Balaji Amines

Background

Balaji Amines Ltd (BAL) is a leading producer of aliphatic amines and manufactures Methylamines, Ethylamines, Derivatives of Specialty Chemicals and Natural Products. Amine technology is a closely guarded process with only a few handful companies having access to such technology. BAL is the first Indian company to have tested an indigenously developed amine technology and is today a producer of export quality products. BAL is largest methylamine player in India (20,000 MTPA) and is the second largest ethylamines producer with a capacity of 6,000 MTPA. Reportedly BAL is one of the lowest cost producers of methylamines in the world.

It has successfully invested in R&D over the last few years to develop specialty chemical derivatives. Some of these serve the domestic market as import substitutes (NMP, Morpholine, Hydroxylamine) while some others are used for captive consumption (P2, GBL) and the backward integration has reduced dependency on MNC suppliers and are helping improve margins in BAL’s quest for cost-leadership.

The total installed capacity of the company at the end of FY10 stood at 55,000 MT (up from 50,500 MT at the end of FY09). Of this about 20,000 MTPA is methylamines, 6,000 MTPA is ethylamines, 6,000 MTPA is NMP/GBL, 3,000 MTPA is Morpholine, 1,200 MTPA is PVP-K30 and the balance are derivative products (18,800 MTPA).

BAL has successfully set up power plants for its captive use which includes a 2.5 MW co-generation plant and 1.75 MW of wind power in Maharashtra (2 units). Another, 1.5 MW wind power unit was just commissioned in Sept 2010, taking the total wind power capacity to 3.25 MW. BAL sells excess power to the grid.


Main Products/Segments

Sales are driven primarily by Amines – Methylamine, Ethylamine, Speciality chemicals – N-Methyl Pyrrolidone (NMP) & Morpholine, and Derivatives – Di-Methyl Amine Hydrochloride (DMA HCL), Choline Chloride and other derivatives. Main competitors in India are RCF (Methylamine) and Alkyl Amines (Ethylamine). With NMP & Morpholine the company has started competing with bigger MNC players like BASF.


Main Markets/Customers

BAL caters primarily to the pharma industry in India supplying to leading pharma companies like Sun Pharma, Ranbaxy, Matrix Labs, Dr.Reddys, Aurobindo Pharma etc. for their Active Pharmaceutical Ingredients (API) requirements. it also caters to the Agro Chemicals,  Refineries (lube extraction),  Water Treatment Chemicals,  Rubber Chemicals, and Photographic Chemicals industries.

BAL derives more than 20% of sales from export to several countries such as UK, USA, Canada, Latin America, Germany, Italy, Middle East, South Africa, France, Brazil, Mexico etc. BAL sells directly to its customers in India while in case of exports it goes through distributors.


Bullish Viewpoints

  • Strong R&D focus – The company boasts of having two state-of-the-art R&D centers at its plants. The R&D initiatives undertaken over the years have been one of the largest contributors in making the company a major player in specialty chemicals. For FY10 it has spent more than 3% of its revenue for R&D. As a result of its R&D and effort to introduce new products where only few global players are present, BAL has a very high market share in some of its products while some of its products are 100% import substitutes.
  • Near monopoly status for some of its products – Globally, amines technology is closely guarded. BAL is first company in India, to test an indigenously developed technology, as compared to its peers, viz- Alkyl Amines Chemicals Ltd and RCF, who preferred technical collaboration with foreign players. This, along with sharp reduction in power & fuel cost, helped BAL emerge as the lowest cost producer of Methyl Amines in the world.
  • Proven success of new products – BAL has recently developed two new value added products, which are currently imported. The company has set up dedicated plants for these products- viz N-Methyl-2-Pyrrolidone (NMP) and Morphline. Both these products could help in boosting sales and margin expansion, as BAL is the only domestic manufacturer (100% import substitute). Global manufacturers include BASF and Huntsman.
  • Strong & Diverse Clientele – About 50-60% of BAL’s topline goes to the pharma and pesticide sector while the rest is spilt amongst a number of other end users like oil refineries, water chemicals, rubber chemicals etc. BAL has a strong presence in the domestic market with major clients from the pharma sector including the likes of Aurobindo, Aventis, Clariant, Dr. Reddy’s, Glaxo, Merck, Ranbaxy, Sun Pharma, Wyeth, Wockhardt, etc. Other clients include rubber chemical companies in Kerala, Gujarat and North India and water companies like Ion Exchange and Thermax. Refineries like IOCL, HPCL etc. Lastly, pesticide companies like Rallis, Meghmani and Gherdia Chemicals are also part of its client list. A diverse and strong client base along with product acceptance from industry leaders augurs well for BAL.
  • Capacity expansions to drive growth – BAL’s gross block has nearly doubled from Rs. 80.5 cr at the end of FY07 to Rs. 157.5 cr in FY10. Total installed capacity has increased from 44,500 MTPA in FY07 to 55,000 MTPA. Few key additions have been the GBL Plant (backward integration), PVPK-30 Plant (forward integration) and DMEA. Dimethylaminoethanol (DMAE) plant with a capacity of 10 MT/day was commissioned during FY10. Other than that, the company has also added wind power of 1.5 MW in Sept 2010 at Satara, Maharastra and cogen of 2.5 MW in FY10. BAL plans to sell part of its surplus wind power to the grid and use 50% captively and post the methylamines expansion it could use the power itself.
  • Fresh Capex plans being undertaken could establish market dominance – BAL intends to add a 15,000 NMP/GBL plant at MIDC, Chincholi, Solapur (could be ready by December 2010) and 30,000 MTPA of methylamines at its MIDC facility (could be ready by June 2011) as per company claims. The total capex for the same could be in the range of Rs. 100 cr and will be partly funded via debt.
  • Strategic Backward & forward integration  – could lead to margin expansion and is a reflection of strong in-house R&D. BAL has successfully set up the plant for GBL, a key ingredient for NMP and now does not need to depend on import of GBL as its requirement can be fully met from captive production. This should reduce the cost of production of NMP and also enhance the product range to serve the domestic and export market. Interestingly, this GBL plant is first of its kind in India and is a 100% import substitute. Moreover, the company has developed the manufacturing process in-house through R&D with catalytic dehydrogenation. The hydrogen produced by dehydrogenation is further being utilized, for the first time in India for running the boilers. BAL has a cogen capacity of 2.5 MW that was sent up in FY09. These initiatives could lead to further margin expansion for the company once it gains the necessary scale. BAL’s strategic backward and forward integration could lead to higher growth rates for the company in FY11 and FY12
  • Good visibility on growth with margin expansion – Demand for BAL’s products could remain strong as the pharma and pesticide industry are on high growth trajectories. The capex and backward integration carried out in FY10 should translate into higher topline growth in FY11. Further, by Q4FY11 the expanded NMP/GBL facility could be commissioned leading to incremental growth. FY12 could see the full impact of NMP/GBL as well as part impact of the expanded Methylamine facility. BAL could continue to grow well due to new product introduction, increase in capacity utilization with timely execution of capex plans. Uninterrupted power supply from captive power plant could give additional margins and operating efficiencies along with improved productivity.

Bearish Viewpoints

  • High Leverage – BAL’s current debt on books is about Rs. 100 cr with debt-to equity at 1.26. In order to fund its future capex the company plans to take on more debt in FY11 and FY12 (another 100 Cr). This could stretch its balance sheet and also increase the company’s exposure to interest rate risk and higher interest and depreciation costs putting some pressure on margins.
  • Aggressive Expansion Execution risks – BAL has planned a number of expansion plans some of which come on stream in FY11 and the balance in FY12 (100 Cr for 15000 TPA NMP/GBL and the Methylamine 30000 TPA additional plants). Any delay in commissioning of capacities could impact the company’s growth prospects. Any change in demand forecast (esp. Methylamine) could lead to unutilised capacity and depressed return ratios.
  • Raw material price risk – BAL’s key raw materials include methanol (made from gas and imported from Saudi Arabia), ethanol (at times imported from Brazil) and ammonia (purchased from players like GNFC & RCF). BAL typically enters into monthly contracts for the procurement of its raw materials. Any sharp rise in raw material price could impact margins adversely.
  • Forex risk – BAL exports its products as well as imports raw materials. In FY10 forex earned was Rs. 61.3 Cr (USD and Euro) and forex used was Rs. 58.8 Cr (mainly USD). Hence, while BAL has a natural hedge In USD, it is exposed to Euro price risk.
  • Delay in approvals for PVP-K30 could mean under utilization of the facility and depressed return ratios & impact profitability for BAL.
  • Hotels foray – Diversification into hotels business may be considered by investors as unrelated. However the company feels that it is a way to exploit its land assets and offers some amount of derisking to its overdependence on chemicals business.
  • Low trading volumes – The scrip though listed on the BSE and NSE does not generate large volumes on a consistent basis. This could lead to higher impact costs.

Barriers to entry

  • Balaji Amines enjoys a near monopoly status for some of its products. Globally, amines technology is closely guarded. BAL is first company in India, to test an indigenously developed technology, as compared to its peers, viz- Alkyl Amines Chemicals Ltd and RCF, who preferred technical collaboration with foreign players.
  • The focus on in-house R&D and proven success is in the market for the specialty chemicals developed (NMP, GBL, Morpholine, P2, PVK-30) -5 key products in last 4 years – is a key differentiating factor for BAL.
  • Strategic backward integration for NMP (GBL) and forward integration for PVP (2P) should help augment Balaji Amine’s quest for cost leadership.

Interesting Viewpoints

  • PVP-K30 plant could contribute significantly to bottomline once approvals are in place – In FY10, BAL set up a 1,200 MTPA PVP-K30 (Polyvinyl Purrolidone) plant at a capex of about Rs. 35 cr. This plant is once again the first of its kind in India. PVP is mainly used by the pharma industry as a binder for granules and tablets. However, this product is awaiting approval from a number of agencies (USFDA, EuroGMP) which is mandatory before it can be used by the Pharma industry as an ingredient. This product is presently made by Huntsman and BASF around the globe, apart from some Chinese companies. BAL has the advantage of in-house raw material right from GBL & 2P leading to PVP K-30. Currently, India imports about 100 tons per month of PVP and BAL is hopeful of supplying this quantity to the domestic market once all approvals are in place. When PVP approvals are received, the product has the potential to contribute about Rs. 30 cr in a full year of operations as it sells at about Rs. 600 per kg. The profit margins in this product could be healthy as there is no domestic competition and is a 100% import substitute. Product acceptance and approval of PVP could be game-changer and lead to a re-rating of the stock.
  • Venture into hotel business – BAL has decided to venture into the hotel business with a view to diversify from being focused only on chemicals. The company plans to utilize its available vacant land in upcoming areas of Solapur for these purposes. The company has appointed Mahajan & Aibara, experienced consultants in Hotel and Restaurant Industry for giving feasibility report for the usage of existing land, who have submitted a report after thorough study. Accordingly, BAL has proposed to setup a Hotel with 100 rooms and banquet facilities with an investment of Rs. 40 cr. The project is expected to completed over a period of 2 years from now (by mid 2012). BAL has signed a formal agreement with Sarovar Group of Hotels for operating/managing the Hotel property.
  • There are prospects of a supply crunch in methylamine capacity with rumours (?) of RCF Mumbai facility marked for close-down. Balaji with its increased capacities may be in a good position to exploit this situation in the near-medium term.

Disclosure(s)

Donald Francis: No Holdings in the Company;


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