Balaji Amines: Anti-dumping probe is just what the doctor ordered
– Anti-dumping investigation under way
– DMF capacity utilisation below-par till recently due to heavy imports
– Focus on quality pharma ingredients is seen as an opportunity given the regulatory challenges
–Expected ramp-up in new capacities a key positive
The Directorate General of Trade Remedies (DGTR) has notified that an anti-dumping probe has been initiated into the imports of Dimethyl Formamide (DMF) from China and Saudi Arabia on the request of Balaji Amines (CMP: Rs 456, market capitalisation: Rs 1,493 crore). We consider this as a key development for the company that needs to be keenly followed.
DMF is probably the only key product of the company the production capacity of which is not optimally utilised due to heavy dumping. Hence, any action with respect to anti-dumping duty can aid its prices and volume.
DMF is used as a solvent for pharma, pesticides and acrylic polymer manufacturing.
In FY19, domestic demand for DMF was nearly 46,000 tonnes. Of this, 35,000 tonnes were imported at very low price. While the company has capacity to manufacture 30,000 tonnes of DMF, it could produce and sell 6,000-7,000 tonnes last year.
Of late, there has been a pick-up in DMF sales volume as the company decided to position the product on a competitive basis. This year so far, DMF volume sold per month is about 900-1,000 tonnes per month translating to 10,000-12,000 tonne annually.
Regardless of the probe outcome, the company is poised to sell 18,000-20,000 tonnes DMF in FY21. Incremental volume sold compared to FY20 even at the current price levels suggests a 5 percent uptick in turnover.
Pharma inputs offer scope
The company gets 51 percent of its sales from the pharma end market. In its product bouquet, a few such as DMF and DMA HCL (Di Methylamines HCL) have been on the radar as they are used as ingredients for drugs such as ranitidine (to treat acid reflux) and valsartan (for treatment of high blood pressure). Both these drugs have been under the pharma regulatory scanner for the possibility of high nitrosamine impurity called N?nitrosodimethylamine (NDMA), which could be carcinogenic.
That explains increased customer scrutiny for quality parameters. This, the management says, could present a good opportunity to position the company as a source of quality pharma inputs as some global suppliers may not pass the test in this space.
The stock has cheered a series of updates on environmental clearance for its mega project in Solapur, production ramp-up for new capacities of acetonitrile and morpholine, better volume growth in Q2 FY20 and start of production at its subsidiary, Balaji Speciality Chemicals.
Pls also read: Balaji Amines: Green clearance sets up the right pitch
The stock is trading at 11.1x FY21 estimated earnings after a conservative estimate for the scale-up in its subsidiary operations. Our view is that even at the current level, it presents an opportunity for accumulation. Stock trades at a significant discount to its peer (Alkyl Amines) and a production ramp up is on the cards.
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