Vinati Organics - On growth path - Centrum

We recently met the management of Vinati Organics (VOL) to get the latest update on current performance and future potential. The management is optimistic on future prospects of the company. VOL derives over 84% of its revenues from isobutyl benzene (IBB) and 2-acrylamido-2-methylpropane sulfonic acid (ATBS). The company is the largest manufacturer of these products globally. VOL derives ~80% of its revenues from exports and has benefited by ~15% depreciation of rupee in H1FY14. The management has identified ATBS as the major growth driver. It has indicated revenue growth of 20-25% and EBIDTA margin of 20-22% for FY14. VOL intends to become debt-free in 2017. Key risks would be lower demand for IBB and ATBS and appreciation of rupee against the dollar.

Major dependence on IBB and ATBS: VOL receives ~84% revenues from IBB and ATBS and hence is heavily dependent on these two products. The company is the global leader for IBB and ATBS and derives ~80% of its revenues from exports. It has backward integrated in the manufacture of isobutylene (IB), which is the raw material for IBB. VOL sources major raw materials benzene and toluene from local manufacturers. As these raw materials are derived from crude, prices are linked to import parity.

Attractive margins: The management expects EBIDTA margin in the range of 20-22%. VOL reported EBIDTA margin of 20.6% in H1FY14. ATBS commands higher margin than IBB and with higher production of ATBS, overall margins are likely to improve. VOL's material cost is linked to crude price and hence is subject to wide fluctuations. Moreover, the company derives ~80% revenues from exports and hence is affected by foreign currency movements. VOL benefited from ~15% depreciation of rupee against the dollar in H1FY14. It has backward integrated in the manufacture of IB and hence has better margins than competitors.

Renowned customers: VOL derives over 80% revenues from export to 22 countries. It exports to global customers including BASF-Germany, Perrigo-China, Nalco, Clariant Chemicals, Dow Chemicals, Lubrizol, Ciba, Rohm and Hass, Akzo Nobel etc. for a wide range of applications. The company's domestic customers include, Shasun Chemicals, Pashupati, Thermax, Indian Acrylic, UPL, Gharda Chemicals, Meghmani Organics etc. The company is expanding its customer base. With the introduction of new products, it is likely to add new customers.

Valuations and risks: At the CMP of Rs219, the stock trades at 15.8x FY13 EPS of Rs13.9 and 15.4x FY14 annualised EPS of Rs14.3. The stock is fairly priced at the current valuations. VOL's share price has appreciated over 100% in the last two months. Key risks include slowdown in demand of its major products IBB and ATBS and appreciation of rupee against the dollar. The company has $29mn (Rs1.8bn) exposure to foreign currency borrowings and hence is affected by forex losses/gains every quarter.

Source : Equity Bulls

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