benefits Derived

The company has revamped the plants and installed capacity of some of the plants increased ranging from30% to 80% which has resulted in higher production vis-a-vis higher sales.

3). Future course of Action

The company has initiated various R&D activities and setting up R & D pilot plants to manufacture someof the new products in India for the first time. One of the products is for backward integration which beingimported presently.


(Conservative Investor) #7

entry into unrelated hotel sector just because it has extra kand available? What Peter Lynch would call “di-worse-fication”


(Abhishek Basumallick) #8

I too was skeptical of this move into hotels. But thinking a bit more, I think it may not be a very bad after all. They have the land and sholapur is an upcoming industrial city/town without good hotels. Plus, the management has handed over the operations of the hotel to the Sarovar group so management bandwidth is not going to be used up trying to run the show. So, overall, they are spending some money to build the hotel and get a consistent royalty out of it (probably increasing over the years). I am not sure if its a “diworsification”. This is not really a new line of business for the company.


(Ayush Mittal) #9

Hi Abhishek,

Yes, I don’t think this will be diworsification". We visited the co last week and are back on a positive note.

The location of the upcoming hotel is good and the plot is really big (3.5 Acre). So it will create value in longer run.

Regards,

Ayush


(Abhishek Basumallick) #10

Hi Ayush,

Have you posted your observations on the management visit somewhere? If so, could you please share the link?


(Ayush Mittal) #11

Balaji Amines - Visit Note

It was an excellent opportunity to visit the company and interact with their director - Mr Ram Reddy. We visited their registered office, Unit 1 & newly build Unit 3.

Key Takeaways:

  • Co is in a leadership position in its key products â Methylamines, Ethylamines and their derivatives. The products find application majorly in Pharma, Agro Chemical and other chemical industry.

  • Over the last 4-5 years through in-house R&D, the company has been able to develop products like NMP, Morpholine, PVP 30 & GBL. Among these, NMP and PVP are of high potential and margins. The other 2 products are more for backward integration (i.e… in-house consumption)

  • The co has an capacity of about 6000 MT of NMP and is in the process of more than tripling the capacity to 22000 MT. The enchased capacity should be available for operation by year end and utilization will be scaled up according to the demand.

  • PVP is a high margin Pharma grade product with technology guarded by likes of BASF etc. The initial response is positive but to get the volumes and pricing, the company needs to get regulatory approvals like WHO GMP, European GP, USFDA etc…and the same may take time. As and when it happens, it may lead to re-rating.

  • Co also has plans to triple their capacity of their main products â Methyl & Ethyl amines from 50 TPD to 150 TPD. This may take 1-2 year.

  • Coâs Unit 1 spread over approx 24 acres is already packed with operational plant. The new unit â 3 has been build on a approx 40 acre land and will cater to future expansions

  • The hotel site is spread over 3.5 acre and the location is good. The co will be building a corporate office also. Rest of the space will be developed over next few years. As the rentals in Solapur are in lower range, we donât expect the hotel operations to add to the cash flows. It will lead to asset value creation for the company.

Given the capital intensive nature of the business and Balaji already being one of the lowest cost producers, we feel the company will continue to maintain healthy margins and grow steadily @ 20-25% for next 2-3 years.


(Vinod MS) #12

Dear Ayush,

Excellent find, the CMP is 236! Is it still attractive at this price?

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(Ayush Mittal) #13

Hi Vinod,

Yes, I feel there is still lot of value butyou need to build your own conviction levels and understanding while buying a stock. Value differs from person to person :wink:

Regards,

Ayush


(Ravenrage) #14

HDFC Sec now has a buy rating on the stock !!


(TCX) #15

here’s the link to the HDFC Securities report on Balaji Amines.

Report is pretty detailed and useful.


(Donald Francis) #16

Balaji Amines stock story updated.

This is a good stock story :slight_smile: - with good visibility into growth and margin expansion. Inputs collated mostly from the HDFC report and other published information.

Ayush, Gaurav, Nagabrahma -please have a look first, there might be something additional that we can bring-in from your plant visit and interaction with Management??

The only thing I am not comfortable is the high leverage levels. Current debt ~100 Cr (d/e 1.26) will shoot up over 2 with planned capex of 100 Cr for NMP/GBL 15000 TPA and Methylamine 30000 TPA expansion being undertaken.

This is aggressive expansion and carries with it the attendant execution and high interest/depreciation risks. Should anything go wrong with the demand forecast (e,g. RCF plant in Mumbai not closing), this will start adding to unutilised capacity and depressed return ratios -just like the PVP-30 is now causing. A combination of these may hurt the company??

What are your considered views -from the interaction with Management??


(Donald Francis) #17

With the recent correction, Balaji Amines is back to the pre-split levels of 220 (1:5 CMP 44). Given its niche dominance, strong growth, good growth visibility on expanded capex and product success, looks a good buy at these levels again.

Post the split, the stock has corrected along with the market and more. Possibly cos it had run up too fast in the preceding weeks. Any newsflow? otherwise, good to go.


(Abhishek Basumallick) #18

News flow is not bad. Company is doing well, so it may be a good time to add…thats what I am doing…


(Hitesh Patel) #19

After a sharp run up to around 57 plus levels, the stock along with the market correction has corrected and posted a low of 36 recently. Since many trading sessions the stock is consolidating above its 200 day exponential moving average which is at around 38-39. Both technically and fundamentally seems to be a good level to buy.


(Excel Monkey) #20

Even though this one has been aconsistentperformer in terms of financials

I am not sure if this company can be called as aspecialtychemicals company

and why do they publicise that methylamine andethyl-amineare some sought of complex products when thesemoleculeshave been around for decades

it is a small company which could be just wiped out because some Chinese chemicalsgiantsdecides toramp upit amines capacity which Balaji produces

and remember Chinese have cheap debt, cheaper capital and free infrastructure

they don’t care about the ROE they want scale

I would be wary of 1-2 product companies