Alkyl Amines Chemicals Ltd

NSE:ALKYLAMINE

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Alkyl Amines Chemicals Limited Q2 FY '23 Earnings Conference Call hosted by HDFC Securities. [Operator Instructions]

I now hand the conference over to Mr. Nilesh Ghuge from HDFC Securities. Thank you, and over to you, sir.

[Nilesh Ghuge, analyst]

Thank you, Tanvi. Good afternoon, all. On behalf of HDFC Securities, I welcome everyone to this Alkyl Amines conference call to discuss the results for the quarter ended September 2022. 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; Mr. Chintamani Thatte, General Manager Legal and Company Secretary; Mr. K.P. Rajagopalan, Corporate Advisor; and Ms. Kanchan Shinde, Chief Financial Officer.

Without further ado, I will now hand over the floor to the management for making the opening comments. Over to you, sir.

[Yogesh Kothari, executive]

Thank you, Nilesh, and thank you from the investors listening. I just want to start off by saying that last few quarters are very challenging and we hope that things will be better now. I will like to say that we have a few projects planned and already some work has been done. One of them would be a high-capacity ethylamines plant which will be coming up by May, June '19 -- I mean, 2023, and we expect that this will help us in our future sales and other things. We are also going to then utilize some of the plants which may be free after this new expansion and new products which we are planning, some of them may be done on the existing plant.

I am quite confident that the new products which we are planning are likely to be with you for the company. And in future, this will contribute a large amount to company. These last few quarters were a little bit challenging, mainly because of pharma industry in India was going through a dull phase I would say, as well as several of other raw materials and our main utility coal had substantially -- they are seeing a substantial price increase. Some of the raw materials have started coming down, however, some are still at the high rates. Adding to this of course is the conflict between -- in Europe which is going on and that has added to several cost increases in some areas.

I think I will now put -- I mean the investors can ask questions now. If any things are there, please let us know.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Nirav Jimudia from Anvil Research.

[Nirav Jimudia, analyst]

So I have 2, 3 questions to ask. Sir, first on your opening remarks, you mentioned that the new products could substantially increase our turnover going forward and for which we may be planning to put up around 25,000 to 30,000 tons of capacity. So if you can just elaborate on in terms of the opportunity size of the number of products which we are planning to put up? And are these imports substitute products, or are they mean for the export market?

[Yogesh Kothari, executive]

Well, let me say that this new capacity which we'll be adding could be for some new products which would be largely import substitution. And these are developed within our R&D, and they are at a stage where there will be commercialize in the next few months as well as may be in a year's time. Some of them are derivatives of the amines, but mainly most of them are new products. And our current expansion which is going on will be on ethylamines that will be done when we finish by May, June next year.

[Nirav Jimudia, analyst]

Correct. So, sir, in terms of the opportunity size, in terms of the sales potential of each of these products, not today, but whenever they will be fully utilized, how much could be the sales potential of the products which we are going to introduce from the expansion what we have announced very recently?

[Kirat Patel, executive]

Nirav, this is Kirat here -- Kirat Patel. The sales potential at full capacity of these products, of course, the market opportunity is much bigger, but what replies as our market share, say, 3, 4 years down the line when full usage of our assets should be made, could be between INR 600 crores to INR 800 crores on the top line.

[Nirav Jimudia, analyst]

Correct. And are these products similar to our existing user profiles in terms of pharma agro? Or these products are developed for some newer user industries?

[Kirat Patel, executive]

Largely, it's -- the market is the same as [indiscernible]. There are -- range -- it's a range of products. So there are different uses for different, but the same industry which we now see [indiscernible].

[Nirav Jimudia, analyst]

Correct. Sir, my second question is like in past of -- one of our annual reports previous -- like some 13, 14 years back, so when I was going and reading them, one of the key issues which we are facing earlier was the power cost. Of course, it was internal to us, and then we gradually improved and reduce our per ton consumption also. So like currently, when in our Board meetings and discussions, what do you feel? Do you feel that are there any such other costs which where there is a scope for improvement? Or like some of the key intermediates which currently we are buying from the outside world and could be added through process innovation in our product portfolio which could help us to improve the margins further? So which -- again could be internal to us in terms of cost efficiency as well as including the intermediates to our finished products.

[Yogesh Kothari, executive]

So what we are doing now is we're adding up solar capacity which will be definitely a lot of saving in the electricity costs. Our coal requirement is mainly for generation of steel which is one of our main inputs. So that is something which we are not able to cut down, but to use high temperature boilers to use turbine to make more power, in this way that we also contribute to our bringing down the cost of power.

[Nirav Jimudia, analyst]

Correct. But sir, are we adding any or thinking of putting up some of the key intermediates which currently we maybe not producing or buying from the outside where which could help us in improving our process side innovation? Because product side you mentioned, we have been already introducing the products, which are -- some of them are import substitutes. So that would be taken care of, but are we also planning to put up some of the intermediate plans along with this, something of that sort and understanding from that point of view?

[Yogesh Kothari, executive]

I'll tell you the raw materials which we use are mainly various ammonia and similar type of products. Now, these are produced in large plants, and we don't have intentions in going into these type of plants because that's not our expertise. And there are many plants all around the world from whom we can buy this. Ammonia, of course, is a separate thing because most of it is imported from abroad and some is made for fertilizer industry in India. And actually, the ammonia prices have really hit us in quite a significant way. We only hope that this conflict in Europe get to a pass because that is to some extent driving the cost revenue.

[Nirav Jimudia, analyst]

Got it. Sir, and the last question to this is, do we still maintain our long-term volume growth of 15% CAGR for next 5, 6 years, which we have been already -- earlier indicating? Or do we want to change that guidance based on the Q2 numbers or probably the outlook of the disruptions going on at the global levels?

[Yogesh Kothari, executive]

Yes. So at the last con call, we had indicated that it could -- we look at our long-term listing of [ 10% to 15% ], which we have more or less achieved in the last 10 years. However, this year, I don't think we will be able to -- we may be on the lower side of this estimate. And it looks a bit of a struggle given the environment right now. So, yes, it will definitely be a struggle for this year, but I think as things settle down, we can go back to that 10% to 15% growth rate in the volume, especially the new products coming in and the old products also have an organic growth.

[Nirav Jimudia, analyst]

Correct. And sir, this Europe, what you told about in your opening remarks, the disruption is going on. Amines is predominantly produced in Europe also. So could that throw us an opportunity to get some additional volumes if the disruption sustains for a longer period of time? Could those volumes which are currently being produced by Europe come to us and thereby we can capitalize on those volumes and fill up our capacities faster than expected? Do you see -- sense those sort of opportunities?

[Yogesh Kothari, executive]

Well, we do not see too many opportunities like that, but there is always a possibility if the conflict drags on for more time.

[Operator]

[Operator Instructions] The next question is from the line of Pujan Shah from Congruence Advisers.

[Pujan Shah, analyst]

Sir, my first question would be on aliphatic amines which is like we have investment around INR 400 crores, and we would be around like -- I was reading the annual report and saying we will be commissioning next 10 years. So could you just share your progress on that part for that?

[Kirat Patel, executive]

As Yogesh bhai mentioned a little earlier, the INR 400 crore aliphatic amines plant coming up in Kurkumbh will be commissioned somewhere May and June of the year 2023, which is say about 6 to 8 months from now. And we are -- already mechanical completion is planned around in April. So we are on schedule more or less and within the budget.

[Pujan Shah, analyst]

Okay, sir. So the Dahej plant, which we have been commissioned and been like planning to get on the route on -- in March '23. Is it on the streamline? Or it's been like some early stage on or like [Technical Difficulty]

[Kirat Patel, executive]

The Dahej plant -- amines plant, the Kurkumbh plant is ethylamines plant, C2.

[Pujan Shah, analyst]

Okay. And my second question would be what is the current utilization at we are operating because of this farmer scenario? And how like -- as we have been leading on the U.S. structure has been destocking currently now and pharma is getting now some traction on to the product? So how you have been setting your order book? And how you are seeing this next H2 for your specific company?

[Kirat Patel, executive]

So if I get it right, you're asking was the pharma industry's difficulties affecting us. Is that the question?

[Pujan Shah, analyst]

No. My question would be, see the pharma industry has currently now been like the pain is behind us right now, so where we are leading in the pharma sector. So are we seeing a better traction for H2 compared to H1? And what are the scenarios probably which would increase like, is it for H2, or we have been eyeing for FY '24 there?

[Kirat Patel, executive]

So, yes, I got it. See, the pharma sector had 3 problems related to it. One was an inventory build-up, one was difficulties in export, and the other was a supply chain issue with China. Yes, they all are saying that slowly, slowly it is getting sorted out and they hope to do better in the second half. And we are also hoping that they will in the second half as they say, in which case we are of course very positive about the outcome. But there are always some unexpected things that happened. So we must put some kind of cautionary note on that. Hopefully, they have pharma industry has sort routing stock.

[Pujan Shah, analyst]

Okay. And sir...

[Kirat Patel, executive]

The exports and the supply chain issues may recur not that.

[Pujan Shah, analyst]

And what is the current utilization like the scenario is a bit of a sluggish?

[Kirat Patel, executive]

The current utilization of our plants?

[Pujan Shah, analyst]

Yes.

[Kirat Patel, executive]

We have about 15 plants and it's -- there are some working at full capacity and some at reduced capacity, but on the whole, I would say we would be about 70%. But we keep adding capacities because there are specific products and specific items which there is a shortage. And there is something else where we are having capacity with a demand situation. But yes, on the whole overall for the company, may be between 70%, 80% capacity utilization. We do have headroom in most products.

[Pujan Shah, analyst]

Okay. And sir, for the agrochemical, if you can share the industry you and yours -- your position in that path? How is the industry going on currently?

[Yogesh Kothari, executive]

Well, as far as agrochemical industry is in India, they appear to be doing quite well, largely because of the need within India as well as for the export markets. And some are of course herbicides, some are pesticides. So depending on the product, our -- some of the amines do go into that like glyphosate, our isopropylamine goes which itself is a quite decent value. And many other agrochemical products have made. So hopefully, that remains -- I mean it continues like that and some new capacity is also might be coming up which will help us.

[Operator]

The next question is from the line of Nirav -- sorry, Harsh Shah from Marcellus.

[Harsh Shah, analyst]

A question on the pharma side. So incrementally quarter-on-quarter, we have seen quite a bit of decline in the top line. However, in the pharma side, the issues around export issues and supply chain issues, they have only improved in this quarter compared to Q1. So in that context, why are we seeing such a sharp decline in the top line?

[Kirat Patel, executive]

Our top line decline is largely value-driven, not volume-driven. There has been a drop in prices [indiscernible] because even the -- some of the raw materials have stabilized and reduced and partly, of course, competition.

[Harsh Shah, analyst]

So can you give us some numbers around the volume growth for Q2 as well as for H1?

[Kirat Patel, executive]

We don't speak volume, but volume has been more or less flat. We don't disclose exact numbers.

[Harsh Shah, analyst]

Okay. And for H1 FY '22, that is last year, other numbers also higher because these are supplying for some COVID-related drugs which we are not supplying right now.

[Kirat Patel, executive]

See, what I was referring to volumes being under stress is quarter-to-quarter, while over the half compared to last year as you're referring to, there is a growth. And in spite of the fact that there were some products which we were supplying for COVID-related medicines which are no longer there. And pharma industry is getting back to what you might put normal. But first, they have had inventories which they have to run down.

[Harsh Shah, analyst]

Okay. So would you be able to quantify volume growth in H1 year-on-year?

[Kirat Patel, executive]

No, we don't actually give the numbers. We just give you an indication of the growth. So the growth of H1 to comparable half year is, there has been a growth. About 1/3 of the growth in the top line is volume and about fixed price.

[Operator]

[Operator Instructions] The next question is from the line of Jaiveer Shekhawat from AMBIT Capital.

[Jaiveer Shekhawat, analyst]

Sir, firstly, the question on the capacity expansion that you're undertaking. Could you specify the overall domestic demand for the new products, the imports that are coming into the market? And if you would be the sole manufacturer in India for these products?

[Kirat Patel, executive]

See, let's start with the first one, which we have already talked about, ethylamine plant which is coming up. That is a well-known market already domestic, a bit of the product will go to export markets. But that is not a significant content. We were running out of capacity of ethylamines and methylamines, so we had to expand, and that's why we have to put up this plant. There is a steady growth in the ethylamines market, and we hope it will continue to grow because on the back of the pharma doing well.

The other 5 products, we have planned capacities, I think, aggregating between 25,000 to 30,000 tons, which may take a little time to get into this market. The markets are both domestic and exports. One or 2 products are export-oriented and the others are domestically focused. So it is going to take us time, and they're going to be launched from, as targeted, from maybe December this year, the first one, and rolled out over the next 18 to 24 months for every quarter or 6 months, 1 or 2 products. And we will talk about the products once they are in the market.

[Jaiveer Shekhawat, analyst]

Understood. And sir, what kind of ramp-up are you looking -- what gives you the confidence to ramp up capacity utilization for these new specialty chemical and amine derivatives products that you look to launch?

[Kirat Patel, executive]

Well, we choose products where there are no more than 1 or 2 people who are making it. We would like to be among the top 3 producers in the world. So we choose some specialties in amine product side. And of course, in the domestic this thing, there is -- as you know that there is -- in the amines and the derivatives and the specialty, there are hardly any players.

[Jaiveer Shekhawat, analyst]

Sure. And sir, on the top line growth itself, what we have seen is even your competitor has seen pressure on their top line. So is it because of the competitor that we have to also pass on the benefit to the end users because you have seen the RM price correction?

[Kirat Patel, executive]

Yes. You are right because who decides the price, as we keep saying, the price is decided by the market, and the market is decided competition. So it's very rare that unless you're a monopoly, you will get a chance to decide prices. So you're right, it's the competition which is deciding the price.

[Jaiveer Shekhawat, analyst]

Right. Because, sir, what I remember is even in, say, prior calls, what the management had guided for is that probably they may not look to pass on the entire benefit to the end users, given the RM brunt was not passed on to the end users. So is there a change that's happening over there?

[Kirat Patel, executive]

Well, there is -- as you can see, the capacities are there in the country. The market share has not grown as fast as expected in some of these products. So there are going to be pressures until the markets catch up. It always follows a wave function. Sometimes it gets very tight and sometimes it -- you have a long situation.

[Operator]

The next question is from the line of Anurag Patil from Roha Asset Managers.

[Anurag Patil, analyst]

Sir, in the second half, how do you see the margin trajectory panning out?

[Kirat Patel, executive]

Well, it's a bit difficult to predict the margin this thing, but [ we've been ] able to defend a certain set of margins. Of course, a couple of years ago, we had enjoyed a very wide increase in margins. And we are now back to normal. And I think the margins is something which we'll be able to probably defend because what we have in terms of raw materials and finished good prices, our [ comparisons about the same consequence ]. And hopefully, sensibly the market will settle to a reasonable price and cost equation. But it's very difficult to what tomorrow's margins are going to be, as you can see that it's difficult to predict even the cost of the largest commodity in the world, oil.

[Anurag Patil, analyst]

Yes, understood. And sir, second is just a clarification. On this recently announced expansion, you mentioned revenue potential as INR 700 crores to INR 800 crores. Am I correct?

[Kirat Patel, executive]

That is for the new products, not including ethylamines. The other new 5, 6 products which we are launching over the next 24 months.

[Anurag Patil, analyst]

Okay. So that is the market opportunity? Or are we saying the revenue potential [indiscernible]?

[Kirat Patel, executive]

No, the market opportunity is greater. This is what we think we will be able to capture.

[Anurag Patil, analyst]

Okay, sir.

[Operator]

The next question is from the line of Nirav Jimudia from Anvil Research.

[Nirav Jimudia, analyst]

So if you can let us know in terms of how many new products we have introduced on the derivatives and the specialty side over last 5 years through our product team? And if you can highlight in terms of its sales contribution, has those products contributing currently 4% to 5% of our sales? So does some of the products that we have introduced over the last 5, 6 years have now been contributing around 4% to 5% of our sales? So have those products matured to that level?

[Kirat Patel, executive]

Well, no, I don't have the exact numbers, but if I look at a slightly longer period, a 10-year period, the products which we have launched in that period, definitely are contributing to both top line and bottom line quite large amounts. Of course, there has been -- the last 3, 4 years, we haven't launched too many new products. In fact, I can think of hardly any. But earlier than that we had launched. And going forward, these 5, 6 products is looking to be adding maybe almost -- maybe 20%, 25% of our top line, significantly on the bottom line if markets hold up.

[Nirav Jimudia, analyst]

Correct. So, sir, generally, when we introduce the products. What payback periods we take into consideration? Because once we start introducing the product, then we try to capitalize, try do debottlenecking some of those products and then those incremental volumes also start giving us those incremental turnover. So what generally we think of a payback period when we introduced 4, 5 products at once as a basket of products in the market?

[Kirat Patel, executive]

So for a new product, the expectations on the paybacks are a little higher because the risks are higher before we spend money on it. But an existing product, obviously, the payback tend to be longer because we know the market and the risks are less. So we are satisfied with the longer payback period. But if you look out maybe a 10-year period of our company or even in the last 5 years, you will find that our return on capital employed is about -- between 20% and 25%. And that is something the minimum we expect.

[Nirav Jimudia, analyst]

Got it. Sir, second question is on the acetonitrile. So if you can make us understand the market of acetonitrile in India and globally what is it at currently?

[Kirat Patel, executive]

Well, the Indian market was in and around about 28,000 to 30,000 tons last year. It seems to have not grown. In fact, it may have had a small degrowth because the pharma industry has had a problem. The international market size, it's a bit of a guess because there's no data available fully, but we expect to be over 100,000 to 120,000 tons.

[Nirav Jimudia, analyst]

Got it.

[Kirat Patel, executive]

Probably more than that. Maybe 150,000 tons.

[Yogesh Kothari, executive]

Special thing in acetonitrile is lot of used material comes into India and people recycle it and use it. Even though the industries are not supposed to use, like the pharma industry and all, apparently some of them are using it, which is to some extent affecting tonnages. But this is something which is not going to stop. It will remain like that. So there's lot of waste material available all around the world.

[Nirav Jimudia, analyst]

Got it, sir. And sir, last on just a small clarification in terms of our other plant of ethylamines, which is going to get commissioned next year, how much time generally it takes for us to achieve the full utilization of this plant before we again go for some debottlenecking or some addition to the existing capacity of [ 33,000 tons ]?

[Kirat Patel, executive]

This is a little difficult question because sometimes we go completely wrong. If you remember, methylamines, which we commissioned in 2017-'18, and we had not expected to debottleneck it for another 5 years because we had gone from 50 to 100 ton. But within 3 years, we had to debottleneck it from 100 to 150 tons per day. But that may be an outlier. Normally, one would expect the first debottlenecking exercise to come up in about 5 years through 7 years from the time you put up the plant.

[Nirav Jimudia, analyst]

Got it, sir.

[Operator]

[Operator Instructions] The next question is from the line of Pujan Shah from Congruence Advisers.

[Pujan Shah, analyst]

One of my question would be in our new product side, how is the competitive intensity landscape if we are focusing specifically on the Indian demand of our new products? And are we seeing any intervening from the government in specific of import tariff for this product and that could be more of real advantage to our company?

[Kirat Patel, executive]

Sorry, you're saying how will we be competitive in the new products?

[Pujan Shah, analyst]

Yes. Sir, competitive landscape for the new products. And the second is, is there any import tariff applicable for the new products, which could be a growth demand for consumption of domestic demand?

[Kirat Patel, executive]

Well, the first question about competition update. As I mentioned earlier, when we do our shortlisting of new products, we try to see if there are not too many players in the field. And normally, 2, 3, 4 people, especially in the specialty chemicals business because it's a global this thing. And therefore, the competition is restricted because technologies are difficult.

The other part about the import restrictions planning or there are no certain specific import restrictions which help us in the domestic market. We have to compete in the marketplace with all the normal taxes.

[Pujan Shah, analyst]

Okay. Sir, and my second question would be, might be a very basic question, but wanted to understand is what is the product engine like, why our products are so efficient that the competitive is limited to 1 or 2 such companies like we have been restricted to duopoly or monopoly of the companies? Are these product has been mostly a CapEx-driven products or like it has been economies of scale where you have been profitable if you achieve a breakeven minimum capacity utilization? So what make this competition limited to each -- for this industry specific?

[Yogesh Kothari, executive]

No, I think the issue is that why are we going into these products. First of all, we do a significant amount of work on it to develop a product after finding out the feasibility of the product. Then we look at our manufacturing expertise in some of the processes which are there. And if it helps us to use the expertise which we have in some of the processes, we try to see that by producing this new chemical in the new plant maybe, that would help us because we already have some of the experience. Our R&D is very strong. We try to make sure that what we develop comes to a level which would be competitive all around the world. So the cost part of it, of course, we do study it. Otherwise, we don't go into it. So we will go into product which is showing some -- not some, decent amount of profitability, then we plan all these new products.

[Operator]

As there are no further questions, I now hand the conference over to management for closing comments.

[Yogesh Kothari, executive]

Okay. I think we had a very good interaction with people who wanted to know more about our products and all. Very confident that the new products which we are getting in, too, will be very successful. And our company will do better in the future. But we had some issues because of the market conditions as well as the raw material cost being so high. But hopefully, gradually, this will also [indiscernible]. We hope that the pharma industry in India has a better positive upturn, both from the local sales as well as from their exports. Well, I think I want to thank everybody who has been listening to this. And I think that should be okay. Thank you, everybody.

[Operator]

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