Management Meet Note

May 29, 2018

Rating Matrix
Rating : Unrated Alkyl Amines (ALKAMI) | 686
Target : NA
Target Period
Potential Upside
:
:
NA
NA Quality play in niche amine chemistry...
We recently met Kirat Patel, Executive director at Alkyl Amines Chemicals
Key Financials
(Alkyl) to get an insight into the amines chemistry business and the
(| Crore) FY15 FY16 FY17 FY18
company’s role in the value chain. Alkyl is a key player in the oligopolistic
Net Sales 476.4 483.6 500.6 624.8
EBITDA 86.8 91.0 91.7 114.5
ammonia chemistry segment in India. The company was established in
Net Profit 45.6 50.0 49.7 64.3 1979 and has 12 manufacturing plants in western India (Maharashtra,
EPS Adj (|) 22.4 24.5 24.4 31.5 Gujarat) with a state-of-the-art R&D unit in Pune. Alkyl manufactures
primary chemicals in aliphatic amines domain like methylamines,
Valuation Summary ethylamine and its derivatives and specialities like DMAHCL, acetonitrile,
(x) FY15 FY16 FY17 FY18 etc. Its outside sales volume as of FY18 stood at ~49,000 tonne with
P/E 30.7 28.0 28.2 21.8 blended realisation at ~| 1.25 lakh/tonne. With optimum utilisation in
EV / EBITDA 18.3 17.4 17.3 13.9 place, Alkyl has put up a Greenfield project in Dahej SEZ to manufacture
P/BV 7.6 6.7 5.5 4.7 methylamines and its derivatives with methylamine capacity of 30,000. It
RoNW (%) 24.6 24.0 20.0 21.6 was already commissioned as of FY18 end. Topline & PAT at Alkyl have
RoIC (%) 28.9 28.0 24.0 29.2 grown at a CAGR of 8.8 & 10.4%, respectively, in FY14-18 to | 625 crore &
| 64 crore, respectively, in FY18. Alkyl realises healthy ~18% margin
Stock Data profile, has a capital efficient business model (RoE & RoCE in excess of
Particular Amount 20%), controlled working capital cycle (< 90 days) and is a consistent
Market Capitalization | 1399 crore
dividend paying company. Hence, it generates healthy cash flow from
Total Debt (FY18) | 191 crore
operations (CFO yield at ~4%). With incremental capacity in place,
Cash (FY18) | 3.2 crore
EV | 1587 crore
healthy demand prospects and calibrated supply from China, Alkyl is well
52 week H/L (|) 790 / 362 placed to clock double digit topline and EBITDA growth going forward.
Equity capital | 10.2 crore End user segmental break up; pharmaceuticals constitutes majority
Face value |5
In terms of end user segments that act as customer for Alkyl, the
FII Holding (%) 1.6
DII Holding (%) 0.1
company realises ~60% of sales from the pharmaceutical sector wherein
for one of the key molecule, along with Balaji Amines, it controls ~80% of
Price Movement global market (DMAHCL, used to manufacture anti-diabetic drug). Its key
clients in pharma include Aurobindo, Sun, Mylan, Dr Reddy’s, etc. This is
12,000 1,000
followed by agrochemical, water treatment and dyes in equal proportion
10,000 800 at ~5% each while also catering to other key segments like rubber &
8,000 600 foundry chemicals. Alkyl also realises ~20% of its sales through exports
6,000 400 wherein it competes with likes of BASF & Eastman Chemicals.
4,000 200 Healthy balance sheet, robust cash flows and return ratios!
2,000 0 Utilising its in-house R&D intellect, Alkyl has embarked upon a capex
Oct-15

Oct-16

Sep-17
Jun-15

Feb-16
Jun-16

Jan-17

Jan-18
May-17

May-18

programme wherein it aims to clock a turnover of ~| 1500 core by FY23.

This involves ~15-20% growth in the topline. On the margins front, Alkyl
Price (R.H.S) Nifty (L.H.S) aims to retain ~18% EBITDA margin profile. However, with increasing
depreciation & interest outgo on account of capacity commissioning, PAT
Research Analysts growth over the aforesaid period is pegged at lower double digit level. At
Chirag J Shah
the CMP, on FY18 numbers, Alkyl is trading at ~22x P/E, ~5x P/BV and
[email protected] ~14x EV/EBITDA, which we believe is not inexpensive.

Shashank Kanodia, CFA

Exhibit 1: Financial Performance
[email protected] (| Crore) FY14 FY15 FY16 FY17 FY18
Net Sales (| crore) 446.1 476.4 483.6 500.6 624.8
EBITDA (| crore) 84.9 86.8 91.0 91.7 114.5
Net Profit (| crore) 43.3 45.6 50.0 49.7 64.3
EPS Adj (|) 21.2 22.4 24.5 24.4 31.5
P/E (x) 32.3 30.7 28.0 28.2 21.8
Price / Book (x) 9.4 7.6 6.7 5.5 4.7
EV/EBITDA (x) 18.7 18.3 17.4 17.3 13.9
RoIC (%) 29.4 28.9 28.0 24.0 29.2
RoE (%) 29.0 24.6 24.0 20.0 21.6
Source: Company, ICICI Direct Research

ICICI Securities Ltd | Retail Equity Research

 Other management meet highlights
 Domestic methylamine production is pegged at ~75,000 tonne
with ~50% being consumed captively in manufacturing
derivatives. Domestic demand is largely met by three players viz.
Balaji Amines; RCF tonne and Alkyl (~7500 tonne). Globally,
BASF is the biggest player. Methylamine is primarily used as a
solvent in agro-chem, dyes and pharma industry and growing at a
CAGR of 3-5%. Currently, it is quoting at ~| 70-80/kg with
contribution margins in range of ~| 10-20/kg
 DMAHCL is the key raw material for Metformin i.e. anti-diabetic
drug, which has been in existence in the last 50-60 years and is
one of the most cost effective medicines with low side effects.
Total market size of DMAHCL is pegged at 25,000 tonne with
Balaji and Alkyl (10,000 tonne) constituting ~80% market share. It
is currently quoting at ~| 80/kg with contribution margins of ~28-
32%. The market of DMAHCL is growing at a CAGR of 10-15%
 Ethylamine is one of the core products at Alkyl (15,000 tonne) and
is a basic raw material for a host of antibiotics. The total domestic
size of this product is pegged at 18,000-19,000 tonne per annum
with global market size pegged at 90,000-100,000 tonne per
annum. The largest player of this product is BASF while the
market is growing at a CAGR of 5-7%. It is currently quoting at
| 120-140/kg with contribution margin at ~| 40/kg
 Acetonitrile is another speciality chemical being manufactured at
Alkyl with capacity of ~10,000 tonne with domestic industry size
being pegged at 16,000-17000 tonne. Globally, this industry is
pegged at ~105,000 tonne. ~2% acetonitrile is generated as a by-
product in the manufacture of acrylonitrile (largely used to
manufacture ABS). With ~80% of the acetonitrile supply
generated via this route it makes Alkyl a price taker. It is currently
quoting at ~| 120-140/kg with contribution margin at ~| 30/kg.
Domestically, Biocon is the main customer for Alkyl in this
segment

 Alkyl also has an investment in the listed entity i.e. Diamines and
chemicals with its stake at 30%. It consolidates results include
profit for this associated entity.

 Alkyl aims to continue its dividend payout at ~20-30%. For capital

allocation, the company looks at 5 years as a good payback
period implying a RoCE of ~20%, however its Dahej project will
not generate such return matrix as it is more strategic in nature
and will serve as replacement of existing capacities while at the
same time will provide room for further downstream product
additions.

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 Key financial
Revenues have grown at 8.8% CAGR in FY14-18 to | 625 crore in FY18.

Exhibit 2: Revenue trend; records CAGR of 8.8% in FY14-18

Overall sales volume at Alkyl were at ~48990 MT in FY18 650 625

vs. ~34234 in FY14 registering a CAGR of 9.4%
600

550

| crore
501
500 476 484
446
450

400
FY14 FY15 FY16 FY17 FY18

Source: Company, ICICI Direct Research

Exhibit 3: Sales volume in FY14-18 Exhibit 4: Sales mix: domestic vs. export (FY2018)

60,000
48,990
50,000 42,599
41,039
36,565 Export
40,000 34,234
20%
tonne

30,000

20,000

10,000 Domstic, 80%

-
FY14 FY15 FY16 FY17 FY18

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

EBITDA margins have held steady at ~18.5% over the FY14-18.

Exhibit 5: EBITDA & EBITDA margins trend

140 19.0 19
120 18.8 19
100 18.3 19
18.2 18.3 19
80
| crore

18
%
114.5

60
18
91.7
91.0
86.8
84.9

40 18
20 18
- 18
FY14 FY15 FY16 FY17 FY18

EBITDA (| crore) EBITDA Margin (%)

Source: Company, ICICI Direct Research

Healthy topline growth, stable EBITDA margins of ~18.5% over FY14-18

period and improving working capital cycle to <90 days in FY18 have led
to strong return ratios with FY18 RoE and RoIC at 21.6% and 29.2%,
respectively.

ICICI Securities Ltd | Retail Equity Research Page 3

Exhibit 6: RoIC & RoE trend Exhibit 7: PAT trend over FY14-18
70 31.5 35
35
29.4 28.9 29.2 60 30
30 28.0 24.5 24.4
24.0 50 21.2 22.4 25
25 29.0
20 24.6 24.0 21.6 40 20

|/share
| crore
20.0 64.3
%

15 30 15
10 45.6 50.0 49.7
20 43.3 10
5
10 5
-
FY14 FY15 FY16 FY17 FY18 - -
FY14 FY15 FY16 FY17 FY18
RoIC (%) RoE (%)
Net Profit (| crore) EPS Adj (|)

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 8: Debt: Equity profile

350 1.2
300 1.0 1.0
250
0.7 0.6 0.8
200
| crore

0.5 0.5 0.6

x
297.0
150

255.3
0.4

208.3

191.0
183.4

100
150.6
149.1

134.6

122.3
111.5
50 0.2

0 0.0
FY14 FY15 FY16 FY17 FY18

Debt Equity Debt:Equity

Source: Company, ICICI Direct Research

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RATING RATIONALE
ICICI Direct Research endeavours to provide objective opinions and recommendations. ICICI Direct Research
assigns ratings to its stocks according to their notional target price vs. current market price and then
categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and
the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No. 7, MIDC,
Andheri (East)
Mumbai – 400 093

[email protected]

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Disclaimer
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