Balaji Amines - A niche duopoly
When you a see a table like below in an annual report it immediately stands out. In 24 years
Sales are up - 100X
Profits are up - 155x
All at a decent ROE, no wonder long term shareholders / promoters have clearly acquired transformative wealth
Balaji Amines has come on my radar multiple times in last 10 years, however I gave it pass every time as I havent worked much on industry dynamics. But in 2020 while working on Diamines chemical idea I figured out that only Indian competitor creating capacity is Balaji Amines so I had to study them.
NB - I started tracking Diamines chemical idea in score card and we removed as valuations started to become lofty and after digging through I wasn't able to figure out how will they remove supplier dependency, so we dropped the idea
The Balaji Amines annual report is must read for anyone who is invested in Amines, here are some of the key takeaways that are worth noting
Before take this course on what are amines and come back
Speciality chemicals is a rising tide
Specialty chemical market in India was valued at Rs. 2,357 billion in FY18 and is expected to reach a value of Rs. 4,527 billion by FY24, expanding at a CAGR of about 11.9% during the FY19-FY24.
The efficient and smart players should comfortably grow in mid 20s,In recent years, the sales volume of specialty chemical manufacturers in India has increased due to stringent Policies in regulatory norms, slow economic growth and rising cost of labour across globe.
Amines Industry is regional / domestic focussed
Aliphatic amines are hazardous in nature when not handled with proper safety during transportation and hence the hazardous nature reduces the threat of imports.Globally, the amines industry is well structured with a small number of participants, typically not more than 3-4 players per region and relatively balanced in terms of demand and supply.
Freight is a big element of cost, which makes imports uncompetitive. High shipping cost and hazardous nature of the chemical, which prevents high inventory levels, also force customers to source locally rather than import it.
Oligopoly is one of the most favourable structures for investors.
High Entry Barriers
Globally, amines technology is closely guarded
High capital-intensive projects
significant investments required in research and development (R&D) to develop set of products to be offered
hazardous nature of the chemical, which prevents high inventory levels, also force customers to source locally rather than import it
More Importantly in India its Duopoly
Absolute size of the industry is very small making it unattractive for any new player to enter the market , In India however it is a duopoly - Indian aliphatic amines market is substantially consolidated with two accounting for 95% of total market share.
But unlike BSE / NSE in indexes where NSE is big brother, Balaji Amines is near equal player to Alkyl Amines and both have many non over lapping products
Crude linked raw materials
Crude is notoriously volatile, However, raw-material cost pass-through to end customers is standard practice in the industry and one can verify with below operating margins for both companies which have improved in last decade
Reverse engineering and import substitution has been key theme for growth
Company's strength is to identify and develop the technology indigenously and identify the raw material of the particular product and undertake the R&D to develop the same in India. The selection policy for end product is to either be the first or second manufacturer in India - to substitute products that are being imported into the country.
Balaji is entering in Diamines space through Balaji Speciality Chemicals Private Limited
Currently, there is a supply shortfall of ethylamine of about 9,000 metric tonnes per annum in India, which is met by imports. It is expected that this supply gap is likely to increase to 15,000 tonnes per annum in coming two years’ time. They will be well positioned to address this opportunity of increase in domestic demand.
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The listed company only owns 55% in subsidiary (sadly) which could do about ~INR 400 crores turnover and if Diamines margins are an indication then pretty decent margins too
I haven't done any detailed numbers on them but FY21 onwards they should be able to clock INR 150 crores bottom line (Including subsidiary) and continue to grow in mid teens top line and bottom line wise.
Should be an interesting catch at 15-17 times earnings
In past 5 years that has been lucrative (red lines in below chart)
Chart Source - Screener.in