This article provides an in-depth fundamental analysis of Alkyl Amines Chemicals Ltd.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
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 the 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.
- The 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 it is increasing for the past 5 years.
- Cumulative PAT is lower than cumulative CFO, which is quite good so the 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 come across this company recently. Therefore, I am yet to do an intensive analysis.
Cons:
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 the 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 the 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 a 28-34% rate, which is another good sign.
Further advised reading: How to do Business Analysis of Chemical Companies
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 into cash flow from operations. PAT for the last 10 years (FY2005-14) is INR 135 cr. whereas the CFO over a 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. The 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 an investment in companies, which have continuously increased 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 dividends to its shareholders. It amounts to sharing the fruits of growth with shareholders. These are signs of shareholders’ friendly management.
Share market too seems to have recognized it. The market capitalization of Alkyl Amines Chemicals Ltd has increased by INR 671 cr. against retained earnings of INR 108 cr. over the 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 offer 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, taking 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
Analysis Summary
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 changes in its debt levels.
These are my views about Alkyl Amines Chemicals Ltd. However, you should do your own analysis before making 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!
Regards,
Dr Vijay Malik
Answers to readers’ queries about Alkyl Amines Chemicals Ltd
Why is the increase in debt is due to lower NFAT
Hello Sir,
Sorry, I had to go into your past article to understand more about ratios. I loved the way you have explained.
Sir, does it mean that if the company has CFO>PAT which means its operational efficiency is good. But if the company is still increasing its debt it is only because of poor NFAT even after the company has increased its NFAT at 2.9 as explained above.
How did you come up to the conclusion that debt is increased because of its poor NFAT even after it is more than 1?
Author’s Response:
Hi,
Thanks for writing to me! I appreciate that you are going through the past articles and are reasoning out with different concepts to conduct the stock analysis.
In the case of Alkyl Amines Chemicals Ltd, the debt seems to have increased due to the debt-funded capital expenditure (CapEx).
As per the latest data available for FY2007-16 in screener export to excel: FY2007-16 PAT: INR 223 cr. and CFO: INR 373 cr. Therefore, the profits have been converted into cash without any issues.
However, during the same period of 10 years (FY2007-16), the company has done CapEx of about INR 206 cr., Paid interest on its debt during this period of about INR 125 cr. and paid dividends of about INR 58 cr., leading to a total outflow of about INR 390 cr.
As a result, we notice that the debt of the company has increased from INR 82 cr. in FY2007 to INR 111 cr. in FY2016.
Hope it clarifies your queries!
All the best for your investing journey!
Regards
Dr Vijay Malik
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Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
