CRISIL has revised its outlook on the long-term bank facilities of Alkyl Amines Chemicals Limited (AACL) to 'Positive' from 'Stable' while reaffirming its rating at 'CRISIL A+'; the rating on the short-term bank facilities has been reaffirmed at 'CRISIL A1'

 
The revision in outlook reflects expectation of continued improvement in AACL's business risk profile supported by sustained growth in revenue and profitability across key product segments - methylamines and speciality chemicals ' owing to significant ramp up in utilisation of the enhanced capacities. Revenue and operating margin grew by 17.2% and 660 basis points, respectively, in fiscal 2020.

While the Covid-19 impacted the revenue growth during the first half of fiscal 2021 at 7.3%, the operating margin further improved by 890 basis points as compared to the corresponding period of the previous year.

Meanwhile, capacity enhancement being carried out for the methylamines and acetonitrile segments supported by a healthy demand, especially from the pharmaceutical sector, should further boost operations.

The ratings continue to factor in AACL's established market position in aliphatic amines and its derivatives and growing speciality chemicals segment, driven by a strong in-house research and development (R&D) capability, and well-diversified product and customer portfolios.

Strengths: Leadership market position

AACL continues to be the market leader in the ethylamine segment and is among the foremost manufactures of methylamine, diethyl hydroxylamine, and dimethylamine hydrochloride (DMA HCL) in India. It had commissioned a new methylamine plant at Dahej in March 2018. Market share in the methylamines market improved significantly since fiscal 2019 as the capacity utilisation at the new plant augmented to optimum levels.

The company further enhanced its DMA HCL, isopropyl capacities in fiscal 2020 and is in the process of enhancing capacities for methylamine and acetonitrile during fiscal 2021 among other smaller capacity enhancements. The acetonitrile market has been favourable in fiscal 2020, as the acrylonitrile production declined significantly, impacting supply of acetonitrile (acetonitrile is a by-product during the manufacturing of acrylonitrile), resulting in steady demand and healthy realisation. Ramp up in utilisation levels in the new capacities and healthy demand should continue to drive growth over the medium term.

 
Operating margin improved to 26.2% in fiscal 2020 from 19.6% in the previous year; supported by growth in volumes, increase in realisation in some of the key products, especially methylamines and acetonitrile segment. The margin further rose to 32.2% during the first half of fiscal 2021 due to increase in realisation owing to favourable market conditions. However, the operating margins is likely to moderate over the medium term as the realisation moderates, however shall remain above 20%.

Weaknesses: Working capital-intensive operations

Operations are likely to remain working capital intensive over the medium term. Gross current assets were moderately high at 104 days as on March 31 2020 (133 days as on March 31, 2019), driven by inventory and debtors of 42 days and 62 days, respectively. Credit of 60-90 days is provided to customers with good track record and inventory of around 60 days is maintained owing to the large product portfolio and bulk purchase of ethanol and methanol to take advantage of better prices.

 
* Exposure to volatile commodity prices

Cost of raw material inputs (alcohols, ammonia and acetic acid) and the company's products (amines) has been volatile, thus impacting profitability. Domestic ethanol prices are dependent on the cyclicality in the sugar industry and methanol prices are driven by crude price movements and demand-supply dynamics in the international markets. Market prices of amines and other speciality chemicals are also volatile depending up on the demand-supply dynamics in the market. Thus, profitability may remain constrained by any unfavourable price movement.

 
However, the company has taken steps to manage prices of raw materials, especially alcohol, by contracting the purchase from sugar manufacturer's and source from international markets as per price dynamics. Steps have also been taken to pass on the hike in prices of raw materials by entering into contracts with customers, such as formula-based, quarterly, and half yearly pass-on, and quarter-based quotations. Nevertheless, the company is likely to remain moderately susceptible to fluctuations in the prices of raw materials and of its products.

Liquidity Strong

Net cash accrual is expected to be around Rs 215-250 crore per fiscal over the medium term (Rs 197.9 crore in fiscal 2020) should comfortably cover yearly debt obligation of Rs 38 crore. Capex of Rs 150 crore per fiscal (Rs 80 crore in fiscal 2020) is expected to be funded by internal accrual. Bank limit of Rs 65 crore was utilised at an average of 4.4% during the 12 months through September 2020. Cash and bank balances were comfortable at Rs 85.6 crore as on September 30 2020. Healthy capital structure also supports financial flexibility.