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Margins continue to tumble; volumes also impacted

* Alkyl Amines (AACL) reported a miss on our revenue estimate (-11% QoQ) on account of a dip in volumes by 10% QoQ. This was largely attributable to lower demand from the Pharma and Agro spaces during the quarter. Alternate raw materials purchased by the aforementioned customers (primarily from China) were impacted, due to which overall production remained low.

* Raw material prices further increased (~30%) on a QoQ basis, although the management expects them to have peaked out. It also guided that logistical issues may get resolved over the next six months – some relief is already observed with regard to container availability, although freight rates continue to be high for time being.

* We build in EBITDA margin normalization from 21% (the lowest ever) in the current quarter to 24.5% in 2HFY22 – accounting for the aforementioned guidance. We further normalize our EBITDA margin forecast by -150bps to 28.0– 28.5% over FY23–24E, resulting in an estimate cut of 6%/5% at the EBITDA level for FY23E/FY24E.

* Our downward margin revision further factors in capacity additions by domestic peer over the next 12–18M, impacting margins for Acetonitrile (ACN).

* AACL is in the process of commissioning its ACN plant at Dahej. Trial runs are in progress, and the plant is expected to commence commercial production shortly.

The management has guided that exports would play a major role in revenue growth going forward (v/s in the past) post the commissioning.

* AACL has the best ROEs among peers at 30–32% over FY23–24E. The stock is trading at 48x FY23E EPS and 34x FY23E EV/EBITDA. We maintain our Neutral rating on the stock and value it at 40x Dec’23 EPS (from 45x earlier) – factoring in the current pressure/vulnerability in margins in the near term, with increased competition in the domestic market – to arrive at Target Price of INR3,250.

Margins tumble for third consecutive quarter – the lowest ever

* 2QFY22 revenue stood at INR3.5b (+20% YoY, -11% QoQ). The gross margin dipped 320bp QoQ to 46% (v/s 49% in 1QFY22).

* The EBITDA margin fell to 21.6% (-670bp QoQ), with EBITDA coming in at INR755m (29% below our estimate). PAT stood at INR541m (-17% YoY and -31% QoQ), translating to EPS of INR10.6 (v/s our est. of INR14.7).

* 1HFY22 revenue rose 38% YoY to INR7.4b, with EBITDA up 8% to INR1.9b (as the EBITDA margin shrank 700bp YoY to 25.2%). PAT grew 12% YoY to INR1.3b.

Valuation and view – maintain Neutral

* Ongoing expansions would boost capacity for Aliphatic Amines by ~30% (capex of INR3b, with expected completion by end-FY23). Current capacity stands at 90ktpa for Aliphatic Amines, 35ktpa for its derivatives, and ~12ktpa for CAN – this would rise to ~30ktpa post the commissioning of the aforementioned expansion.

* We forecast a revenue CAGR of ~20% over FY21–24, with an EPS CAGR of 14% over the same period. Closures at global capacities and a higher-than-expected revenue CAGR present an upside risk to our call, while increased domestic competition poses a downward risk.

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