This article provides in-depth fundamental analysis of Alkyl Amines Chemicals Ltd
Alkyl Amines Chemicals Ltd Research Report by Reader
Q: Hello sir, I looked into Alkyl Amines Chemicals Ltd. Initially, the company looks good at the first possible glance. First things first:
- The profit is growing at 30% for the past 10 years and sales are growing at 17% during the same 10 years.
- Alkyl Amines Chemicals Ltd is paying normal corporate tax level of around 33%.
- Promoter holding too is at a comfortable level of 74%. In fact holding increased since 2008.
- ROE of 34% signifies that Alkyl Amines Chemicals Ltd is capturing the market share.
- Dividend yield is at 1.2%.
- P/BV is relatively higher of around 3 but since Alkyl Amines Chemicals Ltd is not a financial services company, so I ignore it.
- Operating efficiency is adequate as fixed asset turnover is more than 1.73 and its increasing for the past 5 years.
- Cumulative PAT is lower than cumulative CFO, which is quite good so company is getting its dues in cash.
- I have not calculated the receivables days.
- Dupont analysis: PAT margin is also increasing at a good pace and its asset turnover is also growing and the leverage factor is decreasing which justifies the high ROE and its adequacy.
I have not yet done the Buffett earnings retention test or a reverse DCF (my choice of intrinsic value estimation), since I have just came across this company recently. Therefore, I am yet to do an intensive analysis.
The cons, which I feel as of now, are two of them specifically:
- Dividend payout ratio seems degrading but on an average of 10 years, it is comfortable at 17%.
- Then another concern is its high total debt to equity of about 0.94. However, it has reduced its debt with the help of its cash from operations.
Considering its PE of 13, it has crossed the margin of safety line I guess. It had quite a bit of run in the past bull market, so does not come as a surprise to me. Thus, it can be accumulated as long as its sales and profits are growing, I reckon. I feel it is quite cheap considering its ROE and other factors. Let us see how things pan out. I would very much like to know your views on this company.
Thanks & regards,
Dr Vijay Malik’s Response
Thanks for writing to me! I am happy that you have started your own stock analysis and have pointed out the important parameters for analysis of Alkyl Amines Chemicals Ltd.
Financial Analysis of Alkyl Amines Chemicals Ltd:
Alkyl Amines Chemicals Ltd has been growing its sales at a decent pace of 20-25% year on year since last 10 years (FY2005-14). Moreover, this sales growth has been accompanied by improved profitability. Operating profit margins (OPM) of Alkyl Amines Chemicals Ltd have improved from 13% in FY2011 to 19% in FY2014. Similarly, net profit margins (NPM) have improved from 3% in FY2009 to 10% in FY2014. Sales growth with improved profitability is the first sign of any exciting investment opportunity.
Alkyl Amines Chemicals Ltd has been paying taxes at 28-34% rate, which is another good sign.
Operating Efficiency Analysis of Alkyl Amines Chemicals Ltd:
You have rightly pointed out that over the years; Alkyl Amines Chemicals Ltd has been reflecting improved operating efficiency. This is shown by increasing fixed assets turnover and inventory turnover. Receivables days are stable at 68 days, indicating that the credit terms with customers are stable over the years
You are right that Alkyl Amines Chemicals Ltd has been able to convert its profits in to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 135 cr. whereas the CFO over the similar period is INR 231 cr. This is a good sign.
However, the fixed asset turnover ratio, though increasing, is still low at 2.9 times. It indicates that Alkyl Amines Chemicals Ltd operates in a capital-intensive business where heavy capital investment is necessary to grow your business continuously. Alkyl Amines Chemicals Ltd has been using its cash generated from operations to fund its capital expenses. However, it has not proved sufficient to meet its cash requirements.
As a result, Alkyl Amines Chemicals Ltd has to rely on other sources of cash (like debt) to meet the extra funds required by capital investments. Total debt of Alkyl Amines Chemicals Ltd has increased from INR 66 cr. to FY2005 to INR 155 cr. in FY2014.
Investors should stay cautious while considering investment in companies, which have continuously increasing debt levels. High debt has the potential of reducing profitability and increases the risk of bankruptcy under tough business conditions.
Low fixed asset turnover is one of the major reasons for increasing debt levels of Alkyl Amines Chemicals Ltd despite good sales growth, improving profitability and timely cash collections. Investors should read the analysis of two other companies: Ahmednagar Forgings Ltd and Amtek India Ltd, to understand the impact low fixed asset turnover can have on the debt levels of companies. You may read their analysis here:
Alkyl Amines Chemicals Ltd has been paying regular dividend to its shareholders. It amounts to sharing the fruits of growth with shareholders. These are signs of a shareholders’ friendly management.
Share market too seems to have recognized it. The market capitalization of the Alkyl Amines Chemicals Ltd has increased by INR 671 cr. against retained earnings of INR 108 cr. over last 10 years (FY2005-14). Management has created a value of INR 6.2 for the shareholders from every INR 1 of earnings retained & not distributed to shareholders.
Margin of Safety in the market price of Alkyl Amines Chemicals Ltd:
Alkyl Amines Chemicals Ltd is currently available at a P/E ratio of 15.3, which, as rightly pointed out by you, does not offers any margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, Alkyl Amines Chemicals Ltd appears to be a company growing at a decent pace, with improving profitability margins & operating efficiency. However, low fixed asset turnover has ensured that Alkyl Amines Chemicals Ltd has to raise debt for funding its capex requirements despite timely cash collections. An investor should keep a close watch on the debt levels of Alkyl Amines Chemicals Ltd so that she can take timely decisions according to change in its debt levels.
These are my views about Alkyl Amines Chemicals Ltd. However, you should do your own analysis before taking any investment related decision about Alkyl Amines Chemicals Ltd.
You may read our views on another amines manufacturer, Balaji Amines Ltd in the following article: Analysis: Balaji Amines Limited
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.