PICK OF THE WEEK:
Balaji Amines Ltd.
Balaji Amines Ltd.
BSE Code: 530999
CMP: Rs.166.50
Book Value: Rs.140.57
EPS: Rs.31.86
P/E: 5.23
Industry P/E: 8.31
Dividend: 20%
Target: Rs.188-189
SL—Rs.147
CMP: Rs.166.50
Book Value: Rs.140.57
EPS: Rs.31.86
P/E: 5.23
Industry P/E: 8.31
Dividend: 20%
Target: Rs.188-189
SL—Rs.147
Introduction: Balaji Amines Ltd, is an ISO 9001: 2008 certified company, specialized in manufacturing Methylamines, Ethylamines, Derivatives of Specialty Chemicals and Natural Products. It also has facilities for the manufacture of derivatives, which are down stream products for various Pharma /Pesticide industries apart from user specific requirements.
Balaji Amines Limited (BAL), one of the leading manufacturers of Aliphatic Amines in India was set up in the year 1988 to cater to the growing requirements of value based Specialty Chemicals. BAL commenced manufacture 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.
BAL has been consistently adding capacities and fine tuning the processes to provide quality products at lowest cost to the customers. World over, Amine technology is a closely guarded process with only a few handful companies having access to such technology. BAL for the first time in India tested on an indigenously developed technology and developed it further over a period of time.
Today, BAL‘s products are accepted in international markets and have gained the distinct export quality status, which makes it one of the few companies in India having the potential to match the stringent international quality standards for which it has been awarded ISO-9001: 2000 Certification apart from other appreciations and continuous orders from global majors for its product range.
BAL`s state-of-the-art manufacturing facility is located at Tamalwadi Village, near Solapur (Maharashtra State, India). The facility is fully equipped with latest technology like digital computerized controlled systems, which facilitates the control of operations from the control room in addition, BAL possesses an excellent R&D facilities and laboratory, which helps in conducting basic research and also to fine tune the processes.
Shareholding Pattern: The promoters hold 54.64% while the 45.36% of the shares of the company. Among the non-promoters Bhagyanagar Wood Plast Ltd holds 2.17% of the shares of the company.
Financials: For FY10, the company came out with good set of numbers. The total income of the company for FY10 came out to be Rs.263.35 Cr as against Rs.254.53 Cr in the same period previous year. The net profit of the company FY10 came out to be Rs.20.65 Cr as against Rs.15.33 Cr in the same period previous year. The reserves of the company increased from Rs.65.03 Cr in FY09 to Rs.85.20 Cr in the same period previous year. The EPS of the company for FY10 came out to be Rs.31.86 as against Rs.23.65 in the same period previous year. Also both the net and operating profit margins increased marginally in FY10, in Q-o-Q basis.
For Q4FY10, the company came out with very good numbers. The total income of the company for Q4FY10 came out to be Rs.73.66 Cr as against Rs.56.89 Cr in the same period previous year. The PBDT for Q4FY10, more than doubled to Rs.9.06 Cr as against Rs.2.81 Cr in the same period previous year. The net profit of the company for Q4 FY10 came out to be Rs.3.84 Cr as against Rs.63 lakhs in the same period previous year. The EPS of the company for Q4FY10 jumped to Rs.5.93 as against Re.0.97 in the same period previous year. The interesting part is that while the OPM increased to 16.03% in Q4FY10, from 11.51% the NPM of the company increased to 5.12% from mere 1.12 % in the same period previous year.
Industry: The Indian chemical industry is an integral part of the Indian economy, contributing around 6.7% of the Indian GDP. It touches our lives in many ways, whether it is thermoplastic furniture we use or a synthetic garment we wear or drug we consume—we are inextricably linked with it. The industry is a vital part of the agricultural and industrial development in India and has key linkages with several other downsteam industries, automotive, consumer durables, engineering, food processing, etc.
With World Trade Organisation (WTO) assuming an increasing role in international economics, there is an inevitable move towards an inter-linked global economy. However, there have been cases where certain segments of the industry such as pharmaceuticals and biotechnology have performed exceedingly well even at a global level.
The chemical industry in India has the potential to grow to around USD 100 billion by 2010 according to a well known accounting firm. For the industry to achieve this size, Specialty and Knowledge chemical segments would need to grow at 16.4 per cent (current growth rate is 7.9 per cent) and 27 per cent (current growth rate is 12.3 per cent) respectively, while the Basic chemicals segment would need to sustain its current growth rate of 7.7 per cent. This would mean that the Indian industry’s composition would change to match the profile of the chemical industry in global markets.
At USD 100 billion, the industry’s contribution to India’s GDP is expected to grow from the current 6.7% to 12.1% and its share of the global industry is expected to increase from 1.9% to 3.9%, by the end of 2010.
At the Base case, if the current growth rates are maintained, the industry is expected to grow to USD 60 billion by 2010. In that case, the industry’s contribution to India’s GDP would increase to 7.1% and its share of the global industry would increase to 2.3%. The industry would need to seek new directions in order to achieve the incremental USD 40 billion over the Base case scenario. At 12.1% of India’s GDP, the USD 100 billion chemical industry in India will have a substantial impact on the national economy. Some of the areas where the impact is expected to be significant include:
■ Emergence of a new breed of entrepreneurs and leaders who will steer the industry;
■ Rise in the level of intellectual capital being generated and a consequent increase in the number of patents filed;
■ Creation/ acquisition of manufacturing assets, as well as sales networks overseas by Indian companies;
■ Increase in direct employment within the industry from the current levels of around 0.9 million to around 1.3 million by 2010, with the indirect additional employment figures expected to be a multiple of about 4-6 times this number;
■ Development of core skills in chemistry, chemical engineering and general management with an emphasis on the Specialty and Knowledge segments;
■ Increase in the demand for chemical plants and equipment, fabrication and process automation services, with most of the demand being for Specialty and Knowledge chemical plants;
■ Closure of companies/ plants as a result of consolidation as well as relocation of plants to form clusters to reap cost benefits, share knowledge and improve coordination with buyers/ suppliers;
■ Improvement in safety, health and environmental (SHE) standards;
■ Increase in the overall investment levels as India moves towards becoming a global sourcing base for Speciality and Knowledge chemicals;
■ Extensive use of information technology (IT) within the industry for business as well as technical applications;
■ Emergence of Indian aggregators or trading houses offering value to end-customers as well as manufacturers through investments in global sales and distribution facilities, relationships and access to large capacities; and
■ Conducive regulatory and legal framework with changes in legislation pertaining to Value-added Tax (VAT), intellectual property rights, etc.
The chemical industry is a key contributor to the world economy. It is a knowledge-based industry with significant investments in R&D. The industry supplies to virtually all sectors of the economy and produces more than 80,000 products.
In terms of consumption, the chemical industry is its own largest customer and accounts for approximately 33% of the consumption. In most cases, Basic chemicals undergo several processing stages to be converted into downstream chemicals. These in turn are used for industrial applications, agriculture, or directly for consumer markets. Industrial and agricultural uses of chemicals include auxiliary materials such as adhesives, unprocessed plastics, dyes and fertilizers, while uses within the consumer sector include pharmaceuticals, cosmetics, household products, paints, etc.
Growth in revenues within the chemical industry depends largely on the overall growth of the economy and industrial production, and is often measured as a multiple of GDP growth. The chemical industry is a cyclical industry and is driven largely by the business cycles of end customer segments.
The Chemical Industry can be segmented into three broad types: Basic chemicals, Specialty chemicals and Knowledge chemicals. Basic has high feedstock and other raw material costs, whereas Specialty has very high selling and product development costs. Knowledge segment, on the other hand is characterized by large spends on advertising and R&D. Basic is the most mature segment with the lowest profitability, while Knowledge chemicals have the highest profitability and growth projection. Globally, the Basic segment accounts for about 47% of the industry, Specialty 25% and Knowledge 28%.
The economic downturn has had little impact on the Knowledge chemicals industry with most products (largely pharmaceuticals) being price inelastic. However, other trends including the increasing presence of generics within the market and the need for shorter development cycles, resulted in earnings pressure on companies in this segment. Growth within the segment has also been driven by longer life expectancy, population growth; greater spends on healthcare, improved agricultural techniques, etc. Chemical companies across the world have adopted different strategies to face the present day economic realities. In addition to certain universal trends, there are differences in drivers and trends across segments.
Globalisation is a common theme across all three segments of the chemical industry. An enhanced geographical spread gives companies the ability to optimise their supply chain costs globally. As a result, companies tend to establishe their manufacturing locations close to sources of feedstock or close to alternative markets. The destination countries too favour this strategy as is evident by the incentives offered for setting up plants.
Some countries actively pursuing such opportunities are Canada, South Korea and China. Canada has distinct advantages such as cheaper energy and lower corporate taxes. China is being developed into a transportation, distribution and storage hub servicing the needs of the entire Asian chemical industry.
Triggers:
Balaji Amines Limited (BAL), one of the leading manufacturers of Aliphatic Amines in India was set up in the year 1988 to cater to the growing requirements of value based Specialty Chemicals. BAL commenced manufacture 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.
BAL has been consistently adding capacities and fine tuning the processes to provide quality products at lowest cost to the customers. World over, Amine technology is a closely guarded process with only a few handful companies having access to such technology. BAL for the first time in India tested on an indigenously developed technology and developed it further over a period of time.
Today, BAL‘s products are accepted in international markets and have gained the distinct export quality status, which makes it one of the few companies in India having the potential to match the stringent international quality standards for which it has been awarded ISO-9001: 2000 Certification apart from other appreciations and continuous orders from global majors for its product range.
BAL`s state-of-the-art manufacturing facility is located at Tamalwadi Village, near Solapur (Maharashtra State, India). The facility is fully equipped with latest technology like digital computerized controlled systems, which facilitates the control of operations from the control room in addition, BAL possesses an excellent R&D facilities and laboratory, which helps in conducting basic research and also to fine tune the processes.
Shareholding Pattern: The promoters hold 54.64% while the 45.36% of the shares of the company. Among the non-promoters Bhagyanagar Wood Plast Ltd holds 2.17% of the shares of the company.
Financials: For FY10, the company came out with good set of numbers. The total income of the company for FY10 came out to be Rs.263.35 Cr as against Rs.254.53 Cr in the same period previous year. The net profit of the company FY10 came out to be Rs.20.65 Cr as against Rs.15.33 Cr in the same period previous year. The reserves of the company increased from Rs.65.03 Cr in FY09 to Rs.85.20 Cr in the same period previous year. The EPS of the company for FY10 came out to be Rs.31.86 as against Rs.23.65 in the same period previous year. Also both the net and operating profit margins increased marginally in FY10, in Q-o-Q basis.
For Q4FY10, the company came out with very good numbers. The total income of the company for Q4FY10 came out to be Rs.73.66 Cr as against Rs.56.89 Cr in the same period previous year. The PBDT for Q4FY10, more than doubled to Rs.9.06 Cr as against Rs.2.81 Cr in the same period previous year. The net profit of the company for Q4 FY10 came out to be Rs.3.84 Cr as against Rs.63 lakhs in the same period previous year. The EPS of the company for Q4FY10 jumped to Rs.5.93 as against Re.0.97 in the same period previous year. The interesting part is that while the OPM increased to 16.03% in Q4FY10, from 11.51% the NPM of the company increased to 5.12% from mere 1.12 % in the same period previous year.
Industry: The Indian chemical industry is an integral part of the Indian economy, contributing around 6.7% of the Indian GDP. It touches our lives in many ways, whether it is thermoplastic furniture we use or a synthetic garment we wear or drug we consume—we are inextricably linked with it. The industry is a vital part of the agricultural and industrial development in India and has key linkages with several other downsteam industries, automotive, consumer durables, engineering, food processing, etc.
With World Trade Organisation (WTO) assuming an increasing role in international economics, there is an inevitable move towards an inter-linked global economy. However, there have been cases where certain segments of the industry such as pharmaceuticals and biotechnology have performed exceedingly well even at a global level.
The chemical industry in India has the potential to grow to around USD 100 billion by 2010 according to a well known accounting firm. For the industry to achieve this size, Specialty and Knowledge chemical segments would need to grow at 16.4 per cent (current growth rate is 7.9 per cent) and 27 per cent (current growth rate is 12.3 per cent) respectively, while the Basic chemicals segment would need to sustain its current growth rate of 7.7 per cent. This would mean that the Indian industry’s composition would change to match the profile of the chemical industry in global markets.
At USD 100 billion, the industry’s contribution to India’s GDP is expected to grow from the current 6.7% to 12.1% and its share of the global industry is expected to increase from 1.9% to 3.9%, by the end of 2010.
At the Base case, if the current growth rates are maintained, the industry is expected to grow to USD 60 billion by 2010. In that case, the industry’s contribution to India’s GDP would increase to 7.1% and its share of the global industry would increase to 2.3%. The industry would need to seek new directions in order to achieve the incremental USD 40 billion over the Base case scenario. At 12.1% of India’s GDP, the USD 100 billion chemical industry in India will have a substantial impact on the national economy. Some of the areas where the impact is expected to be significant include:
■ Emergence of a new breed of entrepreneurs and leaders who will steer the industry;
■ Rise in the level of intellectual capital being generated and a consequent increase in the number of patents filed;
■ Creation/ acquisition of manufacturing assets, as well as sales networks overseas by Indian companies;
■ Increase in direct employment within the industry from the current levels of around 0.9 million to around 1.3 million by 2010, with the indirect additional employment figures expected to be a multiple of about 4-6 times this number;
■ Development of core skills in chemistry, chemical engineering and general management with an emphasis on the Specialty and Knowledge segments;
■ Increase in the demand for chemical plants and equipment, fabrication and process automation services, with most of the demand being for Specialty and Knowledge chemical plants;
■ Closure of companies/ plants as a result of consolidation as well as relocation of plants to form clusters to reap cost benefits, share knowledge and improve coordination with buyers/ suppliers;
■ Improvement in safety, health and environmental (SHE) standards;
■ Increase in the overall investment levels as India moves towards becoming a global sourcing base for Speciality and Knowledge chemicals;
■ Extensive use of information technology (IT) within the industry for business as well as technical applications;
■ Emergence of Indian aggregators or trading houses offering value to end-customers as well as manufacturers through investments in global sales and distribution facilities, relationships and access to large capacities; and
■ Conducive regulatory and legal framework with changes in legislation pertaining to Value-added Tax (VAT), intellectual property rights, etc.
The chemical industry is a key contributor to the world economy. It is a knowledge-based industry with significant investments in R&D. The industry supplies to virtually all sectors of the economy and produces more than 80,000 products.
In terms of consumption, the chemical industry is its own largest customer and accounts for approximately 33% of the consumption. In most cases, Basic chemicals undergo several processing stages to be converted into downstream chemicals. These in turn are used for industrial applications, agriculture, or directly for consumer markets. Industrial and agricultural uses of chemicals include auxiliary materials such as adhesives, unprocessed plastics, dyes and fertilizers, while uses within the consumer sector include pharmaceuticals, cosmetics, household products, paints, etc.
Growth in revenues within the chemical industry depends largely on the overall growth of the economy and industrial production, and is often measured as a multiple of GDP growth. The chemical industry is a cyclical industry and is driven largely by the business cycles of end customer segments.
The Chemical Industry can be segmented into three broad types: Basic chemicals, Specialty chemicals and Knowledge chemicals. Basic has high feedstock and other raw material costs, whereas Specialty has very high selling and product development costs. Knowledge segment, on the other hand is characterized by large spends on advertising and R&D. Basic is the most mature segment with the lowest profitability, while Knowledge chemicals have the highest profitability and growth projection. Globally, the Basic segment accounts for about 47% of the industry, Specialty 25% and Knowledge 28%.
The economic downturn has had little impact on the Knowledge chemicals industry with most products (largely pharmaceuticals) being price inelastic. However, other trends including the increasing presence of generics within the market and the need for shorter development cycles, resulted in earnings pressure on companies in this segment. Growth within the segment has also been driven by longer life expectancy, population growth; greater spends on healthcare, improved agricultural techniques, etc. Chemical companies across the world have adopted different strategies to face the present day economic realities. In addition to certain universal trends, there are differences in drivers and trends across segments.
Globalisation is a common theme across all three segments of the chemical industry. An enhanced geographical spread gives companies the ability to optimise their supply chain costs globally. As a result, companies tend to establishe their manufacturing locations close to sources of feedstock or close to alternative markets. The destination countries too favour this strategy as is evident by the incentives offered for setting up plants.
Some countries actively pursuing such opportunities are Canada, South Korea and China. Canada has distinct advantages such as cheaper energy and lower corporate taxes. China is being developed into a transportation, distribution and storage hub servicing the needs of the entire Asian chemical industry.
Triggers:
- In Nov. 09, the company commenced production of Polyvinyl Purrolidone (PVP K-30), which is a binder for granules and tablets. This product is presently made by ISP and BASF around the globe apart from China. The plant capacity for the product is 1, 200 TPA and with this, the company will be having advantage of in-house raw materials, right from GBL, 2P to PVP K-30. This is the 6th product in the company’s basket and is likely to add Rs.50 Cr to the topline of the company per annum.
- The company was able to sustain the trend in its performance primarily due to the effective product mix. The long term purchase price contracts with vendors of raw materials and the stringent cost control policy measures implemented by the management have been major contributors to the performance.
- In FY09, the company acquired 100% shares in its subsidiary company, Bhagyanagar Chemicals Limited making it as wholly owned subsidiary company, as against 99.95% in the previous year. It remains to be seen how this move is able to push up both its top and bottomlines.
- There were reports in certain sections of the media some months back that Hyderabad-based speciality chemicals manufacturer Balaji Amines Limited (BAL) is setting up a three-star hotel at a cost of about Rs.30 crore at Solapur in Maharashtra. The company has already finalised a deal with the Sarovar group for managing the hotel being set up in an extent of 1.5 acres and has also entered into a memorandum of understanding with them. According to the management, the hotel was conceived for utilization of its vacant land and also keeping in view the future developments in and around Solapur where NTPC, Bharat Forge and Thermax among others were establishing their units.
- BAL, which has two manufacturing units, one at Tamalwadi in Maharashtra and another at Bollarm, has also embarked upon a Rs.60-crore expansion project to be completed by August 2010. The expansion of the project is being funded through Rs.40 Cr term loan and Rs.20 Cr of internal accruals. The Maharashtra Industrial Development Corporation (MIDC) has allocated 40 acres of land to the company at Tamalwadi where its manufacturing unit is located. The company is expected to get good benefit of expansion from Q2FY11 when, sales are expected to grow by 30-35 % along with significant improvement in bottomlines.
- It is worth mentioning here that in July 2009, BAL, which is a leading manufacturer in the field of fine chemicals, speciality chemicals, aliphatic amines and derivatives, completed a Rs.70 Cr expansion-cum-diversification project involving setting up two windmills of 1.5 Mw and 2.5 Mw each, a research and development plant and a PVPK production plant. After the second expansion project, the company's installed capacity would go up to 50,000 tonnes per annum (tpa) from the current level of around 45,000 tpa. It would also be adding another windmill of 1.5 Mw capacity being set up at Sataram in Maharashtra at a cost of about Rs.10 Cr. The company hopes to achieve a turnover of over Rs.500 Cr by 2012.
- The company has made strategic investment of Rs.2.94 Cr in Balaji Greentech Products Limited which reportedly broke even in the 1st year of operation. Balaji Amines Ltd had earlier diversified into the manufacture of CFL and LED, through its new company Balaji Green Tech Products Ltd. The BAL had been able to achieve an average annual growth rate of over 20 per cent in the past five-six years.
- Balaji has continued to give its full thrust to the in-house Research and Development initiatives both in Unit-I and Unit-II at Hyderabad. These R & D centres are doing remarkable work in identifying new products, conducting research for new derivatives of amines, natural products, optimizing the input parameters for achieving better value additions, increasing the capacity utilization of the plant by improving the process, fine tuning the process, etc.
- India has a leading global presence in the field of pharmaceuticals and some of the largest pharmaceutical companies belong here. Balaji Amines provides the vital raw material inputs to some of these companies and given the quality consistency and the demand for the company's products is increasing, it is being increasingly recognized as a dependable supplier in the long run. In addition to the domestic market the company has developed a long term vendor relations with its overseas customers and a large amount of company's efforts are being focused on the development of overseas markets. The management is of the view that the demand for the company's products being stable to increasing in nature and thus consistent and continuing market exists for the company's products across all verticals.
Chart-Check and Conclusion: From the charts it has been found that the scrip is above its both 50-DMA and 200-DMA, which is itself a bullish indicator. The other chartical parameters are more or less in the buy mode, with clear positive indications from MACD and Bollinger Bands.
Considering the management, products, unique business model, low equity, strong brand image, sophisticated technology, export thrust, innovative products and expansion of capacity, the scrip of Balaji Amines look grossly under priced at a P.E. Ratio of 5.23. If, stock commands a modest P.E. Ratio of 10, its share price should not be less than Rs.300, in any case considering pervious earnings (in 2005, it share price had gone upto Rs.550). After the 2nd phase of expansion the company’s top and bottom lines are expected to change dramatically. Moreover, the promoters are investor friendly but low profile. Now considering the short term play, the scrip can be purchased above Rs.167.5, for a target of Rs.188-189, SL—Rs.147. However, considering good visibility of earnings, for next 2 years one can buy the scrip for a target of over Rs.300. It is really a stock to accumulate for every portfolio.
Disclaimer: Though due care has been taken while preparing this report but no responsibility will be assumed by the author for the consequences what so ever, resulting out of acting on these recommendations or after reading the report.
The calls made herein are for informational purposes and are not recommendations to any person to buy or sell any securities. The information is derived from sources that are deemed to be reliable but its accuracy and completeness are not guaranteed. The author does not accept any liability for the use of this column for buying and selling of securities. Readers of this column who buy or sell securities based on the information in this column are solely responsible for their actions. The author, his acquaintances, his company or his family members may or may not have positions in the Scrips mentioned in this column. Investors should take their own decisions while buying and selling the shares/securities.
Note: The scrip was recommended to the Paid/Premium Group on 11th July, 2010, in the Sunday Report sent to them.
