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Continued capacity addition in the space to impact margins

* Alkyl Amines (AACL) reported revenue in line with our estimates, while EBITDA was 18% below our estimate due to margin contraction. The gross margin contracted QoQ (by 810bps) to 49% in 1QFY22 – the lowest level in the last eight quarters.

* Raw material price inflation is likely to continue over the next couple of quarters due to a demand-supply mismatch in the global commodity markets (as global economies revive to normal levels), coupled with high freight costs.

* In line with the same, we cut our EBITDA margin forecast by 3–4%, resulting in an estimate cut of 9%/12%/8% in EBITDA for FY22E/FY23E/FY24E.

* Our downward revision in margins also factors in capacity additions by domestic peers. For example, Balaji Amines announced capacity additions of 16.5ktpa of Acetonitrile (ACN), over the next 12–18 months, which would take the total capacity to 25.5ktpa.

* India’s demand for ACN stands at 35ktpa, of which ~60% is imported, presenting an import substitution opportunity. AACL is expanding its ACN capacity by 15ktpa to 27ktpa – making it the largest producer with expected commissioning by 3QFY22. Although, with the aforementioned announcement of capacity additions by its peer (Balaji Amines), the domestic market would see increased competition for ACN, impacting AACL’s margins.

* We maintain a Neutral rating on the stock (valuing it at 45x Sep’23 EPS). That said, capacity expansion would facilitate the current high valuations – as even the company’s RoEs would be the best among peers at 32–33% in FY24E.

Margins tumble after peaking in FY21

* Revenue was in line with our estimate at INR3.9b (+60% YoY; +3% QoQ).

* EBITDA came in 18% below our estimate at INR1.1b (+43% YoY; -17% QoQ), with the EBITDA margin at 28.3% (the lowest in the last six quarters).

* That said, conversion cost was down 50bps QoQ to 20.6% (the lowest ever) as operating efficiencies improved.

* PAT stood at INR785m (+49% YoY; -15% QoQ).

Valuation and view – maintain Neutral

* Ongoing expansions would boost the aliphatic amines capacity by ~30% (capex of INR3b, with expected completion by end-FY23). Current capacity for aliphatic amines stands at 90ktpa, its derivatives account for 35ktpa, and ACN for ~12ktpa.

* We forecast a revenue CAGR of ~20% over FY21–24, with an EPS CAGR of 15% over the same period. Closures of global capacities and a higher-thanexpected revenue CAGR present an upside risk to our call, while there may be a downside risk from an increase in domestic competition.

* The stock is trading at 58x/48x FY23/24E EPS and 41x/34x FY23/24E EV/EBITDA – after clocking an upward run of ~15% last month. We value the company at 45x Sep’23E EPS to arrive at TP of INR3,665.

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