BUY on Alkyl Amines - Gross margin continues to outperform - HDFC Securities

Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

Our BUY recommendation on AACL with a target price of INR 4,025 is premised on (1) robust demand from pharmaceutical and agrochemical customers that form ~70% of AACL's revenue mix, (2) rising domestic market share in Methyl Amines, (3) impending capacity expansion for (high-margin) Acetonitrile, and (4) production-linked incentive scheme that provides the right tailwinds for long-term volume growth. 2Q EBITDA/APAT was 28/27% above estimates, owing to a 6% rise in revenue and higher-than-anticipated gross margin.

Margins surprise positively: Sales growth of 19/24% QoQ/YoY to INR 2.9bn owing to 18% YoY volume growth and better realisations in 2Q. Gross margins rose to 57.46% (+156/634bps QoQ/YoY), given benign raw material prices, better product mix, and higher margins courtesy the robust pharma demand. Backed by operating leverage and the high margin Acetonitrile, EBITDA margins grew to 32.7% (+114/730bps QoQ/YoY). Tight supply of Acetonitrile in the global market continues to drive realisation, and we expect the currently elevated prices to sustain in the near to mid-term. However, the current EBITDA margin does not seem sustainable and should cool off to 30.1/29.2% in FY21/22E as COVID-induced pharma demand and, in turn, product prices come off. Opex margin dipped 105bps YoY courtesy higher volume-led operating leverage.

Call takeaways: (1) Capex guidance for FY21/22 is INR 1.5/2.0bn, which is mainly going to be spent on two major projects: expansion of the Acetonitrile capacity that is now under implementation stage and setting of a new plant for Ethylamines in the next 18 to 24 months. At peak utilisation, both plants put together should contribute INR 10bn to the topline at current prices after 3-4 years. (2) Long-term volume growth guidance, given of 10- 15% YoY. (3) Average capacity utilisation of all plants in 2Q was 70-80%. (4) Gross debt of INR 0.6bn on books, with the company being net-debt free in 2Q.

Change in estimates: We raise our FY21/FY22E EPS estimates by 15.2/5.5% to INR 112.5/128.9 to factor in better-than-expected performance in 2Q.

DCF-based valuation: Our price target is INR 4,025, basis Sept-22E cash flows (WACC 10%, terminal growth 3%). The stock is trading at 25.4x FY22E EPS.

Shares of ALKYL AMINES CHEMICALS LTD. was last trading in BSE at Rs.3370 as compared to the previous close of Rs. 3374. The total number of shares traded during the day was 5018 in over 1301 trades.

The stock hit an intraday high of Rs. 3400 and intraday low of 3354.15. The net turnover during the day was Rs. 16960712.

Source : Equity Bulls

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