Alkyl Amines Chemicals: Navigating Headwinds, Motilal Oswal Maintains Neutral Stance

Alkyl Amines Chemicals Ltd (AACL) finds itself under the spotlight as brokerage firm Motilal Oswal maintains a 'Neutral' rating on the stock, setting a target price of Rs 2,270. This outlook comes in the wake of AACL's second-quarter FY24 performance, which largely fell short of market expectations, particularly on the profitability front.

The company's Q2FY24 results painted a challenging picture.

Revenue saw a significant 19% year-on-year decline, settling at Rs 363 crore. The pressure was even more pronounced on the earnings before interest, tax, depreciation, and amortization (EBITDA), which plummeted by a sharp 52% year-on-year to just Rs 55 crore. Consequently, profit after tax (PAT) mirrored this downturn, dropping 53% year-on-year to Rs 43 crore.

While volumes showed healthy growth year-on-year, the gains were overshadowed by a steep decline in realizations, primarily driven by intense competitive pricing in key products like Acetonitrile.

Management's commentary post-results acknowledged the persistent headwinds. The company anticipates that the margin pressure experienced in Q2FY24 will likely continue through Q3FY24 and potentially into Q4FY24, with a more significant recovery projected only by FY25.

This cautious near-term outlook is further evidenced by the decline in capacity utilization, which has fallen from a healthy 70-75% to a more modest 55-60%.

Despite these immediate challenges, AACL is not standing still. The company is actively pursuing a substantial capital expenditure (capex) plan of Rs 300 crore, aimed at both brownfield expansion and the introduction of new products.

This expansion is slated for commissioning by Q4FY24. AACL plans to add new offerings such as Methylamine and Isopropylamine, alongside increasing capacity for existing products like Ethylamine. These strategic investments are expected to bolster the company's product portfolio and enhance its long-term growth trajectory.

However, Motilal Oswal highlights that the current valuations of Alkyl Amines Chemicals already reflect much of this promising long-term potential.

The stock is currently trading at a premium, with a P/E multiple of 48x on FY25E earnings and 32x on FY26E earnings. In light of the weaker-than-expected Q2 performance and the cautious near-term outlook, Motilal Oswal has revised its earnings estimates downwards by a considerable 25% for FY25 and 18% for FY26.

While the new capacities are poised to drive growth from FY25 onwards, the brokerage firm suggests that the immediate period will be marked by profitability challenges and competitive pressures. The 'Neutral' rating, therefore, balances the strong long-term fundamentals and strategic expansions against the short-to-medium term earnings headwinds and elevated valuations.