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R&D, capacity expansion and new products to remain in focus

* AACL focuses on product innovation, waste reduction, and environmental impact, with plans to triple its R&D team and implement a new by-product isolation process in FY25. The company has increased R&D expenses, from 0.43% of revenue in FY19 to 0.65% in FY24 (INR93m), to strengthen its leadership in amines. The total R&D expenditure has increased at a CAGR of 20% in the past 5 years.

* AACL has expanded its ethylamine capacity by 35ktpa (~18% of the total capacity) in Kurkumbh, Maharashtra, with a capex of INR4b and repurposed the old plant to boost methylamine capacity. It aims to diversify its product portfolio as well. There has been pricing pressure amid increased acetonitrile imports from China and, hence, AACL has applied for anti-dumping duty (ADD). In order to beat competition, AACL is working to enhance product quality and production efficiencies.

* AACL increased its aliphatic amines capacity by ~30% in FY24 to ~200ktpa and is introducing new specialty products to enhance margin amid demand challenges. We estimate a ~22% revenue CAGR and a 40% EPS CAGR during FY24-26. Downside risks to our estimates stem from rising competition and raw material price fluctuations. The stock trades at 36.9x FY26E EPS and 24x FY26E EV/EBITDA. We maintain a Neutral rating with a TP of INR2,010.

R&D at the fore

* AACL has continuously increased its R&D expenses, which has helped the company to become a domestic leader in the world of amines. It increased its R&D expenses as a percentage of revenue from 0.43% in FY19 to 0.65% in FY24. Total R&D expenditure in FY24 was INR93m, with capex of INR15m (INR2m in FY19) and revenue expenditure of INR78m (INR35m in FY19).

* The company operates dedicated R&D centers focusing on developing products and improving existing ones and striving to achieve cost efficiencies. R&D revenue and capital investments are also utilized to minimize waste in terms of liquid effluents and residues. AACL, in FY24, spent 0.5% of its total R&D expenses on reducing the environmental and social impact of the products that it manufactures.

* The R&D team has developed a process to isolate valuable by-products from the waste stream of one of the existing products. It is likely to be implemented in FY25. Pilot trials are going on for two complex specialty products that the team has developed with backward integration (likely to start commercial production in FY26). The company also plans to triple the size of its R&D team in the foreseeable future.

Expect AACL to navigate through multiple challenges

* AACL has expanded its capacity of ethylamine at Kurkumbh by setting up a new plant with a capacity ~35ktpa in FY24 in order to meet the growing demand with a capex outlay of INR4b. The old ethylamine plant would, therefore, be now utilized to manufacture Methylamines, which would, in turn, enhance the capacity of the product. AACL is also adding new products and investing in the upgradation of the existing capacities.

* There are a range of products, today, that contribute 15-20% each to total revenue of AACL. The management is expanding its product portfolio to diversify its offerings and reduce dependency on a single product to 10%. That said, the management also targets to have a 5-10% contribution to revenue from new products every year, which it has not been able to achieve so far.

* There has been pricing pressure in some of the products of the company for quite some time now and the management expects it to continue, although prices of some products have stabilized now. Due to an increase in acrylonitrile production in China, dumping of low-priced imports of acetonitrile continues to increase, resulting in a reduction in its sales and creating margin pressures.

* AACL has applied for ADD for two of its products Acetonitrile (ACN) and Mono Iso Propyl Alcohol (MIPA), which is expected by end-FY25. All derivatives and specialty chemicals that AACL is getting into have Chinese competitors, but the management is confident of navigating through this challenge by focusing on better quality and improving production efficiencies.

Valuation and view

* AACL has boosted its aliphatic amines capacity by ~30% in FY24. The total capacity stands at ~200ktpa (including derivatives and specialty chemicals). Additionally, AACL is venturing into new specialty products that are likely to improve its margins amid robust demand (near-term headwinds persist) for amine derivatives and specialties.

* Over FY24-26, we estimate a ~22% revenue CAGR and a 40% EPS CAGR (due to a lower base in FY24). The key risk to our outlook is high competition (domestic and imports, mainly from China), leading to limited pricing power. Commodity nature of some of the products could also make AACL susceptible to raw material price fluctuations. Upside risk could be implementation of ADD.

* The stock is trading at 36.9x FY26E EPS and 24x FY26E EV/EBITDA. We reiterate our Neutral rating on AACL with a TP of INR2,010, based on 35x FY26E EPS.

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