Alkyl Amines Chemicals Limited (506767) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Alkyl Amines Limited hosted by HDFC Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nilesh Ghuge from HDFC Securities. Thank you, and over to you, sir.

Thank you, Jacob. Good morning all. On behalf of HDFC Securities, I welcome everyone to this Alkyl Amines conference call to discuss the results for the quarter ended September 2021. It is pleasure of having with us top management team from Alkyl Amines represented by Mr. Yogesh Kothari, Chairman and Managing Director; Mr. Kirat Patel, Executive Director and Chief Financial Officer; Mr. K. P. Rajagopalan, Corporate Adviser; Mr. Chintamani Thatte, General Manager, Legal and Company Secretary; and Ms. Kanchan Shinde, Senior Manager, Finance and Accounts. And without further ado, I will now hand over the floor to the management for making the opening comments. Over to you, sir.

Thank you, Nilesh. Thank you, HDFC Securities. It's a pleasure to talk to the investors, and this time, we are at the situation where the first 6 months have not been as good as what we were expecting. It's a challenging -- it was a challenging first 6 months, but things are looking brighter now, and we hope to do better in the coming months. For the knowledge of our investors, I will make a statement that we have started commissioning our acetonitrile plant, and in a couple of weeks or rather couple of days, we should start the production. I would like to mention that this first 6 months rather in the last quarter was very, very challenging for us. Practically, each and every raw material of ours, the prices had gone up, in some cases almost 200% to 300%. Acetic acid, which is one of our major raw materials for making acetonitrile, had a real turbulent time. The product -- I mean, the raw materials which we were buying at -- in the range of INR 40, INR 50 per kg went up to INR 110 to INR 120 per kg. And this is something -- the price rise was not so easy to be absorbed in our selling prices. However, in spite of that, we did well. Our plants are running very well, and our efficiency also have been improved. Our new plant also will add to that, and we have also started our new project, which is coming up at Kurkumbh, for manufacture of our higher amines, and this will be one of the largest plants in the world. This plant should come onstream in the end of 1922 (sic) [ 2022 ], and this will also add up much more to our top line. We are also in the process of putting up new projects which are based on our R&D developments, and some of this will come up during the year. We have been fortunate that we were already [indiscernible] new products, which are going into the requirement of the new drugs which are necessary for the COVID treatment. So this all are looking positive for the company, and I'm very sure that our performance should improve much more than what has been done in the last 6 months. I would put it now that maybe you should ask questions, and one by one, our people will -- we will be able to answer. I have with me here, Mr. Kirat Patel, Mr. Rajagopalan, Mr. Chintamani and Kanchan Shinde. So amongst ourselves, we should have most of the answers to your questions. I think I will put the questions -- I mean, I'll ask you people to ask the questions now. Thank you.

[Operator Instructions] The first question is from the line of Karan Khanna from AMBIT Capital.

Yes. So sir, firstly, we've seen that your margins have been impacted because of the raw material prices, but our volume growth for the quarter has been fairly strong. However, can you briefly talk about why sequentially also quarter-on-quarter, there has been a decline in the revenue and also split between volume and realization growth for the quarter?

Kirat, maybe yes.

So quarter-to-quarter, we have had declined of about 10% or so in volume, largely due to a few of our products which go into pharma and agro having issues with the supply chain of our customers. By which I mean, a couple of things that have happened, which is that they buy alternate raw materials from other sources, mainly China, and there has been a disruption in the supply of the other raw materials that they use for their APIs or the technicals. And this has caused them to lower their production of the API and affected our volume growth. So the market has temporarily been kind of upset by these small incidences. And all in all, about 10% of our volume has been lost due to this market. But we hope that all this will come back because the supply chain is kind of getting sorted out and people are going back to the regular production. So basically, it's largely -- it's volume based. Prices have been more or less constant, unable to pass on the full brunt of the raw materials price rise, but they have been respectively up.

Sure. Sir, on the raw material front, from your past experience in quarter like this where you have seen a sharp impact because of the inflationary trend, post how many quarters were you able to pass on these price hikes to your end customers? And as a follow-up, what are the trends that you are witnessing on the raw material front in the month of October and early November?

The prices now of the raw materials seem to be stable. The volatility has kind of eased off because I think it is largely -- you can see it started with the crude prices going up and then resulting into petrochemicals and then downstream. So that seems to have stabilized a bit. Whether it will remain at this level or go up or down, it's a bit difficult to predict. But at the moment, it seems to be stable. And perhaps we hope that it has peaked, the raw material prices have peaked.

And as a follow-up, talking about passing these on to your end customers, how [indiscernible] 1 or 2 quarters.

Yes. It takes about a couple of quarters before we can pass them on to our -- pass on -- where we never managed to pass on the full brunt, but most of it on to the customer. Some things we will have to absorb.

Sure. And lastly, on the CapEx front, can you please talk about your overall capacities for the INR 600 crores, INR 700 crores [ growth ] CapEx over the next 2, 3 years? And we've also seen share of exports have been declining and were below [ 70% ] in FY '21, possibly because you were prioritizing the domestic demand. But going forward, do you have plans of setting up additional capacities to cater to the export market also because currently, you're catering only to roughly 10 countries?

Okay. So let me first answer the last question, which is the export. The export has done well. I mean, in fact, in the last quarter, the exports has been fairly strong. And going forward, we think that exports will increase with our new acetonitrile plant coming on stream. Yes, there are some logistical issues in the exports because of the container and shipping crisis all over the world, which will get -- hopefully get sorted out over the next 6 months. And -- but at the same time, I think our exports will probably play a larger role in our turnover than they traditionally happen. As far as the CapEx is concerned and capacities are concerned, yes, we have just finished implementing the acetonitrile plant which was about INR 160 crores investment, and hopefully, that will start giving revenue in this month onwards. As far going forward, there are some small projects which the one hydrogen plant and other such small, small projects, which are due to be commissioned over the next 6 months, but the biggest project of the lot is the higher amines project, which is being put up in Kurkumbh to the extent of about INR 350 crores to INR 360 crores, which will be commissioned somewhere in December '22. So this year, our CapEx would be between INR 170 crores to INR 200 crores. Next year, it would be about the same. It will overlap between the higher amines plant and the acetonitrile and small, small other issues.

Sure. And any sense on the overall capacities? Is it the next...

I think we have earlier stated this that our amines, aliphatic amines capacity will go up by about 30% once the Kurkumbh plant is onstream. And acetonitrile, as we have stated earlier, will go to about 30,000 tonnes a year from our current about 12,000.

[Operator Instructions] The next question is from the line of [ Shridhara ], individual investor.

My first question is on are these prices at the peak? Or based on your experience, you think there is still a chance of these prices going up, the raw material prices, basically?

I think this type of prices have not been seen too many times before. I have not seen these high prices before. But this is all -- I mean, it can happen any time. But we hope that it does not continue.

Okay. And my second thing is you mentioned about your logistic issues. Are we still facing some logistic issues? What kind of -- either it's container problems? Or what is it exactly?

Yes. What happened, I think, a couple of months ago was that there was a shortage of containers. That seems to have sorted out. However, the freight rates are still fairly high compared to what we were used to in the past. For example, if something was about $2,000 per shipment, it has gone to $8,000 and $10,000. Fortunately, some of our higher-value products are able to absorb that. So it's not such a big issue. But availability has got -- looks like it's slowly being sorted out. The prices remain elevated.

You mean to say like there is a problem with availability of raw materials for us, or logistics?

No, no, no. You are talking about logistics where the availability of containers and shipping. Where raw materials are concerned, availability is not an issue. It's the price. Whether it is the chemicals or it is our utilities like coal and steel and all that, availability is there, but the prices have gone very high. Compared to 1 year ago, something like 100% to 300%. Compared to even previous quarter, they have jumped by 30% to 60%.

Okay, sir. And in the meantime, the Chinese supply is getting over into India in the meantime? They are able to...

Not really. In fact, the Chinese imports, especially going to the pharma industry, is having challenges. Our industry is having challenges because of that. And this is somewhere we are also getting hurt because our products, which are being used by the same pharma companies, are getting affected in their purchase. Hopefully, we hope that this gets sorted out fast.

The next question is from the line of Kishan Gupta from CD Equisearch.

So actually, I want to understand this, how much of this INR 350 crores revenue this time has come from acetonitrile?

We don't actually break up our revenue product-wise because there are maybe something like 30 products, and each of them are contributing to some extent. The larger products may contribute between 10% to 15% of the revenue, and the smaller products all the way to 1% and 2%. So it's a wide range, but we cannot comment on an individual product.

So you mean to say acetonitrile, in any which way, will not be more than 15%?

In which way? In value of total sales, right?

Yes, yes.

In that range.

Okay. And essentially, if you see like at what prices, raw material prices, you said acetic prices -- acetic acid prices, is it viable for you to manufacture acetonitrile?

We have been manufacturing even in the high prices. Our margins have come down in acetonitrile. So we hope that now it stabilizes because at the high price of the raw materials, it's difficult for our competitors also to produce and market.

And what sort of challenges are you expecting or some sort of disruption in acetonitrile market because of your higher capacities going onstream now?

We do not expect too many disturbances, but there are some new areas which have -- which are coming up within India as well as internationally. So our -- from our point of view, these are positive signs for us. We are very competitive in our production. So we can take the challenges. As far as the pricing is concerned, earlier, we did not have enough material to market. So that has now sort of ended, and we will be able to sell more.

Okay. So as you said, like that you are -- you don't expect much disruption. So like, as you went about increasing your higher raw material price increases to customers, so what sort of pricing power -- because this is a specialty chemical. So what sort of pricing power do you have essentially for acetonitrile do you think?

So there is always a situation where you have to stop somewhere because, I mean, the consumers also don't want to produce something at higher input costs. But so far, we have been quite comfortable in selling our products, and most of the consumers have not had any major issues with that because this must be forming a very small percentage in their input costs.

Okay. So essentially, you're saying that passing on raw material prices does not appear to be a big challenge for acetonitrile?

In some -- in some products.

Sorry?

In some of the products.

Okay. That includes...

Quarters. It's not instant.

[Operator Instructions] The next question is from the line of Dhruv from HDFC.

Sir, just wanted to understand how does this global freight rate, sea freight rate changes influence our business. I mean, I'm just wondering from an import perspective, does it help us in pricing a product better because the imported blended price of the alternate product has become higher. Does that benefit us or no?

No. Actually, the market share of imports for most of our products has been marginal, 5% to 10%. So they are not a key driver towards the price setting. Wherever we have about 40% -- 30%, 40% of our turnover is internal competition is more than the domestic. The remainder also, we have a fairly dominant position in the marketplace. So it doesn't really take too much of a role, the imports. Yes, marginal health is there whenever there is some freight differential, but people like the Chinese and all, they adjust their prices accordingly.

Okay. Okay. Sir, I used to think that ethylamines -- I used to think methylamines are largely domestic, but ethyl has a decent import share or Balaji, they reduced over the years?

That is reduced. Between our 2 plants and Balaji's plants, we must be having more than 80% market share between the domestic players itself.

Okay. And methyl was anyways largely domestic?

Yes, methyl was largely domestic because freight is -- transporting methylamines is a bit difficult because of the nature of the product.

Got it. And sir, the second and last question was -- the second and last question was on the acetonitrile. Now the -- if I'm not wrong, the alternate is the acrylonitrile as a byproduct of -- and acetonitrile come as a byproduct of that. Given for our route, the RM cost is increasing. Does it -- and I'm not sure what's happening with the alternate route. Does it, in any sense, pose a challenge even if the raw material prices stay at the current levels?

Personally, I don't think so because the alternate raw materials, the input cost for them also have gone up. Plus the route which we are using while acetic acid and the product which comes out of that is of a much higher purity, without -- with hardly any impurities. So many applications, the route which we use has a better use. So we do not see any -- I mean, rather acetonitrile route is not going to increase or the cost is going to go down by that.

Okay. Sir, are we starting to get a premium for our acetonitrile versus the alternate route now?

We always are getting because otherwise, we would not have been able to sell at all.

Okay. Okay. So okay. So -- sorry, I'm a bit confused. So for a pharma application, if I'm just wondering for pharma application, if somebody has to buy acetonitrile, given your priority level is better and they are, I believe, in terms of quality requirements, very particular. So the ultimate will never be bought, irrespectively, price, right? I mean, whatever the price differential will be...

It depends again on end application. In some cases, they were using it earlier also, which they can still use it. And if they are able to get something purer, the same application and at competitive prices, I'm sure they would prefer to use the route which we use.

We have the next question from the line of Reena Shah from Elara Capital.

Sir, I just wanted to ask on acetonitrile itself. Now, what kind of market size which is there in India and over the globe which you are looking to capture where? I think how the global capacity, which you can give some light on how global capacities are there? As we are seeing Balaji also expanding in this particular product, how the dynamics of this particular product would change from here?

I think the international sizes are -- the capacities are around 150,000 tonnes to 200,000 tonnes. And some of it is in China, which is also using rather most of their production is via the both which we are using. Balaji Amine's route is also what -- I mean, what the way we are using. Internationally, acrylonitrile route, I have not seen much changes taking place. And I -- and they are trying to be -- I mean, well, making acetonitrile, and acetonitrile coming out as a byproduct. We are trying to improve our own efficiencies by making sure that acetonitrile production in that which comes as a very small byproduct is reduced. So we improved our own efficiencies. So it's all the -- it's all a circular type of a thing where some cases here and there makes a lot of difference.

Okay. And sir, with this expansion of capacities, how much raw material that would you have to import or do you have to dependent on imports from other countries?

Acetic acid is the main raw material which we use for that. So that is all going to be imported. And [indiscernible] also directly comes imported only. So it's all imported.

The next question is from the line of Kavita Thomas from First Global.

Yes. So sir, I had just 2 questions on the margin front. Now sir, we have -- we have always had margins which have been upwards of 25%, 26% -- I mean, 28%, 30% has been our EBITDA margins in the past while this quarter, it has come down to around 22% largely, as you explained because of increased raw material costs and obviously the other logistic-related cost. So sir, how do you think will this -- because as you mentioned, the logistic cost will take some time to normalize. So overall, how do we see this situation getting back to normalcy? What is your views? And what is -- could you throw some color on that, sir?

Yes. So the EBITDA margin, which you mentioned, earlier, it has been fluctuating. It has -- earlier, it used to be between 18% and 22%, and then it slowly started rising about 1.5 years ago and went up, as you said, up to about 28%. Then the last couple of quarters, they have been dropping. That was the peak, 28%. And the 22% or 23%, which is this quarter's margins, are something which we have a result of the raw material price increases. The price increases are not necessarily due to logistical issues, but because of the supply chain from crude to petroleum products to downstream commodities all the way, prices have been rising. And it has side effects on various things like coal, and coal has effect on steel. And generally, the basket of goods which we buy, all the prices have risen. So that is the reason why the EBITDA margins have been squeezed. We have not been able to pass on this totally to the customers because it takes a couple of quarters before it is passed down. The other view also is that we think that this is the highest we have seen of these prices. And hopefully, this is a trend which will now go in the opposite direction, if not at least stabilize. So this is the overall view of why the EBITDA has gone up and down.

Yes, sir. I only wanted to understand further in terms of -- like how long do you think will this continue? Because though they have peaked out, as you said, to pass it on to the customers, it will take a couple of quarters. So will be, for, you know, if there are logistical-related issues, primarily since we are importing ammonia, acetic acid. So all these products, raw materials are at their peaks in terms of prices. So when do you think will situation get to a better scenario where raw material prices will soften and will get back to a situation which we enjoyed probably a couple of quarters back?

Very, very difficult to say because, for example, I would just say that is it possible for you to predict what the crude oil prices will be? It's the cause -- root cause of most of these price increases. So I mean, it's the largest commodity in the world and nobody is able to predict that. So I would not venture a guess about where the prices would go. And my -- I mean, the best guess is on the past, and this seems to be the highest we have seen. So hopefully, it doesn't go further up and then hedge now in the opposite direction.

Also sir, I just wanted to understand in terms of like for these raw materials, which we import, and obviously, there are disruptions even from China. So is it a possibility that we have some sources from India itself? Or is that kind of possibility there? Or we still have to depend on...

Our raw materials are not coming from China. Our customers' raw materials, some of them, are coming from China. So most of our raw materials are coming from Middle East or Europe or America. I don't think we are importing anything from China.

Okay. So as you've indicated, sir, these prices are almost as you feel it's peaked out now?

That's our best guess. We could certainly hope, and we could turn out to be wrong. I mean, people feel that $80 barrel is a high price, but it has gone to $110 in the past also [indiscernible].

We have the next question from the line of Mr. Nilesh Ghuge from HDFC Securities.

Just a couple of questions from my side. Sir, the first question is on the government production-linked incentive scheme. So what is the -- it has been already 1, 1.5 years announcing this PLI scheme. Sir, what is the ongoing impact being observed by you after the scheme announcement? Have you seen any change in demand or any projects which are coming up over the next 2, 3 years so that they can take the benefit of the scheme announced? And what is the impact or the benefit to amines industry?

The PLI scheme is going to be rolled out over the next 5 years. Definitely, it will have an impact on the pharma industry where they have -- it is one of those industries which have been -- sectors which have been highlighted. However, the bigger impact is the move away from China more than just the PLI because the PLI will affect people's margins by 1% or 2%, considering the amount of money that is being promised to people based on production. But as a majors, that sector as a pharma sector is very, very optimistic of growth, both domestic and in terms of their export potential. And the disruptions in China is helping Indian manufacturers quite a bit, irrespective of the PLI. It is just the talking, it's not the real base cream. I mean, the real thing is the change in the attitude of people to try and move to more -- to diversify their source of raw materials.

And also it will create lot more jobs. That itself will be uplift to the overall economy, which in turn always helps most of the industries.

I think if you can -- it's just a small straw in the wind, but the pharma city outside Hyderabad, that big multi-acre site that the government is developing, is totally sold out to the pharma. You cannot buy another plot there. So you can imagine what people are thinking forward of what they will expand into.

Okay. Okay. And sir, second question on this -- on your product portfolio. See, currently, if I look at the Alkyl Amines products which are very close to APIs, maybe 2 steps away from APIs, so are there any plans of the company to enter into API manufacturing?

Not immediately.

Okay. Okay. And sir, we touched up on this CapEx plan. We are planning about INR 1.7 billion this year and next year as well. So apart from that, for your future expansion, are we looking for any land parcel in and around the -- wherever, in the Maharashtra or in Gujarat, further future expansion plan?

Yes. We are looking -- we are looking for parcels of 100 acres, anywhere from 70 to 150 acres. But I would also like to state that all our CapEx requirement, all the plans which we have till September of '23 or even later, we have enough land available currently.

Okay. Okay. So you are looking for the plant, the land parcel for future expansion, beyond September 2023. Okay. Okay. And sir, in our last interaction, you said about the debottlenecking of your -- the brownfield expansion of your DMAHCL. So what is the current status of that? And I will also like to know the status of your aliphatic amine expansion project.

The aliphatic amines, we said we are putting up a new project in Kurkumbh with project cost of around INR 350 crores to INR 360 crores which will come up end of '23 -- sorry, end of '22. And what was the other question?

DMAHCL.

DMAHCL is a continuously we go on adding capacities to our existing stack of capacities. And so every year, you will see our capacity going up, which will really help us selling more of DMAHCL.

Thank you. As there are no further questions from the participants, I now hand the conference over to management of Alkyl Amines Limited for closing remarks.

Well thank you very much, everybody. And I hope that we have been able to clarify some of the points which have been raised. As I mentioned earlier that so far, this last first half has not been so good, but it's not been so bad also considering the conditions prevailing. As we mentioned, we hope that the raw material prices to stabilize and we are able to -- and our new projects, which we have planned, and one of them acetonitrile which is just starting that will add to our top line as well as bottom line. So thank you very much, and I thank my colleagues over here, and I wish everybody a happy Diwali. Thank you.

Thank you. On behalf of HDFC Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.