A Financial Analysis Report

On

Balaji Amines Ltd.

Project submitted in partial fulfillment of the course
Management Accounting (MANAC1BJ21-1)

Submitted to
Prof. Debarati Basu

Submitted by
Group 8: Section C

Anushka Sharma (BJ21131)

Kshitij Saxena (BJ21180)
Kushankur Datta (BJ21148)
Payal Dabir (BJ21157)
Sanil Khemani (BJ21166)
Utkarsh Gupta (BJ21177)

Submitted on
September 22, 2021

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Contents

1. AMINES INDUSTRY OVERVIEW:................................................................................ 3

2. COMPANIES .................................................................................................................. 3-4

3. ECONOMIC ANALYSIS ............................................................................................... 4-6

4. SIGNIFICANT ACCOUNTING POLICIES .................................................................. 6-9

5. INTERPRATATION OF FINANCIAL STATEMENTS ............................................. 9-10

6. COMPARATIVE ANALYSIS .................................................................................... 10-12

7. EXHIBITIONS ............................................................................................................ 12-14

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1. AMINES INDUSTRY OVERVIEW:

Amines are organic derivatives of ammonia. These are extensively used in the pharmaceutical and

chemical industries as reactants. Indian amines industry is dominated by mainly three companies:

Alkyl Amines, Balaji Amines, and RCF.

Amines industry grew in India, reducing India's import dependence on these crucial feeders into

the chemical industry. Products in this category include aliphatic amines, which form the core of

business for both the companies being considered. The size of the amines industry in India is about

60,000 MTPA, and it is expected to grow at >4% in the next five years.

2. COMPANIES

Information about the two companies concerning history, production, customers, and directors can

be found below-

Company in Focus: Balaji Amines Ltd.

Balaji Amines Ltd. (BAL) is India's largest exporter of amines and its derivatives and supplies to

various companies.

Business Overview:

Balaji Amines was set up in 1988 to cater to India's demand for specialty chemicals. BAL

commissioned its first plant at Tamalwadi, Solapur, in the year 1989. Expansions to the production

facilities carried out in 2003, 2008, and 2011 added a capacity of 20,000 MTPA. Currently, the

total production capacity at BAL is 48,000 MTPA. Out of the ten members on the Board of

Directors, 5 are independent directors, one of them a female member. Mr. A. Prathap Reddy is the

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Chairman & Whole-time Director. The other non-independent members on the board are members

of the Reddy family.

Competitor: Alkyl Amines

Alkyl Amines Chemicals Ltd. (AACL) is a leading manufacturer of aliphatic amines, amine

derivatives, and other specialty chemicals

Business Overview:

Incorporated in 1979, the Company was established to reduce India's dependence on imports of

alkyl chemicals. Alkyl Amines' first production plant was commissioned in 1982 at Patalganga in

Maharashtra. Further expansions in 1986 and 1992 made AACL a global supplier of amines and

amine-based chemicals. Currently, the total production capacity of AACL is more than 30,000

MTPA. About 61% of the revenue is drawn from pharma products, while agro chem related

products bring in the next 6%. Out of the ten members on the Board of Directors, 4 are independent

directors, one of them being a female member. Mr. Yogesh M. Kothari is the Chairman &

Managing Director

3. ECONOMIC ANALYSIS

Incorporated in 1988, Balaji Amines Limited commenced business in the Amines space. In the

next three decades, the Company expanded to offer 25+ products in Amines, Specialty Chemicals,

and Derivatives. The significant industries catered by Balaji Amines include Pharmaceuticals,

Agrochemicals, Paints & Resins, Water Treatment Chemicals, Animal Feeds, and Dye and textiles.

Around 75% of the Company's revenues are generated from the pharmaceutical and

agrochemical industries. The pandemic elevated the demand for pharmaceutical ingredients

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(API), leading to an increased demand for Amines and Specialty Chemicals. In addition, during

the pandemic, agrochemical manufacturers also witnessed a surge in demand.

Strengths of the Company:

1. Market leader- Balaji Amines is one of the top manufacturers in its segment and

enjoys market leadership in the following products: Methylamines, Ethylamine,

DMAC, DMAC HCL. It also is the sole producer of seven specialty chemicals.

2. Diverse customer base- Balaji Amines has a diverse customer base with a totality of

180 Clients globally (Exhibit 1). Such a broad clientele and presence across various

industries ensures Balaji Amines against unforeseen regional or industry-wide mishaps.

3. Exports- Balaji Amines has a robust presence around the globe. It exports to over 50

countries today. During 2020-21, around 15% of the total revenue generated was

through exports, and it is rapidly trying to increase its footprints in the global market.

4. China +1 Model- The Chinese Government's stringent environmental laws led to an

increase in the cost of production, which subsequently disrupted supply. India being

the next best sourcing station, Balaji Amines capitalized and captured a significant

share of the outbound China orders.

5. Local purchase- Indian companies that previously sourced specialty chemicals and

their derivatives from China, switched to Indian producers (including Balaji Amines)

in the last few years due to reduced costs and logistical simplicity.

6. Capital Expenditure (CAPEX)- Balaji Amines capitalized on the growing demand

by expanding capacity. From 2017-2020, the capital expenditure increased from 23.23

crores to 86.55 crores (An increase of 270 %).

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 Weakness of the Company:

1. Raw Material Sourcing- Most of the raw material is imported by the Company

making it susceptible to supply chain disruption. The import of raw materials also

makes the Company open to exchange rate fluctuation risks.

2. Environmental Laws- Being a chemical manufacturer with five manufacturing units,

the Company needs to follow ecological laws strictly. Changes in environmental policy

by the Government will have a significant impact on the Company.

4. SIGNIFICANT ACCOUNTING POLICIES

PARTICULARS BALAJI AMINES ALKYL AMINES

Revenue Recognition-Sales
Investments
subsidiary/associates
Inventory: Finished Goods
Stock in process, Stock of raw Recorded at Cost
materials, Stores and Spares and
packing material
Cost basis
Depreciation
Useful life of assets
Hedging against risk
FOB shipping point FOB Destination
in Cost of acquisition Cost less accumulated impairment if
any
Lower of cost or Net Realizable Value Lower of cost or Net Realizable Value
Lower of cost or Net Realizable Value
Absorption Costing Weighted Average
Straight-line basis Straight-line basis
Useful life of assets is based on the Useful lives for Plant and Machinery
indicative life span prescribed under and Roads are determined by the
Part C of Schedule II of Companies internal technical evaluation done by
Act, 2013 management's expert
Natural hedging- No derivative Derivative contracts for foreign
contracts currency risk-
Recorded at Fair Value

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 1) Basis of Preparation:

The financial statements for both companies are prepared on a historical cost basis using the

accrual method, except for the certain financial assets and liabilities that are measured at fair value.

For e.g., Both the companies engage in imports and exports. Alkyl Amines uses derivative

instruments to hedge against the foreign currency risk, while Balaji Chemicals employs a natural

hedge (hedging risk of exports with imports). Thereby, Alkyl Amines has derivative instruments

which are recorded at fair value.

2) Revenue Recognition

Balaji Amines: Recognizes revenue from the sale of goods at the time of dispatch (FOB Shipping

Point), implying that the buyer takes responsibility for loss or damage when the goods are shipped.

Alkyl Amines: Alkyl Amines recognizes sales revenue when the control of goods is transferred

to the customer, mainly during the delivery of goods (FOB Destination). Thereby, they undertake

the liability for loss or damage until the goods are delivered to the buyer.

3) Investments

Balaji Amines-Investments are recorded at the cost of acquisition. This includes equity

investments made in the subsidiary Balaji Specialty Chemicals Private Limited treated as non-

current assets and investment in National savings certificate as current assets.

Alkyl Amines-Company has short-term investments in mutual funds and hence is recorded using

fair value (NAV) through the statement of Profit and Loss (FVTPL). This implies any profit and

gain on the investment would be directly affecting the Income statement.

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 4) Inventory

Balaji Amines: Finished goods are valued at lower of cost or Net Realizable Value, whereas the

cost of raw material, spares, stores, and packing material is recorded at cost. Cost is determined

through absorption costing; the product absorbs all expenses wherein, i.e., the cost of the product

includes variable, fixed, and semi-variable costs.

Implications: Higher Profits and higher inventory value. It might result in overcharging of profits

for a period as fixed overheads will not impact the income statement until the product is sold.

Alkyl Amines: Finished goods, raw materials, stores, and spares, packing materials are valued at

cost or net realizable value, whichever is lower. Inventory value is based on the weighted average

method, which assigns the average cost of production to a given product.

Implications: Easier to compute and compare the profits of different periods.

5) Depreciation

Balaji Amines Limited: Depreciation/amortization on fixed assets is provided on a straight-line

method, representing that asset consumption is assumed to be consistent throughout the useful life.

Further, unlike Alkyl amines, the useful life of assets is assumed to be best represented by what is

prescribed by Schedule II of the Companies Act, 2013.

Alkyl Amines: Depreciation on assets is provided on the straight-line method. This means that the

management believes that assets will be used in a consistent manner. The Company uses

Component accounting for the parts that have a separate useful life and significant cost compared

to the total asset. Further, the management determines useful lives based on the internal technical

evaluation done, different from the useful lives prescribed by Schedule II of Companies Act, 2013.

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This may be because management believes that the useful life determined by them would better

represent the period over which it expects to use these assets.

5. INTERPRATATION OF FINANCIAL STATEMENTS

Balaji Amines:

• Capital work-in-progress increased from INR 25.08 Crores to INR 173.28 Crores (590.9%)

in 5 years (March 2017-March 21). This is due to the implementation of their Greenfield

Project, Phase I of which has been completed. The Company plans to use further 160 Cr.

CAPEX during the next financial year towards producing DMC, Ethylamine in Unit IV &

Captive Power Plant in Unit III. (Exhibit 2)

• The 'other long-term liabilities' increased from 5.96 Crores to 145.87 Crores (2347.48 %)

in the 5-year period (March 2017- March 21). This is due to the loans that were taken to

fund the CAPEX.

• The 'other non-current assets' decreased from 189.44 Crores to 144.62 Crores (23.6%) in

March 2020-March 2021. This can be attributed to the reduction in capital goods. Company

was starting expansion in 2020 and paid in advance for machinery and assets for the

new plant. With Phase 1 completed in 2021, the machines were delivered to the Company,

thus reducing the 'advance' paid.

• Total operating revenues increased from INR 667.53 Crores to INR 1227.78 Crores (84%)

in 5 years (March 2017-March 21).

• Profit-After-Tax increased from INR 85.57 Crores to INR 231.71 Crores (171%) in 5 years

(March 2017-March 21).

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 • Working Capital Cycle (WCC) decreased from 644 days to 410 days between March 2020

and March 2021, indicating greater leverage of Balaji Amines over payment cycles.

Alkyl Amines:

• Total Non-current liabilities decreased from INR 92.98 Crores in March-20 to INR 71.08

Crores in March-21(23.6 % decrease). This is due to Alkali Amines strategically paying

off its debts to clear its books. (Exhibit 3)

• Cash and cash equivalents increased from INR 32 Crores in March-20 to INR 126 Crores

in March-21(293.75%). This is due to an increase in the fixed deposit accounts section

under cash & cash equivalents. Those fixed deposits had an original maturity of less than

3 months and were included under cash & cash equivalents.

• Total operating revenues increased from INR 529 Crores to INR 1223 Crores (131.1%) in

5 years (March 2017-March 21).

• Profit-After-Tax increased from INR 50 Crores to INR 295 Crores (490%) in 5 years

(March 2017-March 21).

• Working Capital Cycle (WCC) decreased from 722 days to 343 days between March 2018

and March 2021, indicating better payment terms with its suppliers and more efficiency at

customer revenue collection.

6. COMPARATIVE ANALYSIS

1. ROE Analysis

The ROE of Bajaj Amines increased by 61% from FY20 despite a decrease in the AE ratio due

to growth in the Asset turnover ratio and Net profit margin ratio. The asset turnover ratio increased

primarily due to high growth in revenue of approximately 34%, which resulted from the

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Company trying to diversify its revenues by entering new geographical markets, with the Company

currently being present in 50 countries. The net profit margin increased due to massive growth in

the profit after tax of 103% as the Company achieved economies of scale (most of the plants started

operating at maximum capacity).

ROE of Alkyl Amines increased by approximately 10%. The relatively low increase in ROE

compared to Bajaj Amines was primarily due to a reduction in financial leverage. Many firms post

the pandemic have taken steps to reduce their net debt and a decrease in the Asset Turnover Ratio

because of the 150% increase in the book value of the total assets. A major contributor to this was

cash and cash equivalents, which increased 4x because of an increase in the fixed deposit accounts

section under cash & cash equivalents. Those fixed deposits had an original maturity of less than

3 months and were included under cash & cash equivalents. (Exhibit 3)

2. Debt/Equity Ratio

Balaji Amines has a debt/equity ratio of 0.0 as the Company repaid all its borrowings amounting

to 103 Cr to various banks and institutions. Alkyl Amines has a debt/equity ratio of 0.027, which

is significantly lower than the industry average of 0.424 and is higher than DE ratio of Balaji

Amines. Both these firms will be able to raise capital at a cheaper cost relative to the industry.

3. Interest Coverage Ratio

Balaji Amines has a very high-interest coverage ratio of 59.16, much higher than the industry

median of 22.6. This implies the cost of raising capital through debt would be very low for this

firm and this is reflected in the financing costs, which in FY21 are roughly 0.5% of the total

operating revenue. Alkyl Amines has an even high-interest coverage ratio of 64.3, a major

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contributing factor to the low financing cost of 0.5% of the total operating revenue, which is a

significant advantage for the firm. (Exhibit 4)

4. Earning Power

Balaji Amines had an earning power of 26.3%, higher than the industry median of 15.7% but lower

than that of Alkyl Amines, which had an earning power of 42.2%. This is significant because it

indicates Alkyl Amines is more efficiently able to utilize its assets.

5. Operating Cycle

Balaji Amines has an operating cycle of 309 days and a working capital cycle of 410 days, which

is higher than that of Alkyl Amines with an operating cycle of 190 and a working capital cycle of

344 days. This implies that Alkyl Amines enjoys better payment terms with its suppliers and is

more efficient at customer revenue collection.

6. Liquidity Ratios

Balaji Amines had a current ratio of 2.43 and a quick ratio of 1.95, which is higher than the industry

medians of 1.74 and 1.16 and is also higher than the current ratio of 1.87 and quick ratio of 1.44

of Alkyl Amines. Balaji has 19.7% of its total current assets parked in inventory. In comparison,

Alkyl has 23% of its current assets parked in inventory and hence approximately 77% and 80% of

the total current assets are relatively liquid assets. However, the number of days receivables for

BA and AA is much higher than the industry median, which signifies inefficient collection

methods or a low amount of power with the buyers, possibly due to intense competition. Both

companies have to offer more favorable terms to the customers.

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7. EXHIBITS

1- Balaji Amine’s Clientele

2- Capital Work in Progress of Balaji Amines and Alkyl Amines

200
Work in Progress (Crore Rs.)

180
160
140
120
100
80
60
40
20
0
2021 2020 2019 2018 2017
Balaji Amines 173.28 46.27 63.24 66.49 25.08
Alkyl Amines 137.62 44.88 43.15 18.4 34.76

Balaji Amines Alkyl Amines

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 3- Long Term Liabilities of Balaji Amines and Alkyl Amines

Long Term Liabilities

250

200
Rs.(Crores)

150

100

50

0
2017 2018 2019 2020 2021

Balaji Amines Alkyl Amines

4- Balaji, Alkyl v/s Industry

Industry Average Balaji Amines Alkayl Amines

Debt/Equity Ratio 0.424 0.0 0.027

Interest Coverage 22.6 59.16 64.3

Ratio

Earning Power 15.7 26.3 42.2

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