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Company Background

Black Rose Industries Limited (BRIL) is led by Mr Anup Jatia, Executive Director, part of the promoter family which has strong business routes in Japan for over six decades. Mr Jatia, who schooled in Japan and graduated as a chemical engineer in USA, started the Chemicals Distribution Business (CDB). BRIL imports and distributes specialty, performance and rubber chemicals with strong direct relations with manufacturers in Japan.

CDB provided a strong foundation for BRIL to move into manufacturing and continues to grow. BRIL entered Chemicals Manufacturing Business (CMB), with Acrylamide Liquid (Acrylamide-L) in FY14 in Jhagadia, Gujarat with an initial capacity of 10,000 mtpa set up at a capex of Rs 400 mn. Subsequently it expanded capacity to 20,000 mtpa (for merchant sales), at negligible incremental capex. Acrylamide-L finds extensive usage in manufacture of polymers.

As natural forward integration, BRIL set up a 40,000 mtpa Poly-Acrylamide Liquids (PAM-L) and is also setting up 3,600 mtpa of Acrylamide Powder (Acrylamide-P) capacity at the same site which is expected to get commissioned by end-Q3FY22. It is also in the process of setting up, 2,000 mtpa of nmethylacrylmide (nMA), and 10,000 mtpa Poly-Acrylamide Solids (PAM-S) capacity at the same site. Acrylonitrile is the key raw material for Acrylamide.

Q1FY22: Muted sales led by Covid-19 disruptions and deferred exports

* During Q1FY22, BRIL’s standalone sales grew significantly by 130.4% y-o-y due to lower base and de-grew by ~11% q-o-q to Rs 605.8 mn on account of drop in exports of AcrylamideL due to logistics issues (unavailability of containers and high freight rates) and slowdown in domestic market due to Covid-19 disruptions. Exports of ~300 MT of Acrylamide has been deferred to Q2FY22 due to logistics issues.

* CMB reported muted growth of ~4% q-o-q at Rs 201.9 mn during the quarter. Acrylonitrile prices started increasing during Q2FY21, peaking at USD 3,200/MT in March 2021; started cooling down in Q1FY22 and stabilised in July and August. It is expected that prices will soften further due to an oversupply scenario in Asia and a new Acrylonitrile plant coming in China. However, Acrylamide prices remained high during the quarter (on arrival basis).

* CBD sales also de-grew, during Q1FY22, by ~19% q-o-q at Rs ~404 mn led by delay in arrivals of imported products. The price of Resorcinol remained under pressure as a price war in the Chinese domestic market spilled over into the Indian market, impacting sales. Further, shortages due to logistics issues also affected CDB. However, Demand during Q2FY22 is stronger than that seen in June 2021.

* Going forward we expect BRIL sales at ~Rs. 5.8 bn and EBITDA margins at ~17% by FY23E on account of better product mix with high contribution from CMB business led by optimum CU of Acrylamide – both L & P and PAM-L. PAM-L and Acrylamide sales are expected at ~Rs 918 mn and Rs ~2.3 bn respectively, by FY23E. However, our estimates are contingent upon the future uncertainties of COVID-19 disruptions and on-going global logistics issues which might impact our forecasts.

* Game changing entry in Poly-Acrylamides and other new products:

* From an initial capacity of 6,600 mtpa commenced in January 2020, PAM-L capacity has now been scaled to 40,000 mtpa. The Company launched its ceramic binder product, BRILBIND CE01, for ceramic tile industry of Morbi during Q4FY20 which has found good acceptance across end users. BRIL has revised the prices of its ceramic binder upwards from April 2021 onwards which is in line with trend of RM prices and competitors’ price movement. With performance consistency having been established, the Company is conducting more R&D to further improve the performance and add additional grades to the range. Setting up Acrylamide-P capacity to replace imports from China…and other new products

* BRIL is venturing into manufacturing Acrylamide-P (3,600 mtpa), at an estimated capex of Rs 80 mn, funded through internal accruals, which is expected to generate revenue of ~Rs 650 mn (current prices) at optimum CU. Currently, the entire Acrylamide-P requirement in India (3,500 mtpa) is fulfilled through 100% imports from China, which the initial capacity aims to replace, while further capacities could be added, going forward, to serve larger global requirements as global customers are also looking at alternative sources other than China. Mitsui Chemicals, Inc., Japan, is providing technical services for this planned expansion.

* BRIL’s R&D team has developed two non-PAM products viz. n-methylacrylmide (nMA) and Polycarboxilates with capacities of 2,000 MT and 5,000 MT respectively. nMA is a specialised intermediary monomer with domestic demand at 1,000 MT, majorly imported in India from Belgium. nMA unit is expected to be commissioned by Q3FY22 and has potential to generate revenue of ~Rs 300 mn at optimum CU at current prices. nMA finds application in textiles and coating industry whereas Polycarboxilates find usage in ceramic tiles.

* Work on the 10,000 mtpa PAM-S plant continues. After completion of initial civil work for the building, slightly delayed due to Covid-19 related restrictions and to facilitate BRIL’s entry into Acrylamide-P, nMA and new PAM-L products. This is now expected to complete in FY24E. At full capacity, PAM – L & S are expected to generate revenue of ~Rs 3 bn. In PAM-S, BRIL is expected to emerge as a significant regional player due to lack of existing capacity.

Valuation

BRIL is emerging as a nimble footed strong player making strategic and tactical moves in niche speciality chemicals at negligible incremental capex. Its growing CDB provides it a strong foundation. It entered niche Acrylamide-L, becoming the largest player in South Asia; now aspiring to capture the Acrylamide-P market from China; strategic move into PAM-L and now into nMA and PAM-S - all finding extensive usage in several growth industries.

BRIL revenues and margins are expected to increase steadily in coming years with high RoE and RoCE and negligible debt. We have valued BRIL on PE basis at 17x FY23 EPS of Rs 14.4 on account of better return ratios. We recommend a “Buy” on the stock with a target price of Rs 245/- (~34% upside) in 18 months.

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