Our ADD recommendation on AACL with a target price of INR 5,310 is premised on (1) robust demand from pharmaceutical and agrochemical customers that form ~70% of AACL’s revenue mix, (2) rising domestic market share in Methyl Amines, (3) impending capacity expansion for (high-margin) Acetonitrile, and (4) production-linked incentive scheme that provides the right tailwinds for long-term volume growth. 3Q EBITDA/APAT was 53/54% above estimates, owing to a 20% rise in revenue, lower-than-anticipated raw material costs, offset by a higher-than-anticipated tax outgo.
* Margins surprise positively: Sales grew 11/26% QoQ/YoY to INR 3.2bn. Sales grew in 9MFY21 mainly due to value with better realisations, and not volumes. Gross margins rose to a record high of ~60.9% (+343/550bps QoQ/YoY) in 3Q, given benign raw material prices, better product mix, and higher margins, courtesy the robust pharma demand. Backed by high gross margins, operating leverage and well-rounded performance by all products, EBITDA margins shot up to 38.0% (+530/976bps QoQ/YoY). Ethylamines and its derivatives performed well in 3Q and helped drive realisation. Tight supply of Acetonitrile in the global market continues to drive realisation, and we expect the currently elevated prices to sustain in the near to mid- term. However, the current EBITDA margin does not seem sustainable and should cool off to 29.6/29.7% in FY22/23E as COVID-induced pharma demand and, in turn, product prices come off.
* Call takeaways: (1) The Board has approved an investment of INR 3.0-3.5bn to set up 30-40% additional capacities (of the current 80-90 ktpa) of Aliphatic amines at Kurkumbh and Patalganga in anticipation of increasing demand in the domestic and export market. Capex guidance for FY22/23 is INR 1.5/2.0bn. (2) The Board has declared an interim dividend at 200% i.e., INR 10/sh for FY21. (3) Average capacity utilisation of all plants in 3Q was 80- 90%.
* Change in estimates: We raise our FY21/FY22E EPS estimates by 5.1/1.7% to INR 118.2/131.1 per share to factor in better realisation from Ethylamines and its derivatives, and to account for the overall performance in 9MFY21.
* DCF-based valuation: Our price target is INR 5,310 (WACC 10%, terminal growth 3.5%). The stock is trading at 34.3x FY23E EPS.
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