Buy Vinati Organics; target of Rs 2331: HDFC Securities
HDFC Securities’ research report on Vinati Organics
Sales in Q2 fell 3.1% YoY to Rs 2.45bn. EBITDA stood at Rs 0.99bn, up 4.8% YoY. Currently, the ATBS plant is operating almost at its full capacity of 26ktpa. The brown field expansion of 14ktpa in ATBS has been pushed forward by two months to Dec-19 owing to a minor delay in engineering work. Having captured Lubrizol’s market share in entirety, VO now holds >60% of the global ATBS market. The expanded capacity of ATBS enable it keep volume growth intact. We expect further volume growth of >10% for the company in ATBS that will result in 100% utilization of expanded capacity in 3.5 years. The Butyl Phenol plant (capacity 35ktpa) has started operating from Sep-19. The samples from the plant have been sent to customers for approval. Commercial production is expected to start in 4Q and we expect its gradual ramp-up over FY20-22E. It should contribute ~Rs. 1.2bn to the topline by FY21E. The business would largely be driven by domestic sales (60-70% of installed capacity), while the export market would take 2-3 years to pick-up. IBB sales volume remained low in Q2. BASF, a major customer, is struggling with the production of Ibuprofen. With a handful of customers in the global market, VO is unable to push volumes. Hence, we expect subdued volume growth in FY20. EBITDA margins from Butyl Phenol products will be ~15% compared to the blended margins of 41.1% in 1HFY20. As contribution from these products in revenue increases over FY20/21, blended EBITDA margin will decline. We expect EBITDAM to reduce to 36.4/35.8% in FY21/22E from the current levels.
We upgrade VO to BUY despite muted performance in 2QFY20. VO will generate RoE of 30.5/27.1/24.8% and RoIC of 29.6/30.7/33.1% in FY20/21/22E. Valuations are contextually low at 22.8/19.4x FY21/22E PER. Our TP of Rs 2,331/share is based on a 25x Sep-21E EPS.
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