Edelweiss Investment Research

CMP INR 555 Target INR 764

Trading Buy: Balaji Amines (BAL) Ltd Rating: BUY Upside: 38%

High growth rider in the oligopolistic aliphatic amines industry Date: 9th November, 2017

Strong demand-led volume growth coupled with steady margins

BAL has steadily built up capacity in methylamines and other specialty chemicals between FY10-FY14 riding on the strong demand potential from
its key end-user industries — pharmaceuticals and agrochemicals. With limited competition (duopoly) and ability to substitute imports via
competitive pricing, BAL is rapidly increasing utilisation levels and gaining operating efficiencies. While its methylamines and derivatives capacity
is operating at blended 80% utilisation levels, its remaining portfolio is operating at near 65-70% levels. Methanol being a key raw material for
methylamines, a substantial portion of revenues is from price-linked contracts that allow BAL to pass on the methanol price volatility without
significantly impacting its gross margins.

Brownfield capacity expansion to add substantially to shareholders’ returns and cash flows
The company is adding production capacity for DMA HCL, morpholine and acetonitrile in its existing facility, Unit III, from internal accruals. Whilst
BAL’s existing capacities in DMA HCL and morpholine are nearly fully utilised, the expansion is on account of strong: i) domestic demand for DMA
HCL, and ii) potential for import substitution in morpholine. Further, acetonitrile will be a new addition to BAL’s portfolio with healthy demand
potential from exports and domestic markets. The additional infusion of INR 60 crore for the three products should add nearly INR 170 crore in
incremental revenues by FY19 and up to INR 280 crore at the peak utilisation level. Resultantly, the company is expected to generate cumulative
free cash flows of nearly INR 180 crore in FY18 and FY19 with higher asset turns and profitability sans any new investment allocation.

Inexpensive valuation makes it a compelling BUY

In our view, BAL is all set to benefit immensely from its capacities and client base built up historically coupled with incremental expansions. Ergo,
we expect strong growth in revenues, improving margins with higher utilisation levels and product expansions. Our earnings estimates per share
for FY18 and FY19 are INR35.1 and INR42.4 respectively. We value the company at 18x FY19 earnings estimate of INR42.4/share and initiate our
‘BUY’ recommendation with a target of INR764/share.

Year to March FY15 FY16 FY17 FY18E FY19E Bloomberg: BLA:IN

Revenues (INR Cr) 619 643 670 814 960
52-week range (INR): 599.30 / 273.10
Rev growth (%) 1.4 3.9 4.2 21.4 18.0
EBITDA (INR Cr) 102 127 153 200 238 Share in issue (cr): 3
Net Profit (INR Cr) 33 58 81 114 138
M cap (INR cr): 1,799
P/E (x) 31.2 22.3 15.8 13.1
20.1 15.5 12.4 9.5 7.6 Avg. Daily Vol. BSE/NSE :(‘000): 67
EV/EBITDA (x)
RoACE (%) 15.8 20.8 26.2 31.7 33.8 Promoter Holding (%) 54.55
RoAE (%) 15.5 22.7 26.0 28.0 26.4

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Neha Agarwal Jigar Jani

Research Analyst Research Analyst
nehap.agarwal@edelweissfin.com jigar.jani@edelweissfin.com
Balaji Amines Ltd.

Balaji Amines is expected to deliver strong growth with margin accretion on the back of increasing utilization levels and product expansion. While
revenue is expected to grow by 20% CAGR between FY17-19, profitability is expected to expand by as high as 230 bps during the same period. At
an inexpensive valuation of 13x FY19 earnings estimates with augmenting ROE (expected to expand from 26% in FY17 to 34% in FY19), BAL
provides high margin of safety to investors.

Expanding utilization of Higher free cash flows to

Faster debt repayment with
capacities on the back of spur return ratios and give
new capex being entirely
high demand from pharma scope for further expansion
funded by internal accruals
and agrochem industries

FY15 FY16 FY17 FY18E FY19E FY15 FY16 FY17 FY18E FY19E Multiple Price Target

Revenue 619 643 670 814 960 ROACE (%) 15.8 20.8 26.2 31.7 33.8 15x 637
EBITDA 102 127 153 200 238 BAL
Debt to 18x 764
EBITDA Margin 1.1 0.6 0.3 0.2 0.2
16.4 19.7 22.8 24.6 24.8 equity ratio
(%)
PAT margin (%) 5.4 9.0 12.0 13.96 14.32

Free cash flow

PAT CAGR of 31% generation to lead to
Entry = INR 555
over FY17-19E an exit multiple of
FY19E 18x

Upside of
38%

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Balaji Amines Ltd.

Our target price is arrived at by assigning an 18x P/E multiple to BAL on an EPS of INR 42.4 in FY19E on
Price Target INR 764 augmenting ROCE and margin expansion.

Bull BAL is on a rapid utilization stage with strong demand from both domestic and exports markets.
INR 849
Generation of high free cash flows can open further expansion opportunities to the company. This
20x 2019E EPS
makes for a compelling bull case scenario with a potential rerating and upside of 53%

Base INR 764 We value the company at 18x FY19 earnings estimate of INR42.4/share and initiate our ‘BUY’
18x 2019E EPS recommendation with a target of INR764/share.

Bear In the bear case scenario, we have assumed a slow ramp up in new capacity utilization due to
INR 481
demand slowdown or regulatory hurdles. Assigning a lower multiple of 13x FY19E on an EPS of INR 37
13x 2019E EPS 37
gives us a target price of INR 481/share, downside limited to 13% from CMP.

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Balaji Amines Ltd.

Average Daily Turnover (INR cr) Stock Price (CAGR) Sensex CAGR (%)
3 months 6 months 1 year 1 year 2 years 5 years 10 years 1 year 2 years 5 years 10 years
4.3 2.8 2.1 80% 106% 61% 37% 26% 13.5% 11.7% 5.7%

Domestic aliphatic-amines is an INR 1,200 cr industry with an oligopoly structure created by high barriers to entry due to limited
Nature of Industry technological know-how. The industry’s growth potential is driven by its major end-user sectors pharmaceuticals and agro-chemicals.
Over the past few years, the industry participants have also started exports to the European nations as well as other developing markets.

High quality and cost competitiveness has stretched opportunity size beyond the domestic amines industry. Expansion into specialty
Opportunity Size
chemicals with import substitution potential and globally growing demand has open the industry participants to a much larger market.

Brownfield capex of INR 60 crore has been completed by the company in FY18 with internal accruals. BAL has also announced an
Capital Allocation
investment of INR 66 crore into Balaji Specialty Chemicals limited for 51% stake in the firm.
Business Value Drivers

Predictability Regulatory hindrances and limited information from secondary markets may impact predictability

Sustainability Very difficult to dislodge clients due to high switching cost; Scope to expand globally will ensure sustainability

The shift from core methylamines to higher derivatives and specialty chemicals will ensure that the future performance in terms of return
Disproportionate Future
ratios will be better than the past as asset turnover and margins will steadily improve

Business Strategy &

Current focus is towards ramping up existing capacities and simultaneously looking out for expansion opportunities
Planned Initiatives

Near Term Visibility Strong visibility for 31% CAGR bottom line growth along with 230 bps improvement in operating margins from FY17-FY19E

Long Term Visibility To remain one of the largest aliphatic amines capacity players with increasing regulated market presence

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Balaji Amines Ltd.

Focus Charts – Story in a nutshell

Highest capacity in methylamines and derivatives with Higher capacity utilization with import
Contribution of profit margins to ROE
rapid expansion plan within the duopolistic domestic substitution and exports to fuel revenue
consistently rising
industry growth
100%
1200 30%
90%
22% 960
1000 80%
Methylamines 48,000 15,000 30,000
814 20%
70%
800 670
610 619 643 10%
15,000 60%

(INR cr)
Ethylamines 6,000
600 512 10%
450 50%
347 0%
DMA HCL 22,000 10,000 400 40%
262
-4%
-10% 30%
200
Acetonitrile 10,000 10,000 20,000
20%
-17%
0 -20% 10%

2010

2011

2012

2013

2014

2015

2016

2017

2018E

2019E
DMF, NMP, NEP, and 77,000 7000 10,000 20,000
specialty chemicals 0%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17
Existing capacity Upcoming capacity
Volumes growth (RHS)
Pricing growth (RHS)
* all numbers in metric tonnes per annum (MTPA) Sales/Assets Asset/Equity Net Profit Margin
Sales

Consistent capex towards high-value derivatives and specialty chemicals….. ….materialized into higher margins
(in INR cr) 30,000 7,500 In FY18:
MT/annum MT/annum of 7,000 MT/annum of Morpholine; Average of INR 28,000
of DMF; DMA HCL; 10,000 MT/annum of Acetonitrile; Average of INR 22,000 per MT
600 200
7,500 Hotels division 7,500 MT/annum of DMA HCL
15,000 30,000 MT/annum commenced 30
500 MT/annum MT/annum of of DMA
of NMP Methylamine HCL 150

in INR Thousands
400

300 100 20

200
50
100 10
2011 2012 2013 2014 2015 2016 2017 2018E
0 0
2011 2012 2013 2014 2015 2016 2017 2018E
Gross profit per MT
Gross Block CWIP Capex (RHS)

Source: Company, Edelweiss Investment Research

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Balaji Amines Ltd.

I. Aliphatic amines: Niche industry with strong demand potential

Industry value chain

Feedback Aliphatic Amines Derivatives End Markets

C2-6 Alcohols
Higher

~60%
Aliphatic amines
Ammonia
Pharmaceuticals
Methylamines
Methanol
Aliphatic amines
Derivatives

~30% ~8%
Other Ingredients
Agro chem
e.g. ethylene oxide,
hydrogen. Carbon
disulphide, acetic acid Cleaning agents and others

Source: Edelweiss Investment Research

The global aliphatic amines market is estimated to grow from $4.1 billion in 2014 to $5.6 billion by 2019, at a CAGR of 6.5% from 2014 to 2019. China is the largest
single producer and consumer of alkylamines and has accounted for 56% and 55% of total world production and consumption, respectively in 2015. Overall, nearly
65% of the world demand in 2015 was from Asia, and this percentage is forecast to increase to 68% by 2019.

Consistent growth in aliphatic amines industry … … with increasing demand from Asian markets
Western Brazil, 1%
Europe, 7%
5.6
4.95

4.1
Japan, 2.50% US, 13%
(US$ bn)

Middle East,
2%
China, 58%
India, 4%

2014 2017 2019E

Source: Edelweiss Investment Research

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Balaji Amines Ltd.

Niche characteristics create natural entry barriers … … leading to an oligopolistic market structure

Aliphatic Amines Ehanol Amines Ehylene Amines Region Key players

Niche Industry Europe BASF Arkema

Not able to be transported US Eastman Hintsman

easily

Player Vertical Integration Japan Mitsubishi Gas Koep Chemical

End Market Diversity China Feicheng Acid Shandong Huala Hengsheng

High Rates of Customer Loyalty India Balaji (BAL) Alkyl Amines (AACL)
and High Switching Costs
*Only key companies whose cumulative market share is nearly more than 75% have
been mentioned
Secular Growth

Level of Intensity Very high High Moderate Low

Source: Edelweiss Investment Research

While Indian players like AACL and RCF have procured the amines technology from Leonard Process Technology, BAL claims to have developed it indigenously.

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Balaji Amines Ltd.

II. End-user industries: Consistent growth to aid demand uptick for Strong volume growth in key pharma drugs from methylamines indicates
higher ongoing demand
amines players
10
a. Extensive usage in solvents and pesticides has led to significant exposure in 8

ìn billion units
the pharma and agrochem segments
6

Used as Used in 4

2
Others 10% Others 13% 0
2011 2012 2013 2014 2015 2016 2017
Paper and textiles 4% Specialty Chemicals 3%
Metformin Ranitidine HCL Amlodipine
Surfactants 5% Dyes 3%
Source: Edelweiss Investment Research
Water treatment 7% Foundry Chemicals 4%
Despite the rising pricing pressure in US generics, volume growth in basic
Rubber 7% Treatment 5%
generics continues to remain strong. Hence, methylamines and
Feed additives 8% Trading 5% derivatives, being utilised at the lower end of the value chain by bulk drugs
players or integrated formulations players, are expected to continue to
Pesticides 15% Agro 6% see a surge in demand.
Solvents 44% Pharmaceuticals 61%
Further, in the domestic market, volume growth has exceeded price
growth in seven of the past 11 quarters indicating a strong uptick in
Source: Edelweiss Investment Research volumes at an aggregate level.

Strong volume growth in pharma to support BAL’s capex utilisation Domestic pharma growth vectors indicate a strong surge in volumes
Extensive utilisation of aliphatic amines as solvents is in the pharmaceutical
10%
industry. Solvents can be used as reaction agents or even extraction agents. Their
8%
high boiling points and varying densities are used for facilitating multiple reactions.
6%
Solvents account for 80%-90% of the mass utilised in a typical pharmaceutical 4%
chemical operation. Hence, we expect strong volume growth in these segments 2%
to continue to build demand for the underlying chemicals that are required. 0%

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18
-2%

Volume gr Price gr New products gr

Source: AIOCD, Edelweiss Investment Research

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Balaji Amines Ltd.

b. Agrochem industry to be fuelled by increasing generics consumption Higher agrochem capacity expected to be followed by higher utilisation
The agrochemicals market in India is expected to be a $10.6 bn market by FY2020 levels in the medium term
with nearly 55% exports. Cotton (50%), paddy (18%) and horticulture (14%) crops
account for 82% of the total demand for agrochemicals. We expect a steep rise 350 82% 90%
81%
in demand for pesticides in the domestic markets coupled with a strong surge in 76%
exports owing to higher demand for generics as multiple chemicals are expected 73% 80%
300
to go off-patent. 62% 63% 62% 63% 63% 70%
250 56%
60%

in '000 MT
5.8 200 50%
4.8 40%
150
in $ billion

3.8
3.4 30%
100
2.3 2.2 20%
50
10%

0 0%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
FY2014 FY2017 FY2020
Capacity Production Utilisation (RHS)
Domestic Exports
Source: Department of Chemicals, Govt. of India
Source: Industry

Underpenetrated domestic consumption and multiple agrochemicals having

gone off-patent are expected to fuel generics demand ahead

1.6
China 13.0

1.2
Japan 11.0

0.9
(USD bn)

Netherlands 9.4
0.7

USA 7.0
0.4
0.2
UK 5.0

2015 2016 2017 2018 2019 2020 India 0.6 (kg/ha)

Agrochemicals going off-patent Agrochemicals consumption

Source: Industry

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Balaji Amines Ltd.

III. BAL: Dominant player in the Indian aliphatic amines industry

a. Near monopoly in specific products within the aliphatic amines industry

The Indian aliphatic amines industry is largely a duopoly with Balaji Amines (BAL) and Alkyl Amines Chemicals (AACL) comprising more than 90% of the market. Yet,
the product portfolio of these two companies within the industry is varied with each being dominant in specific chemicals. This has made the industry structure
appear closer to being a monopoly for each of the players with the key competition being, only imports.

However, with the scope of demand for each of their products increasing, both players are keenly expanding into higher derivatives and specialty chemicals,
several such expansions also being an infringement into the other’s portfolio.

BAL and AACL are dominant in the domestic aliphatic amines industry… ….with each expanding into the other’s portfolio

1400

1200 95
Methylamines 48,000 15,000 30,000
92
1000
501 Ethylamines 6,000 15,000
446
800

DMA HCL 22,000 10,000

600

400 10,000 10,000 20,000

Acetonitrile
670
610
200
DMF, NMP, NEP, and 77,000 7000 10,000 20,000
specialty chemicals
0
2014 2017
Existing capacity Upcoming capacity
BAL ALK Others
* all numbers in metric tonnes per annum (MTPA)
Source: Company Source: Company, Edelweiss Investment Research

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Balaji Amines Ltd

Currently BAL is the largest player in the domestic aliphatic amines market with significant exposure to the pharma and agrochem markets. It has the largest
domestic capacity in methylamines (48,000 MTA) with nearly 75% captive consumption whilst the remainder is consumed by end-users.

80% sales in pharma and agrochem 60% from methylamines and derivatives

Other
specialty DMAHCL, 28%
Cleaning agent
and others, 20% chemicals and
derivatives,
21%
Pharma, 55%

DMF, 6%
Agrochem, 25% PVP, 17%

MDEA, 13%

Source: Company, Edelweiss Investment Research Source: Company, Edelweiss Investment Research

Over the past five years, the company has doubled its methylamines derivates capacity and expanded from basic methylamines in favour of higher value-added
derivatives. Such vertical integration has enabled BAL to maintain a dominant position in a majority of its products through the dual advantage of cost
competitiveness and product switching flexibility. This, coupled with industry attributes that create natural entry barriers, ensure a strong and continuous demand
potential for BAL’s offerings.

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Balaji Amines Ltd

b. Export potential tailwind driven by global reputation and superior production quality

BAL’s growth has historically been driven by both the domestic and exports markets with equivalent contribution from both. In fact, exports have been accounting
for nearly 20% of the company’s annual revenues over the past five years.

REACH certificate for newer products to foster exports growth

in INR cr REACH:
200 TEA, GBL, NEP 50%
Certificate of Suitability for
180 PVP-K30
REACH: REACH:
160 NMP 148 Morpholine 40%
144
140 132
127
120
120 30%
105
24% 24%
100 22% 22%
20% 22%
75 18% 18%
80 67 20%

60

40 10%

20

- 0%
2010 2011 2012 2013 2014 2015 2016E 2017E

Exports Exports as % of Amines revenues (RHS)

Source: Edelweiss Investment Research

In the recent two years, the company witnessed lower export realisations in line with its domestic realisations due to global methanol pricing pressure. Going
forward, we expect a modest surge in export realisations on the back of recovery in methanol prices coupled with higher volumes from new approvals like
morpholine. Overall, exports are estimated to grow at 15-18% CAGR over the next three years to FY21.

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Balaji Amines Ltd

IV. Derivatives expansion leads to upward revision in gross margins

BAL has expanded its capacity across all major products since FY2011. The company has doubled the capacity of its core product — methylamines, to 60,000
MT/annum in FY2012. Further, it has set up large capacities for N-methyl-2-pyrrolidone (NMP), Di methyl formamide (DMF) and DMA HCL with the expectation of
capturing the likely high demand over a decade. These derivatives, with high value addition, have uplifted BAL’s margins notwithstanding the slowdown impact
of global commodity prices.
With high capex in derivatives and specialty chemicals…

In FY18:
7,500 MT/annum of DMA 7,000 MT/annum of Morpholine; 10,000 MT/annum of
30,000 MT/annum of
600 HCL; Hotels division Acetonitrile; 200
DMF;
commenced 7,500 MT/annum of DMA HCL
15,000 MT/annum of 30,000 MT/annum of 7,500 MT/annum of
500 DMA HCL
NMP Methylamine
150
400

(in INR cr)

(in INR cr)

300 100

200
50
100

0 0
2011 2012 2013 2014 2015 2016 2017 2018E

Gross Block CWIP Capex (RHS)

Source: Company filings, Edelweiss Investment Research

…..Average gross margins of BAL expanded by ~30%

Average of INR 28,000 per MT

Average of INR 22,000 per MT
30
(in INR Thousands)

20

10
2011 2012 2013 2014 2015 2016 2017 2018E

Gross profit per MT

Source: Company, Edelweiss Investment Research

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Balaji Amines Ltd

V. BAL: On the cusp of a profitable trajectory from new capex

With its ability to produce high-quality products which can substitute imports coupled with its efforts in the direction of leveraging upon its methylamines and GBL
capacity, BAL has been successful in increasing the utilisation levels of its facilities at a fast pace. With most of its methylamines and derivatives capacity at near
optimal utilisation levels, BAL is now expanding its key derivative products alongside entering newer specialty chemicals to gain from both vertical integration and
operating efficiencies.

Existing End-market
Products (Broad Categories) Expansion Comments
capacity utilisation

18% (total
Methylamines 48k - Expect higher captive utilisation into derivatives
utilisation 70%)
Methylamine derivatives
DMA HCI 22k 90% 7.5k Excess demand with limited capacity
Di Methyl Formamide (DMF) 33k 15% - Import substitution due to plant shutdowns in China
Di Methyl Acetamide
7.5k 80% - Strong product with steady growth
(DMAc)

GBL, 2-P and linked products

N-Methyl-2-Pyrrolidone (NMP) 22k 50% - High-value specialty chemicals with consistent growth potential

N-Ethyl Pyrrolidone (NEP) 11k 50% -

Ethylamines and derivatives 6k 80% - Limited capacity with low focus

Morpholine 3k 80% 7k High growth focus due to import substitution tendency
Major product of AACL; steady domestic and export demand expected
Acetonitrile 0 0 10k
from existing clients

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Balaji Amines Ltd

Key highlights of product specific cases

DMF
 Nearly 50% of production and over 70% of consumption by China
 There is global oversupply with no scope to increase capacity; Nearly 75% of domestic demand is met through imports
 CASE POINT – Multiple plant shutdowns in China due to environmental concerns has increased import prices and subsequently brought domestic suppliers into
the field. BAL has increased production from 300 MT/month to 1,000 MT/month from Aug-Sept 2017 onwards
DMA HCL
 Widely used as an intermediate in a few of the most common pharma drugs such as metformin and ranitidine; consistent volume growth in each of these
drugs
 BAL is the largest manufacturer in the world with leading Indian pharma companies as customers
 CASE POINT – Extant capacity of 22,000 MT/annum is already optimally utilised; BAL is confident of strong demand for the additional 7,500 MT/annum being
set up
Morpholine
 Only three major players globally ex China: Huntsman, BASF Germany and Balaji
 India’s consumption is 7,000 MT/month while Balaji is providing 45%, the remainder is imported from China and Saudi Arabia
 BAL’s prices are highly competitive versus imports; this makes its product highly preferred over imports
 Current capacity is nearly optimally utilised; hence tendency for high import substitution exists
 CASE POINT – Going forward, BAL expects to meet ~80% of domestic demand in the medium term. Additonally, it has received the REACH certificate for the
product and can start exporting

Acetonitrile
 Substantially used in pharma with an annual estimated demand of 15,000 MT/annum
 AACL is the largest player in this product with 10,000 MT/annum capacity, operating at near optimal levels and has plans to expand to 30,000 MT/annum over
the next 3-5 years
 BAL has got the EC for 20,000 MT/annum but will start with a 10,000 MT/annum set up
 CASE POINT – BAL has already secured some export demand from its existing clients and is confident of achieving ~60% utilisation level by end-FY19 through
both domestic and exports exposure

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Balaji Amines Ltd

VI. Hotel business turning profitable

BAL started its hotel business in Q3FY14 with an investment of INR 110 crore. The hotel, named Balaji Sarovar. is a 129-room 5-star property managed by the Sarovar
group. In the three years of its operations, Balaji Sarovar has hosted multiple conferences for doctors as well as for other professionals. Additionally, the rapid growth
of industries in Solapur’s MIDC area is only expected to increase the requirement of a premium space for corporate purposes.

With over two full years of operations, the business has turned cash profitable. However, superior depreciation costs continue to keep net profits negative. Going
forward, we expect the hotel business to turn fully profitable while continuing to provide tax benefits to the parent entity to the extent of its depreciation levels.

18 45% 60%

16 30% 40%
17%
14
5% 20%
12 8%
-11% 0%
-3%
(in INR cr)

10
-20%
-39%
8 -39% -28%
-40%
6
-70%
-60%
4 -81%
2 -80%

0 -100%
2014 2015 2016 2017

Revenue Depreciation Interest PBITD (RHS) PBIT (RHS) PBT (RHS)

Source: Company, Edelweiss Investment Research

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Balaji Amines Ltd

VII. Valuation
In our view, BAL is all set to benefit immensely from its capacities and client base built up historically coupled with incremental expansions. Ergo, we expect strong
growth in revenues, improving margins with higher utilisation levels and product expansions. Our earnings estimates per share for FY18 and FY19 are INR35.1 and
INR42.4 respectively. We value the company at 18x FY19 earnings estimate of INR42.4/share and initiate our ‘BUY’ recommendation with a target of INR764/share.

BAL is at a discount to peers at current valuations

30.0
(Price/Earnings multiple)

25.0

20.0

15.0

10.0

5.0

0.0
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Balaji Amines Alkyl Amines

Price/Earnings multiple bands

900
800
700
600
500
400
300
200
100
0
Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16
Mar-06
Jun-06

Mar-07
Jun-07

Mar-08
Jun-08

Mar-09
Jun-09

Mar-10
Jun-10

Mar-11
Jun-11

Mar-12
Jun-12

Mar-13
Jun-13

Mar-14
Jun-14

Mar-15
Jun-15

Mar-16
Jun-16

Mar-17
Jun-17
Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17
10x 15x 18x 22x 25x Balaji Amines

Source: Edelweiss Investment Research

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Balaji Amines Ltd

VIII. Financial Analysis

a. Production volumes on the rise, sales dampened on lower commodity prices

Revenues of BAL have been flat over the past three years owing to commodity pricing pressures despite consistent volume growth. However, we expect prices to
bottom out in FY17. This, coupled with increasing volumes from new product introductions as well as its existing portfolio, will likely lead to positive revenue growth
for the company in the medium term.

1200 30%

22% 960
1000
20%
814
800
670
610 619 643 10%
(INR cr)

600 512 10%

450
0%
347
400
262
-4%
-10%
200

-17%
0 -20%
2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E

Volumes growth (RHS) Pricing growth (RHS) Sales

Source: Company, Edelweiss Investment Research

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Balaji Amines Ltd

b. Gross margins consistent owing to price-linked contracts

BAL relies on methanol and ammonia as its key raw material, with methanol accounting for more than 50% of its raw material costs. With over 70% of its revenues
arising from methylamines and its derivatives, BAL is closely impacted by any volatility in methanol prices. Hence, the company has entered into multiple price-
linked contracts in order to safeguard its margins.

However, only about 64% of the cost of goods sold (COGS) per unit production is explained by domestic methanol prices.

45 60

40
50
35

(INR/metric tonne)
30 40
(INR per kg)

25
30
20

15 20

10
10
5

0 0
Q4FY10

Q1FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Q4FY17
Methanol - domestic COGS per unit capacity (RHS)

Source: Company, Edelweiss Investment Research

Changing product mix towards higher value-added products explains for the remaining volatility in COGS and consequent gross margins. The upward revision in
gross margins discussed in section IV is concluded from this phenomenon.

Going forward, we expect methanol demand from China to increase due to the steep increase in methanol-to-olefins (MTO) plants. However, owing to multiple
region exposure as well as the high level of uncertainty, we estimate gross margins to remain stable at the current levels of 40%.

19 GWM
Balaji Amines Ltd

c. Contribution of profit margins to ROE consistently rising

Having set up significant capacity between FY11 and FY14, BAL has been enjoying higher margins by improving utilisation levels as well as operating leverage.
Whilst optimal capacity utilisation levels in several products is still a long way away, the company’s brownfield expansion into allied specialty chemicals and high-
demand derivatives is expected to further enhance margins.

Going forward we expect a steep rise in sales and profitability with merely a small increase in asset base. Subsequently, the strong effect of higher margins is
expected to continue over the medium term, on the back of the continuous increase in utilisation levels driven by consistent demand growth and geographical
diversification by the company.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Sales/Assets Asset/Equity Net Profit Margin

Source: Company, Edelweiss Investment Research

20 GWM
Balaji Amines Ltd

d. Financial deleveraging to benefit expansion plans ahead

BAL has been reducing debt levels post its major expansion span between FY11 and FY14. Allocation of cash flows towards debt repayment has subsequently
reduced the interest outgo and benefitted the company’s equity stakeholders. Going forward, we expect the company to continue to generate large free cash
flows from the existing business, allowing the company to invest ahead in expansion plans from internal accruals.

1.60 35
120
1.40 30 100
1.20 80
25
1.00 60
20 40

(INR cr)
0.80
20
15
0.60 0
10 -20
0.40
-40
0.20 5
-60
0.00 0 -80
2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E

Gross Debt/Equity Interest coverage (RHS) Free cash flows

Source: Company, EdelInvest Research Source: Company, Edelweiss Investment Research

21 GWM
Balaji Amines Ltd
Details of subsidiary companies
Bhagyanagar Chemicals
● Wholly-owned subsidiary from FY05
● Company earns lease rentals from
BAL for its plant in Bollaram,
Hyderabad
22
Balaji Greentech
● Majorly owned subsidiary from
FY09
● Manufactures, supplies a
comprehensive range of Compact
Fluorescent Lamps (CFL);
● Loss making entity; the company
closed operations in FY18
Balaji Specialty Chemicals
● To acquire 55% stake for INR 66cr
by end of FY18
● Environmental clearance received
for Ethylenediamine (EDA) ,
Piparezine (PIP) and
Diethylenetriamine (DETA)
● Operations expected to began
from H2FY19
GWM
Balaji Amines Ltd

Risks and Concerns

Methanol price volatility: With over 70% of its revenues arising from methylamines and derivatives, BAL’s exposure to methanol prices is significant. Although the
company has entered into price-linked contracts in order to hedge against methanol price fluctuations, any major volatility could dampen gross margins to some
extent.

Wildlife Santuary clearance: The incremental capex plan of BAL for DMA HCL, Acetonitrile and Morpholine is pending for Wildlife Sanctuary clearance. The
compant expects to receive the same by Q3FY18. However, in case of delays, it could have some negative impact on our forward estimates.

Rising competition: The Indian aliphatic amines industry is merely 5% the size of the global aliphatic amines industry but has been posting healthy growth. Although
the industry is subject to technological barriers, entry of new domestic players or even large overseas players is likely to impact dynamics of the industry.

Regulatory concerns: While all expansion plans of chemical companies are pre-approved for environmental clearances, any further changes in the regulatory
stance or in the environmental norms, could impact Balaji Amines adversely.

23 GWM
Balaji Amines Ltd

Peer Comparison

ROE (%) Asset Turnover EBITDA margin (%)

FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17

BAL 15.5 22.7 26.0 1.4 1.4 1.4 16.4 19.7 22.8

AACL 27.3 25.4 19.8 1.7 1.5 1.4 18.2 18.8 18.1

24 GWM
Balaji Amines Ltd

Financials
Income statement (Standalone) (INR crs) Balance sheet (INR cr) Ratios
Year to March FY15 FY16 FY17 FY18E FY19E As on 31st March FY15 FY16 FY17 FY18E FY19E Year to March FY15 FY16 FY17 FY18E FY19E
Equity share capital 6 6 6 6 6 ROAE (%) 15.5 22.7 26.0 28.0 26.4
Income from operations 619 643 670 814 960
Preference Share Capital 0 0 0 0 0 ROACE (%) 15.8 20.8 26.2 31.7 33.8
Total operating expenses 517 516 518 614 722
Reserves & surplus 221 274 347 451 577 Debtors (days) 70 71 68 70 70
EBITDA 102 127 153 200 238 Shareholders funds 228 280 354 458 583 Current ratio 3.7 2.7 2.4 2.5 3.1
Depreciation and amortisation 20 19 20 22 25 Secured loans 247 162 99 99 89 Debt/Equity 1.1 0.6 0.3 0.2 0.2
EBIT 82 107 133 178 213 Unsecured loans 9 10 6 6 6 Inventory (days) 66 44 54 56 56
Interest expenses 35 22 13 10 9 Borrowings 256 173 105 105 95 Payable (days) 34 31 37 37 37
Profit before tax 51 88 126 173 210 Minority interest 2 0 0 0 0 Cash conversion cycle (days) 103 84 85 89 89
Provision for tax 18 30 43 60 72 Sources of funds 486 453 459 563 678 Debt/EBITDA 2.5 1.4 0.7 0.5 0.4
Gross block 450 469 473 584 604 Adjusted debt/Equity 1.1 0.6 0.3 0.2 0.0
Core profit 33 58 82 114 138
Depreciation 109 128 147 170 194
Extraordinary items 0 0 -2 0 0
Net block 341 341 325 414 410 Valuation parameters
Profit after tax 33 58 81 114 138 Capital work in progress 3 16 25 0 0 Year to March FY15 FY16 FY17 FY18E FY19E
Adjusted net profit 33 58 81 114 138 Total fixed assets 344 357 351 414 410 Diluted EPS (INR) 10.2 17.8 24.9 35.1 42.4
Equity shares outstanding (mn) 3 3 3 3 3 Unrealised profit 0 0 0 0 0 Y-o-Y growth (%) (1.1) 73.8 39.9 41.0 21.0
EPS (INR) basic 10 18 25 35 42 Investments 0 0 0 0 0 CEPS (INR) 16 24 32 42 50
Inventories 112 78 99 125 147
Diluted shares (Cr) 3 3 3 3 3 Diluted P/E (x) 54.2 31.2 22.3 15.8 13.1
Sundry debtors 119 124 124 156 184 Price/BV(x) 7.9 6.4 5.1 3.9 3.1
EPS (INR) fully diluted 10 18 25 35 42
Cash and equivalents 7 9 3 3 90 EV/Sales (x) 3.3 3.1 2.8 2.3 1.9
Dividend per share 1 2 2 3 4
Loans and advances 37 34 55 55 55
EV/EBITDA (x) 20.1 15.5 12.4 9.5 7.6
Dividend payout (%) 12 11 9 9 9 Other current assets 0 0 0 0 0
Diluted shares O/S 3.2 3.2 3.2 3.2 3.2
Total current assets 276 245 282 339 477
Basic EPS 10.2 17.8 24.9 35.1 42.4
Common size metrics- as % of net revenues (INR crs) Sundry creditors and others 57 55 68 83 97
Basic PE (x) 54.2 31.2 22.3 15.8 13.1
Year to March FY15 FY16 FY17 FY18E FY19E Provisions 18 34 52 54 57
Dividend yield (%) 0.2 0.4 0.4 0.5 0.7
Operating expenses 83.6 80.3 77.2 75.4 75.2 Total CL & provisions 75 89 120 137 154
Net current assets 201 156 162 202 323
Depreciation 3.2 3.0 2.9 2.7 2.6
Net Deferred tax -45 -50 -51 -51 -51
Interest expenditure 5.6 3.4 1.9 1.2 1.0
Misc expenditure -14 -10 -3 -3 -3
EBITDA margins 16.4 19.7 22.8 24.6 24.8 Uses of funds 486 453 459 563 678
Net profit margins 5.4 9.0 12.0 13.96 14.32 Book value per share (INR) 70 86 109 141 180

Growth metrics (%) Cash flow statement (INR crs)

Year to March FY15 FY16 FY17 FY18E FY19E
Year to March FY15 FY16 FY17 FY18E FY19E
Net profit 33 58 84 114 138
Revenues 1.4 3.9 4.2 21.4 18.0
Add: Depreciation 20 19 20 22 25
EBITDA 11.8 24.6 20.5 31.3 18.8 Add: Misc expenses written off 11 (4) (6) 0 0
PBT 11.9 72.4 42.9 38.0 21.0 Add: Deferred tax 3 5 0 0 0
Net profit (1.0) 73.7 42.9 38.0 21.0 Gross cash flow 67 78 98 136 162
EPS (1.1) 73.8 39.9 41.0 21.0 Less: Changes in W. C. 49 (46) 11 41 33
Operating cash flow 18 124 86 95 129
Less: Capex 31 32 13 86 20
Free cash flow (13) 92 73 9 109

25 GWM
Balaji Amines Ltd

Appendix A: Global amines industry

Amines are derivatives of ammonia (NH3) wherein, the hydrogen atoms in ammonia are replaced one at a time by hydrocarbon groups (termed as ‘R’). Amines
are classified based on the number of hydrogen atoms in the ammonia molecule that have been replaced. They can be classified as primary amines, secondary
amines and tertiary amines. They can be produced by the reaction of alcohol and ammonia..

A. Primary Amines Amines: based on the structure of ‘R’

In primary amines, only one of the hydrogen atoms in the ammonia
molecule is replaced with a carbon group.
R = alkyl group of CnH2n+1
Methyl Amine Ethyl Amine 1-aminopropane 2-aminopropane with C being 1 to 6
R = alkyl/cycloalkyl
and non-aromatic Alkyl
Aliphatic
B. Secondary Amines Cycloalkyl
In secondary amines, two of the hydrogen atoms in the ammonia ammonia/NH3
compounds formed Aromatic
molecule are replaced R = alkyl group of CnH2n-1
by replacing H
R contains aromatic ring
of 6 carbon atoms
Amines
Ethylene

R = carbon double bond

compound with hydrogen
C. Tertiary Amines
In a tertiary amine, all of the hydrogen atoms in an ammonia molecule Alkanolamine
have been replaced by hydrocarbon groups.
R contains alcohol /OH
group

Source: Company, Edelweiss Investment Research

26 GWM
Balaji Amines Ltd

Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200

Vinay Khattar

Head Research

vinay.khattar@edelweissfin.com

Rating Expected to

Buy appreciate more than 15% over a 12-month period

Hold appreciate between 5-15% over a 12-month period

Reduce Return below 5% over a 12-month period

840 Balaji Amines price chart

740
640
540
(INR cr)

440
340
240
140
40
Jul-13

Oct-13

Jul-14

Oct-14

Jul-15

Oct-15

Jul-16

Oct-16

Jul-17

Oct-17
Jan-13

Apr-13

Jan-14

Apr-14

Jan-15

Apr-15

Jan-16

Apr-16

Jan-17

Apr-17
Balaji Amines Sensex

27 GWM
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28 GWM
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29 GWM
 Equity | India | Specialty Chemicals

Sales Balaji Amines Ltd. 14 November, 2017

Note
BUY
CMP (`) Target (`) Company Snapshot
574 725 Balaji Amines Ltd.,is an ISO 9001: 2008 certified company, specialized in manufacturing
Methylamines, Ethylamines, Derivatives of Specialty Chemicals and Natural Products.
Potential upside Absolute Rating
These have been the main products; it also has facilities for the manufacture of
26% BUY derivatives, which are downstream products for various Pharma /Pesticide industries
apart from user specific requirements. Balaji Amines Limited (BAL), is one of the leading
Market Info (as on 13th November 2017)
manufacturers of Aliphatic Amines in India was set up in the year 1988 to cater to the
BSE Sensex 33,034
growing requirements of value based Specialty Chemicals. BAL commenced manufacture
Nifty S&P 10,225 of Methyl Amines in the year 1989 and subsequently added facilities for manufacture of
Ethyl Amines and other derivatives of Methyl Amines and Ethyl Amines.
Stock Detail
BSE Group B
BSE Code 530999 Investment Rationale
NSE Code BALMINES Unique business structure provides an edge over its peer
Bloomberg Code BLA IN Balaji Amines has unique business structure. It is one of the leading manufacturers of
Market Cap (`bn) 182.3 Aliphatic Amines. It specialized in manufacturing Methylamines, Ethylamines and
Free Float (%) 46% derivatives of them. The company enjoys leadership position in many of its products like
52wk Hi/Lo 599 / 271 Monomethylamine (MMA), Dimethyl amine (DMA), Trimethylamine (TMA), Dimethyl Amino
Avg. Daily Volume (NSE) 56,128 Ethanol (DMAE), Mono Methyl Amino Ethanol etc. It caters to host of industries like
Face Value / Div. per share (`) 2.00 / 2.20 Pharma (51% of revenues), , Agro Chemicals (26%), Paint Stripping & Resins, Rubber
Shares Outstanding (mn) 325 cleaning etc. The company has three state of the art units – two near Solapur and one
near Hyderabad. In addition Balaji possess a fully furnished Laboratory which helps the
Shareholding Pattern (%) company in development
Promoters Public Of newer products. It also operates a 5 start hotel in Solapur – Balaji Sarovar, the only 5
54.5 45.4 star properties in the city.

Financial Snapshot (`mn) Niche play provides high growth momentum in the upcoming period
Worldwide Amines technology is a closely guarded process with only few handful
Y/E March FY14 FY15 FY16 FY17E
companies having access to such technology. For the first time in India, Balaji tests on a
Net Sales
6,431 7,306 8,475 9,831
indigenously developed products and over the years has become a leading player in the
EBITDA
segment and commands healthy market share of 60-70% in domestic region for various
1,267 1,527 1,864 2,163
products. Balaji has mastered the complex process which we believe, would act as a
Net Profit
576 824 932 1,081 major entry barrier for domestic competitors and would provide revenue visibility and
P/E(x)
20.5 22.5 19.7 16.9 stable profitability.
ROE (%)
21% 23% 22% 27%
Robust Financials makes Balaji Amines lucrative
EPS
17.8 25.4 29.2 33.9 Consistent growth in the top line also backed by operating margin improvement makes
Balaji Amines more lucrative. Consolidated EBITDA margins have improved to 20.9% in
Share Price Performance
FY17 from 16.4% in FY13. This shows that company has improved in operating efficiency.
175
165 A net profit margin has also improved to 12.8% in FY17 from 6.1% in FY13. Return on
155 equity has improved from 18.3% in FY13 to 23% in FY 17. ROCE has shown strong growth of
145
135 9.6% in FY13 to 19.1% in FY17. This makes Balaji Amines a safer bet as compared to
125 others. We believe that this will create a great opportunity for the investor for longer
115
105
term horizon.
95
85
75 Valuation
May-17
Nov-16
Nov-16

Jun-17

Jul-17
Dec-16

Mar-17
Mar-17

May-17
Jan-17

Jul-17

Aug-17
Sep-17
Sep-17

Nov-17
Feb-17
Jan-17

Apr-17

Oct-17

BALAJI AMENIES BSE Sensex

At CMP of `574, Balaji Amines Ltd. is trading at 22.5 xs at its FY17 earnings of `25.4 .With
strong margin improvement and strong Business perspectives; We expect stock to trade at
Rel. Perf. 1Mth 3 Mths 6Mths 1Yr 21.4x its FY19E earnings of `33.9. We assign a BUY rating on the stock with a price target
BFL (%) 0.31 6.9 7.2 36.6 of `725 which is more than 26% upside from current levels.
Sensex (%) (2.2) 3.9 11.6 5.8
Source: Company data, Retail Research

Omkar Tanksale +91-22- 6614 2692 omkar@geplcapital.com Retail Desk 1

 Equity | India | Specialty Chemicals

Balaji Amines Ltd. 14 November, 2017

NOTES

Name Designation Email Contact

Omkar Tanksale Sr. Analyst - Fundamental Research omkar@geplcapital.com 91 (22) 6614 2692

I, Mr. Omkar Tanksale (Research Analyst of GEPL), having Education Qualification MBA Finance, hereby certify that all of the views expressed in this research report accurately reflect my views
about the subject issuer(s) or securities. I, also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this
report.

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