Specialty Chemicals: Looking Beyond The Star Performers

The industry dynamics have evolved significantly over the past five years with strong growth catalysts in place like the domestic availability of raw materials, robust demand from end-user industries, competitive manufacturing costs and favourable government policies, said Mehul Thanawala, senior analyst at JM Financial. The Chinese authorities’ crackdown on polluting chemical makers helped their Indian peers, he said.

SRF Ltd. led the gains so far this year, followed by Deepak Nitrite Ltd., Vinati Organics Ltd. and Aarti Industries Ltd., rising 20-46 percent. That compares with a 6 percent rise in the boarder NSE 500 Index.

But beyond the list of these top-performing stocks in the sector, there are other companies that have delivered a consistent revenue growth and return-on-equity in the last five years.

Selection criteria:

• Market capitalisation of at least Rs 2,000 crore.
• A 10 percent annualised growth in revenue in the last five years.
• Return on equity of 20 percent.

Here’s the list of best-performing specialty chemicals makers on these parameters:

Alkyl Amines

Alkyl Amines is a global supplier of amines and amine-based chemicals to the pharmaceutical, agrochemical, rubber chemical and water treatment industries, among others. It has three manufacturing sites located at Patalganga and Kurkumbh in Maharashtra and Dahej in Gujarat. It’s the largest manufacturer of ethyl amines.

Its revenue rose at an annualised rate of 13.7 percent in the last five years. The top line stood at Rs 846 crore in the year ended March, a 37 percent jump over the previous fiscal.

The company passes through increase in costs, aiding margins which have averaged over 18.5 percent since financial year 2015.

As Chinese exports of amine derivatives have taken a setback, Alkyl Amines is increasing its methyl amine capacity in the next two years to capture the opportunity, Nilesh Chugh, research analyst at HDFC Securities, said in a note. The share of exports is expected to rise from 20 percent to 25 percent by March 2021 on the back of demand from pharma and agrochemicals segment.

• HDFC Securities expects total sales, Ebitda and net profit to grow at a CAGR of 9.7 percent, 10.9 percent and 10.2 percent, respectively, over the next three years.

The company plans to spend Rs 250 crore to expand its methyl amines capacity, setting up amine derivative capacities and de-bottlenecking its Dahej plant over FY20 and FY21, according to Yogesh Kothari, chairman and managing director at Alkyl Amines.

Margins will only witness a bump after FY20 as the share of high-margin derivatives increase in its overall product mix. Any delay in the new facility will be a key concern, said HDFC Securities.

Fine Organics

Fine Organics is India’s largest manufacturer of oleochemical-based additives used in food and plastic. The company’s revenues have grown at an annualised rate of nearly 13 percent to Rs 1,060 crore in FY19. That was largely driven by high capacity utilisation across its plants and healthy realisations.

The company has four manufacturing plants near Mumbai: two at Ambernath, one each at Badlapur and Dombivli for a combined installed capacity of 69,300 tonnes a year, operating at near-full capacity. This is likely to result in modest volume growth in the near term, said Dipesh Mehta, analyst at SBICAP Securities.

To ensure growth and cater to the rising demand, the company plans to double its existing capacity to nearly 131,300 tonnes a year by the end of FY21. Work on its Ambernath facility having a 32,000-TPA capacity is moving as planned and is likely to commence operations by the end of the first quarter of the ongoing fiscal, the company said.

• Anand Rathi estimates the company’s revenue and net profit to grow at a CAGR of 19 percent and 13 percent, respectively, over FY19-21.

While brokerages are positive on the long-term growth prospects for the company, any fluctuation in raw material costs that contribute 63 percent of its revenue poses a key risk to margin. The recent rise in the stock price, according to Anand Rathi, already factors in the positives.

Advanced Enzymes

The Thane-based chemical company is the largest maker of enzymes in India with seven units: five in India and two in the U.S. The company said it operates in a niche category of specialty chemicals with high entry barriers and is among the top 15 globally.

It has developed more than 68 enzymes and over 400 formulations, according to its latest investor presentation. Human nutrition accounts for 76 percent of its total revenue in the last fiscal.

Revenues rose at an annualised rate of 12 percent in the five years through March this 2019.

• Emkay Global expects the company’s revenue, Ebitda and net profit to grow at a CAGR of 13.49 percent, 15.58 percent and 20.16 percent, respectively, till FY21.

The management has guided for a 10-13 percent organic revenue growth and Ebitda margin in the range of 41-45 percent for FY20.

While the successful turnaround of its subsidiary Evoxx and focus on expanding its business verticals like animal feed business are key catalysts to growth, higher dependency on large clients and revenue concentration in the U.S. and India act as key risks, Amar Mourya, senior analyst at Emkay, wrote in a note.

Himadri Specialty Chemical

Himadri is India’s No. 1 fully integrated specialty carbon maker with a coal tar distillation capacity of 5 lakh tonnes. It’s used for making coal tar pitch used in aluminium and graphite and carbon black, a reinforcement agent in tyres.

The company’s revenue rose at an annualised rate of 11.8 percent since FY14.

Weakness in the end-user (auto and aluminium) industries, coupled with production shutdown due to debottlenecking exercises, was more than offset by improved realisation which rose 25 percent year-on-year in FY19 on higher sales of -added products, Chirag Shah of ICICI Securities wrote in a note.

Brokerages remain bullish given the company’s 20 percent margins and a lean balance sheet with the debt-equity ratio of 0.3 times.

• Dipesh Mehta, analyst at SBI Cap Securities, expects revenue, Ebitda and profit to grow at a CAGR of 23 percent, 24 percent and 27 percent in FY19-FY21.

Capacity expansion in high-margin specialty carbon black and de-bottlenecking of its existing distillation capacity provide confidence, according to ICICI Securities. Any disruption in sourcing of key raw materials, continued weakness in demand and slower-than-anticipated ramp up of new facilities pose key threat to earnings, it said.