A hidden gem in an oligopolistic Amine market.
Updated: Sep 26, 2020
Balaji Amines Ltd, a prime contender to take China’s share of the pie.
September 6th 2019, Balaji Amines Limited. Current Market Price Rs. 261 a share.
Let me begin with a famous quote by one of the best value investors alive Charlie Munger (Vice Chairman, Berkshire Hathaway Inc.)
“I find it quite useful to think of a free-market economy as sort of the equivalent of an ecosystem. Just as animals flourish in niches, people (companies) who specialise in some narrow niche can do very well”
In our experience, businesses which focus on a specific niche and constantly strive for excellence & growth in that niche, often turn out to be very good investments in the long run. One such company is Balaji Amines Ltd. It is engaged in the manufacturing of aliphatic amines, their derivatives and specialty chemicals.
For those who do not know what these are, Amines are products derived from Ammonia (NH3) by the displacement of Hydrogen (H2) in the Ammonia molecule by other radicals such as Methyl, Ethyl, Propyl etc. They have a pungent odour and their aqueous solutions are strongly alkaline. Amines and their derivatives find wide spread applications in various industries mainly Pharma (~60%), Agro (~25%), rubber, dyes, metallurgy and paints.
Globally, the Aliphatic Amine industry is a niche that is worth US$ 4.1 billion or roughly 0.1% of the chemical Industry and is growing at a CAGR of 7-10% per annum. China is the largest consumer and producer of aliphatic amines accounting for almost 60% of the global production. Many countries solely depend on China for their Amine requirements. Overall the Aliphatic amine industry is an oligopoly dominated by a few players as listed below.
90% of the Indian Amine market is held by two companies, namely Balaji Amines Ltd. and Alkyl Amines Ltd. The Oligopolistic nature of this Industry is a result of the presence of high barriers to entry for other players. To start with, Aliphatic Amines are highly hazardous in nature when not handled with proper safety protocols in place. They are expensive to transport & costly to import due to the safety measures involved. Manufacturing Aliphatic Amines requires a high degree of technological expertise and a large upfront capital cost for the procurement of specialised machinery. Moreover, obtaining environment clearances is a slow & lengthy process having many touchpoints with governmental authorities. The absolute size of the Aliphatic Amines industry as mentioned earlier, is relatively small, making it unattractive for very large players to enter the market. All these factors prove to make a strong economic moat around existing businesses in this sector.
In this article we further look into Balaji Amines Ltd, a frontrunner in the Indian Amine space.
Balaji Amines was established by Mr Prathap Reddy in the year 1988, at Tamalwadi village In Solapur. The plant was setup to carter to the growing demand of methyl & ethyl amines which were being imported in large quantities from China.
Balaji Amines is currently run by Mr Ram Reddy who has a rich & varied experience of 30 years in the amine business. Presently, BAL & its subsidiary Balaji Speciality Chemicals produce various products such as Methyl amine, Ethyl Amine, DMAHCL, Choline Chloride, Dimethylformamide, Morpholine, N-Methyl-2-pyrrolidone, Ethylenediamine, Piprazine, Diethyl triamine etc. The Company has a total installed capacity of over 2 lakh Metric Tonnes per Annum. The products manufactured find use cases in various industries as depicted below.
BAL’s clientele includes noteworthy names such as Dr Reddy’s, Aurobindo Pharma, Sun Pharma, Venky’s, Indian Oil, HP, Hikal etc. The company exports to around 25 countries which contributes to about 20% of the top-line. This is expected to increase steadily in the future as many countries have begun searching for alternative suppliers in lieu of China amidst the ongoing trade tensions.
Balaji Amines has an interesting business model where in the company selects only those products to manufacture which are either, 1. heavily imported from other countries, or 2. products in which the company is confident of securing a first or a close second position in the market. For example, Balaji Amines along with its peer Alkyl Amines enjoys a global market share of 80% for DMAHCL. BAL also plans on manufacturing Acetonitrile & THF (Tetrahydrofuran) in India, which will make it the sole producer of THF and one of the two producers of Acetonitrile in the country catering to a demand of 15,000 Metric tonnes per annum for each chemical. Further, the company has also received approvals to manufacture Morpholine which has very few suppliers in the world.
Additionally In order to substitute imports from other countries the company has added capacities of Ethylenediamine, Piprazine and Diethyltriamine, which account for combined imports of 40,000 Metric tones every year in India.
Apart from the above the company has embarked upon an aggressive expansion plan to induct manufacturing capacities of 34,000 metric tonnes per annum of various chemicals such as Mono Isopropyl Amines (MIPA) & Iso propyl Alcohol (IPA) in the near future. The greenfield project would be carried out on a 90-acre land parcel in Solapur, Maharashtra and the capex to be incurred by the company in the first phase is estimated to be rupees 200 crores. A part of the capex is planned through internal accruals (~80 crores) and the rest would be a loan taken from the bank. The entire project is expected to take around 15 months to complete from the second quarter of FY20’.
On the financial front, Balaji Amines has performed consistently well over the years with a steady top line growth of 10% CAGR and an impressive bottom line growth of 28.5% CAGR per annum over the last five years. This has been the result of continuous efforts in monitoring costs, including value added products, and improving operational efficiency.
At the current market price of Rs.260 a share the company trades at a surprisingly low price to earnings ratio of 7.2x and a price to book value of 1.5 times. The company has also maintained good liquidity and a conservative level of debt to equity of 0.3 : 1 on its balance sheet. The high entry barriers in the Amine industry coupled with low valuations of BAL make it an attractive bet for the long run.
We like BAL over its peer Alkyl Amines which currently trades at a much higher valuation in the market. We believe BAL is capable of commanding similar and even higher valuations owing to the management’s ambitious growth plans for the company.
Overall, China has been a key exporter dominating the speciality chemicals & Amines industry for a long time. However with rising wages, stricter pollution control norms, and a desire for India to become self-reliant, a bright future awaits the Indian business engaged in this sector.
Other nations too are now turning towards Indian Manufacturers’ as their first choice for the procurement of speciality chemicals & Amines. BAL seems well placed to capture these opportunities which will propel the company into a higher growth orbit.
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