Buy Balaji Amines Ltd For Target Rs.1,077 - HDFC Securities
Balaji Amines Ltd. (BAL) is India’s largest aliphatic amine company with ~50% market share. It has been one of the consistent compounders over last decade where it’s Revenues, EBITDA & PAT registered a growth of CAGR 13%, 15% and 17% respectively. It has successfully created a niche for itself in a highly capital intensive, oligopolistic industry with huge entry barriers by constant focus on import substitution and calibrated approach towards capacity expansion. More than 80% of the products produced by the company were previously imported in India while currently ~60% of its product portfolio comprises of products which are only manufactured by Balaji Amines in India which includes NMP, NEP, 2P (N Methyl/Ethyl/2 Pyrrolidone); GBL (Gamma Butyrolactone); Morpholine; DEAE (Di-Ethyl Amino Ethanol); DMAE (Di-Methyl Amino Ethanol); DMU (Di-Methyl Urea); DMF (Dimethyl Formamide) and PVPK-30 (Pharmapure Povidone). Going forward, we expect strong tailwinds to continue on the demand side mainly in products sold to Pharma and Agrochem industry (77% of revenue). Also its higher focus on launching new import substitute products in India and incremental capacity addition in Ethylamines (16,500 MT), Methylamines (50,000 MT) Di-methyl Carbonate (DMC) and Acetonitrile (9000 MT) provides good visibility of growth.
Valuations and View:
We are positive on the future earnings growth trajectory of Balaji Amines. We expect its earnings growth momentum to sustain which is likely to be mainly driven by richer product mix, gradual improvement in utilization of its new capacities and sustainable demand for amines from its end-user industries like pharma and agrochem. In our view, Balaji Amines’ Revenue and PAT is likely to record a growth of 13% and 32% CAGR over FY20-22E along with consistent FCF generation, debt free status & superior ROIC (25%+).
The stock is currently trading at valuation of 18.1x FY22E earnings. We feel the base case fair value of the stock is Rs 1000 (19x FY22E) and bull case fair value is Rs 1077 (20.5x FY22E). Investors can buy the stock on dips to Rs.904-908 band (17.25xFY22E EPS) and add more on dips to Rs.840-844 band (16.0xFY22E EPS)
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