Recommendation from Chemicals Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

ALKYL AMINES CHEMICALS : FORMULATING A SUCCESS STRATEGY

 HERE IS WHY
☛Dominant market position
☛Good financial performance
☛Strong growth prospects. 

Alkyl Amines Chemicals Limited (AACL) is a supplier of amines and amine-based chemicals to various players in different industries such as the pharmaceutical, agrochemical, rubber, chemical and water treatment industries. It manufactures aliphatic amines such as ethylamine and methylamine, amine derivatives and specialty chemicals at its facilities in Patalganga and Kurkumbh in Maharashtra and Dahej. The company also has a research and development facility at Hadapsar, Maharashtra.

According to CRISIL, the Indian amines industry is oligopolistic and AACL is one of the leading players with over 100 products. The company continues to be a market leader in the ethylamine segment and among the foremost manufacturers of methylamine, diethyl hydroxylamine and dimethylamine hydrochloride in the country. The fact of being present in an oligopolistic market helps the existing players to maintain their revenue and profits. In fact, AACL has not only seen stable but rising sales and profits. It has also seen good improvement in ROCE, which indicates its ability to be profitable and allocate cash resources efficiently.

Additionally, the company aims to gain from the increased capacity of its existing plant by FY21. The company plans to add capacities in its Dahej plant and also increase capacities at other locations too. These will help boost the topline further. The company’s plants are operating at various capacities and the management believes they have headroom of about 10-20 per cent capacity in most plants. Hence, the company can see growth even without significant capex at the moment. The management also adds that AACL has been witnessing good demand on account of the pace picking up in the pharmaceutical and tyre sectors.

The commodity nature of some of its products makes the company susceptible to fluctuations in raw material prices and exchange rates. It is also vulnerable to alcohol price volatility. Domestic alcohol prices are dependent on the cyclicality of the sugar industry and the government policy for its use in the oil sector. However, some petroleum-based raw materials are subject to international crude oil price fluctuation.

The company may see some relief in raw material prices with crude oil currently at low levels. For the quarter ended December 2019, its gross sales increased 20.8 per cent to Rs 256.91 crore in Q3FY20 from Rs 212.67 crore in Q3FY19. Total expenditure for Q3FY20 stood at Rs 184.34 crore as against Rs 174.09 crore in Q3FY19, showing an increase of 5.89 per cent. PBIDT, excluding other income, showed an increase of 88.12 per cent to Rs 72.57 crore in Q3FY20 from Rs 38.58 crore in the same quarter last year.

PBIDT margin, excluding other income, for Q3FY20 stood at 28.25 per cent as against 18.14 per cent in the same quarter last year. PAT for Q3FY20 stood at Rs 59.23 crore as against Rs 21.22 crore in the same quarter last year, showing an increase of 179.18 per cent. PAT margin for Q3FY20 stood at 23.05 per cent as against 9.98 per cent in the same quarter last year. The ROCE for FY19 was 27.70 per cent. The stock is trading at a PE multiple of 23.19x. By virtue of these factors, we recommend our readerinvestors to BUY this stock.