Balaji Amines Opportunity

[csheth3650]

Balaji Amines reported decent numbers for the quarter (Revenue dipped but margins have improved sharply) which I am posting below. I also went through the entire thread - Management was no where near to its FY13 PBT guidance of Rs 55-60cr and also its revenue guidance of Rs 900cr post completion of its capex plans - however, stock price almost doubled from there. Need to know whether its still an investment grade stock? Senior members can throw some light here. Thanks.

• For Q4, Company reported sales degrowth of -14% yoy to Rs 148cr, however, Ebitda grew +37% yoy to Rs 29cr primarily on account of -27% yoy decline in material cost. Consequently, Ebitda margin improved 720bps yoy/510bps qoq to 19.5%. Further, Interest cost were lower by -10% yoy while depreciation cost was marginally lower which led PBT to grow +112% yoy to Rs 19cr. Higher tax expense of Rs 7cr this qtr led PAT growth of +29% yoy to Rs 11.8cr. Q4 EPS at Rs 3.63/sh

• For full year, Sales, Ebitda and PAT grew -1%, +12% and +8% yoy to Rs 605cr, Rs 102cr and Rs 36cr yoy respectively. Ebitda margin saw improvement of 200bps yoy to 16.9%. FY15 EPS at Rs 11.22/sh.

• On Segment Performance,
o For Q4, Company’s core Amines division reported revenue degrowth of -14% yoy to Rs 145cr while Hotel division grew +51% yoy to Rs 4cr. Amines division reported strong PAT growth of +42% yoy to Rs 16cr while Hotel division losses doubled of Rs 4cr vs loss of Rs 2cr yoy.
o For full year, Amines division reported Sales, Ebitda and PAT growth of -2%, +7% and +37% yoy to Rs 594cr, Rs 116cr and Rs 50cr respectively. While its Hotel posted strong operational performance, however, bottomline impacted on higher depreciation and tax spend which led Net loss of Rs 14cr vs Rs loss of Rs 3cr yoy.

• Board declared dividend of Rs 1.2/sh, yield works out at 1%

• Balance Sheet: Company’s gross debt at Rs 208cr vs Rs 225cr yoy. Networth at Rs 238cr vs Rs 202cr yoy. D/E at 0.88x vs 1.11x yoy. Cash balance of Rs 36cr.

• At CMP of Rs 112.7, Company’s MCap at Rs 365cr and Ev of Rs 538cr respectively. Stock trades at PE of 10x and Ev/Ebitda of 5.25x its FY15 earnings. PBV at 1.5x with ROE of 15.3%

In Rs Crs Q4FY15 YoY QoQ Q4FY14 Q3FY15 FY15 YoY FY14
Net Sales 148 -14% 5% 172 142 605 -1% 610
Ebitda 29 37% 42% 21 20 102 12% 91
Ebitda margin 19.5% 7.2% 5.1% 12.3% 14.4% 16.9% 2.0% 14.9%
Other Income 1 130% 138% 1 1 3 30% 3
Interest 7 -10% -3% 8 8 31 0% 32
PBT 19 112% 130% 9 8 56 22% 46
Tax 7 NA 253% 0 2 19 60% 12
Adj PAT 11.8 29% 90% 9 6 36 8% 34
PAT margin 7.9% 2.6% 3.6% 5.3% 4.4% 6.0% 1% 5.5%
Adj EPS 3.63 29% 90% 2.80 1.91 11.22 8% 10.35

Segment Performance
Amines Division
In Rs Crs Q4FY15 YoY QoQ Q4FY14 Q3FY15 FY15 YoY FY14
Sales 145 -14% 4% 169 139 594 -2% 606
Ebitda 29 18% 22% 25 24 116 7% 108
EBIT 29 34% 43% 22 20 104 11% 93
PBT 22 101% 131% 11 9 64 31% 49
PAT 16 42% 78% 11 9 50 37% 37

Hotel Division
In Rs Crs Q4FY15 YoY QoQ Q4FY14 Q3FY15 FY15 YoY FY14
Sales 4 51% 27% 2 3 11 186% 4
Ebitda 5 281% 163% 1 2 8 345% 2
EBIT 1 1080% 79% 0 1 2 983% 0
PBT -3 NA NA -2 -1 -8 NA -3
PAT -4 NA NA -2 -3 -14 NA -3

[Shivkumar]

There was some problem with the DMF plant which was solved only a few months ago. The management has opted for accelerated depreciation of the hotel in order to save tax.

In order to bring down debt, company has frozen capex. But with interests rates trending down, management may return to investment mode possibly in the next three or four quarters.

Promoters are looking to revoke pledged shares following the construction of the hotel which would be used as collateral.

Awaiting annual report for further clarity on various subjects.

disclosure: holding full quantity.

[Shivkumar]

http://www.bseindia.com/xml-data/corpfiling/AttachLive/BEB8A44B_89BC_484B_BD40_FA4A49A24F9C_133046.pdf
good results. management seems to be walking the talk reducing debt and thus interest outgo.

shiv kumar

[Shivkumar]

Benefits of lower crude continue. Margins have expanded and even the hotel business is showing operational profits. Lower interest payments indicate that management is on track about reducing debt. Let’s see how ‘Smart City’ Solapur helps the hotel business.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/AF98EDEC_62CE_4052_BB5D_8A0A3E4D4630_191916.pdf

[Shivkumar]

Net profit has nearly doubled in the last quarter as raw material and finance costs are lower. Management is making full use of the Accelerated Depreciation benefits for the hotel. It is also walking the talk of a capex holiday to pay back debt. Debt/Equity ratio is around 0.5 now. Reserves are also sharply up, so expectations of bonus shares have also gone up.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/2EC51417_9CC3_40B0_AD63_2BA22EA66BA0_173733.pdf

[vinkash]

The company looks to be reasonably valued at cmp. Good growth in profits yoy and reduction in debt. As per the AR, they plan to expand into products like acetonitrile and morpholine. Are these chemicals more of a commodity? Where are they used? @Shivkumar, @mythace can you please share your views? Thanks.

[mythace]

@Vinkash, Let me just talk about the chemistry here. Haven’t analysed the company basis financials.

Both acetonitrile and morpholine can be considered as bulk chemicals.

Acetonitrile is prepared from acetic acid/ acetylene (derived from a petrochemical plant - Reliance, GNFC etc) and ammonia (typically imported in India). There are 50+ manufacturers and 400+ suppliers of acetonitrile in the world. Acetonitrile finds end use in manufacturing a lot of pharmaceuticals and agrochemicals.

Morpholine is prepared from ammonia and ethylene oxide (also derived from petrochemical feedstock). Morpholine find end use as solvent, as a ingredient/ input in ointments, agrochemicals, surfactants. There are 20+ manufacturers and 250+ traders around the world dealing in morpholine.

Pricing for both will a function of RM prices + conversion. So, companies with enough scale to command best prices for raw materials and having low cost operations will win.

Current scenario for bulk and specialty chemicals in India has improved a lot because of low crude prices (leading to lower input prices) and imposition of stricter environmental norms in China (the lowest cost producer in the world past 10-15 years)

Hope this gives perspective on new products.

[vinkash]

Thanks for your prompt response!

[Shivkumar]

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/C0A5D5C6_AFBB_4522_A284_C80A1BAEBBA6_182345.pdf

Good results on the back of lower raw material prices. However RM prices have been increasing in the past few quarters and this could
lower margins going ahead. Management has been using the benefits from higher margins pare down debt which has resulted in lower interest
outgo.

Hotel business seems to be showing loss due to accelerated depreciation. (CAs may please enlighten me on how this works).

http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/B015F7D2_D129_4308_BE38_2D727FDF90FA_145313.pdf

In the concall above management seems bullish on the prospects of capacity expansion adding to both top and bottomline over the next few years.

Interesting to note that amines business is growing at 18 per cent per annum globally. Balaji Amines has near monopoly in some chemicals in India.

MANAGEMENT HAS ALSO COMMENTED ON COMPETITOR ALKYL AMINES IN THE CONCALL.

Moreover, if the company manages to get the govt to impose anti-dumping duty on imports from China it would help improve margins.

In the past the management has walked the talk so I expect them to do so in future as well. But I may also be wrong in estimating management quality.

Equity of the company is low while reserves have been growing. There is thus talk of bonus issue in the future.

disclosure: my views may be considered biased because Balaji Amines is part of my core portfolio.

Shiv Kumar

[vikrantmehta888]

I have seen in last 3.5 years the stock has become 10X but I am really not sure if the revenues have more than doubled. Surprisingly, We are still at PE of 12. The management is superbly professional and command the Metformin manufacturing by dictating the prices. Other areas are improving as well.

[ishandutta2007]

@Shivkumar

Interesting to note that amines business is growing at 18 per cent per annum globally. Balaji Amines has near monopoly in some chemicals in India.

then why has the topline grown by on 7% for last 3 years ?

[Shivkumar]

Price of amines is linked to crude which is supposed to be the raw
material. (I am not aware of the technical details). However volumes have
been increasing and the management has been able to steadily improve
margins.

[ishandutta2007]

@Shivkumar

However volumes havebeen increasing

If volume is increasing why is topline not increasing? are they selling at lower margins now ?

But since bottomline is increasing that may not be the case either.

[Shivkumar]

since raw material prices are lower, they pass on some of the benefits to
the customer. that is why topline is lower while bottomline is better.

Got to know that in the last quarter chemical companies were saddled with
higher priced inventory whose costs could not be passed on.

You could compare results of Alkyl Amines with that of Balaji Amines for a
clearer picture.

[mythace]

Pricing for bulk chemicals is closely related to the raw material costs. It can be simplified as RM cost + conversion cost + overheads + margin. As RM prices fluctuate (say methanol/ ethanol and ammonia), so will the international pricing of the chemical fluctuate. Methanol prices are linked to natural gas prices and ammonia prices were also at multi-year lows in the last FY. Volume increase (in qty terms) and bottomline growth are the parameters one should look at, instead of top line.

[Shivkumar]

Balaji Amines latest AR is a must-read for anyone interested in India’s
specialty chemical industry.

“With proactive policies of Government of India coupled with increased reputation of Indian products in the international area we believe a new age of more aggressively priced Indian chemical products based on lower commodity prices has come into effect. This will lead to an ever increasing overall market size which we believe will help your company’s topline and bottomline over the next couple of years”. - From the management discussion and analysis.

After a gap of several years when it worked to bring down debt levels, BAL has again increased capex to grow capacities. Capital works in progress has been increased to Rs 25 cr from Rs 16 cr in the previous year. Of this Rs 8 cr has been invested in expanding capacity of Amines division. Rs 16.5 cr invested in R&D.

Company has come out with newer products which promise higher margins: Acetonitrile, Povidone K-90 (PVK-90) and Crospovidone.

Management has indicated that it would be undertaking backward and forward integration to improve its value chain.

Process improvement in existing plants is also on.

Over the years, management has steadily brought down debt and both long and short-term debt is down to Rs 81 cr from Rs 134 cr. D/E ratio is below 0.25 from 1.5 a few years ago.

Finance costs have therefore come down steadily and interest outgo stood at Rs 11.69 cr as against Rs 20.08 cr in the previous year.

Margins have improved in a big way and operating profit is up from Rs 93 cr to Rs 130 cr yoy.

With share capital of Rs 6.48 cr and reserves of Rs 362 cr one can expect a good bonus issue in the coming year or two.

Last week, the company received environmental clearance for facilities to expand capacities for Acetonitrile and Morpholine. Capacities will go up from 3000 MT to 10,000 MT and will substitute imports in a big way.
However demand for these chemicals seem to be slow growing and the
management increases capacities that will take care of requirements
for several years down the line.

Management is also making full use of the provisions for accelerated depreciation in the Income tax laws regarding the hotel project.

Stock has fallen 10 per cent from peak and is still available at P/E below 14.

Disclosure: holding in core portfolio.

This post is not a recommendation to buy, sell or hold the stock.

Shiv Kumar

[django]

Indeed the AR is interesting.

My only concern is current PE vs historical PE (3-6 years) avg.
From this angle, it looks expensive.

Would appreciate your thoughts.
Sincerely,
Django

[vinkash]

The management has executed expansion projects successfully in the past, overall debt is falling and the return ratios are quite good showing the quality of business. Hence the historical PEs alone can’t be used in such cases. One needs to see if the current valuations are backed by improving results and balance sheet or not. Plus there should be enough headroom for growth compared to its current market cap. Of course one needs to keep in mind that a chemical company may not necessarily grow at a steady y-o-y rate due to possible delays in environment clearances, surges in raw material etc. For e.g., the mgmt mentioned that methanol prices rose last qtr thereby putting pressure on margins.
Disc: invested

[suru27]

@django My sense is the concept of relative valuation with self has a big assumption : “Assuming everything remains constant”. But businesses do not work that way. That reminds me statement of Prof where he says, a stock at 100 Rs after running up to 200 Rs might be costly by price but cheaper by value because it might have created additional levers to mitigate risk and improve opportunity during this journey. Now if we take historical PE of 6-7 of Balaji Amines, to do a fair valuation, let us take all factors which impacts a stock PE like debt equity ratio, growth rate, PAT margins, execution capability, management reputation, equity dilution , future prospects etc etc. Now, let us see if DE ratio has improved in last 5 years, margins have improved in last 5 years and can be sustained, has there been any equity dilution in last 5 years, has management walked the talk, does Chinese shift makes it more interesting, does management has visibility for growth in higher margin products and then if one sense factors impacting PE improving over last 5 years, then, question comes how much improvement or reduction in PE , one would like to tag? I am discussing this in a non-quantified manner but i am sure one can do a quantitative analysis of this in terms of valuation but wanted to deliver the key message on how to look at relative valuations with itself across various time frames. Disc : Initiated position last week and plan to add with better conviction and valuation attractiveness if other higher quality bets stay overvalued

[django]

Dear Saurabh,

Your points are well received. Thank you.

I too have started investing in early Jun in small chunks
Will add more in near future.

Regards,
Django