Should I buy Alkyl Amines analysis

Not many of us know how to analyse a chemical sector stock. Through this blog, I will try to help you understand the industry in the simplest possible way. Also, we will end the discussion with a comparison of Alkyl Amines with Balaji Amines and other chemical companies like Deepak Nitrite.

1. Alkyl Amines Business

Alkyl Amines Chemicals Ltd. was started in 1979 by Mr Yogesh Kothari. It operates in a very small segment of the chemical industry - the amines and is currently one of the largest manufacturer in India (around 50%), along with Balaji Amines. Amines play a major role in the pharmaceutical industry and agrochemicals. These are primarily used as a solvent.

Alkyl Amines' Business comprises of 3 major segments:-

• Aliphatic Amines

Methyl amines and Ethyl amines are the aliphatic amines used to make different types of derivatives. These can also be sold directly and are used by Alkyl Amines to produce various types of products. The company had set up a plant for methyl amines after which the stock price rallied a lot (after 2017). 

Now, they are establishing a plant in Dahej for acetonitrile which is expected to generate 300 to 350 Crores turnover. It will be operational by Q3 FY2021.

• Derivatives of amines

Around 55% of the business of Alkyl Amines comes from derivatives. These are used in API manufacturing. The margins of derivatives are on the higher side. 

• Speciality chemicals

Alkyl Amines has launched a lot of value-added products involving acetonitrile, which is a result of their R&D.

2. Alkyl Amines Management

Alkyl Amines was started by Mr. Yogesh Kothari in 1979 who himself has a chemistry background. Moreover, the majority of shares (more than 70% till date) are held by the promotors, which clearly reflects a strong commitment of the promotors towards the company.

3. Alkyl Amines Customers

Alkyl Amines has 400+ customers from agrochemicals and pharmaceutical sector including major players like Divis Laboratories and PI industries. Around 61% of the products produced by Alkyl Amines are used in pharmaceuticals. Also, there is no customer who provides more than 5% of the sales.

4. Alkyl Amines Competitors

Alkyl Amines' peers include Balaji Amines (major competitor) and RCF (Rashtriya chemical fertilizer).

Out of which, Alkyl amines and Balaji Amines together hold a 95% share in this industry. RCF only has a 5% market share. Thus, Alkyl Amines and Balaji Amines are a duopoly in this sector.

5. Alkyl Amines Fundamental Analysis

Next thing you should know are the fundamentals of Alkyl Amines.

From the company's annual reports, 

• Sales - Increasing every year ✅ (Doubled every 5 years)
• Profits - In an uptrend ✅ (6X growth in past 5 years - 2017 to 2021)
• Operating Profit Margin - Above 30% currently and increasing every year ✅(Very good sign)
• ROE and ROCE - acceptable (ROE 5Yr 35.3%  ROCE 5Yr 38 %) ✅
• Debt -Debt free (negligible debt to equity ratio of 0.02) ✅
• Promotor holding - Majority of the shares are held by the promotors ✅

Other important pointers to consider:-

• Operating Cash Flow - Positive and Increasing✅
• Dividend payout - Healthy ✅ (Paid every year)

The financials seem to be pretty good at the first glance, but the prominent reason had been the increasing demand for acetonitrile. Thatswhy, the price has moved a lot from 2017 onwards.

6. Alkyl Amines Q2 FY 2021 results

So, how were Alkyl Amines' result? - POOR 

This can be clearly understood from the below table.

                     

Criteria	Alkyl Amines Performance
Sales QoQ	DOWN
Sales YoY	UP
Profits QoQ	DOWN
Profits YoY	DOWN
OPM	DOWN

                     Alkyl amines earnings

The exact figures of Alkyl Amines' September quarter results along with a comparison with the previous quarter and on a year on year basis have been highlighted in the below image.

Alkyl Amines Q2 FY 2021 results

Source - Screener

• Alkyl Amines Financials at a glance (Q2)

Alkyl Amines Sales - Rs. 349 crores

Alkyl Amines Profits - Rs. 54 crores

Alkyl Amines Operating Profit Margin - 22%

Alkyl Amines EPS - Rs. 10.59

Alkyl Amines Debt to Equity Ratio - 0.04

Alkyl Amines Promotor holding -72.03%

• Alkyl Amines Q2 results analysis

Due to an increase in the raw material cost, the overall expenses of the company increased. This led to a decline in the profit even after a net increase in the sales.

7. Alkyl Amines Valuations

As per the PE ratio, the stock is trading at premium valuations. One reason for high PE is the duopoly Alkyl Amines has in the amines sector. Secondly, the increase in the demand of acetonitrile has led to a drastic increase in the stock price.

Alkyl Amines for long term

The market has already realised the high growth present in Alkyl Amines and thus gives it high valuations. Obviously, the stock can correct a little (and it should), but it can be a potential wealth creator for its investors over time, as the company expands its capacity and profits increase.

Speaking of the CAGR delivered by the company:-

• Alkyl Amines CAGR - 193% in 2020
• Alkyl Amines CAGR 10 years - 68%
• Alkyl Amines CAGR 5 years - 92%

Alkyl Amines CAGR

Source - Screener

8. Alkyl Amines Future Prospects

• The growth of the entire amine industry is dependent on the end use industries - which are primarily pharmaceutical and agrochemicals industry. These industries are expected to grow and thus drive the growth of amines industry. 
• The industry has high entry barriers and therefore the rise of a new competitor is highly unlikely. 

Thus, Alkyl Amines and Balaji Amines are going to continue operating as the key major players in this industry. Overall, the market capitalisation of these companies is still low and with further capital expansion and increase in profits, growth is bound to happen, although at a lower pace.

9. Alkyl Amines Risks

• No scope of global expansion as there is a high risk of fire or corrosion in transportation of Amines.
• Dependency on Automobile industry - A major reason for a sudden spike in the operating margins is the downtrend going on in the automobile industry. This has led to an increase in the price of acetonitrile as the demand still remains the same. But, as the auto sector starts performing well, these amine companies might get a hit.

10. Common Questions

• Alkyl Amines ASM list update

Alkyl Amines is currently in ASM stage 1. This has led to a drop in the volumes and thus a decline in the stock price.

• Alkyl Amines buy or not

There has been an increase in the demand of acetonitrile. This demand is expected to increase even more and thus Alkyl Amines is doing a lot of capital expansion. The valuations are on the higher side as of now, but it can definitely be a good pick for the long term.

• Alkyl Amines vs Balaji Amines

Alkyl Amines has a higher market cap, profit growth, revenue growth and CAGR. Both the companies are focusing on capital expansion by setting up new plants. So, based on the financials, Alkyl Amines looks a better pick for the long term as compared to Balaji Amines and thus trades at a higher PE. But, both are fundamentally strong companies with very high ROE and ROCE and thus you can add anyone of them.

• Alkyl Amines vs Deepak Nitrite

Deepak Nitrite firstly is a diversified chemical company including basic chemicals, fine and speciality chemicals and performance products. So, it is not correct to compare it with a company that operates only in the amines segment. But, if we are to compare, then both the companies have good CAGR, ROE and ROCE as well over a long term. But, from valuation perspective, Deepak Nitrite is trading at a fair valuation. It will be benefited by the government's Aatmanirbhar Bharat initiative.

So, out of the two, Deepak Nitrite should be the first choice.

11. Topics you might be interested in

• How to choose stocks for long term investment
• Swing trading approach
• Best dividend stocks
• TCS vs Infosys vs HCL vs Wipro FY22 Q2 Results Analysis
• Should I buy IEX for bonus

Frequently Asked Questions (FAQs)

1. Who is the founder of Alkyl Amines? 

Alkyl Amines was incorporated in 1979 by Mr Yogesh Kothari.

2. Are the promotors for Alkyl Amines selling their shares ?

The promotor holding for Alkyl amines has come down by around 2%. Despite of that, the promotor holding continues to stay well above 70%. Hence, this should not be viewed as an alarming sign.

3. How much is Alkyl Amines dividend?

Alkyl Amines has not announced any dividend for this quarter.

4. Is Alkyl Amines a monopoly?

No, it operates in a duopoly with Balaji Amines.

5. Is Alkyl Amines a multibagger?

Alkyl amines has given more than 190% returns in 1 year. So, YES. Alkyl Amines can be called a multibagger.

6. What are Alkyl Amines expansion plans? 

Alkyl Amines is expanding its capacity for aliphatic Amines by 30-40% at Kurkumbh and Patalganga sites. This would be a capex of Rs 300 to 350 Crores and is expected to get completed by Q3.

Hope the post was helpful. Do let us know your opinion about Alkyl Amines for investing and also comment if you have any queries. Stay tuned for more interesting posts.