SELL on Vinati Organics - Lacks expansion triggers - HDFC Securities

Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities.

Vinati Organics (Q4FY20): Lacks expansion triggers. SELL
(TP Rs 825 CMP Rs 997 MCap Rs 102 bn)

Our SELL recommendation on Vinati Organics with a TP of INR 825 is driven by demand slowdown for the high margin 2-Acrylamido 2-Methylapropane Sulphonic Acid (ATBS) that contributes ~60% to its revenue. In the absence of new product pipeline, we believe current valuations are high at 31.0x FY22 PER.

View on the result: 4Q EBITDA/PAT were 24/17% above estimates owing to higher than anticipated gross margins (59.7% vs. estimated 55.4%).

EBITDA: 4Q EBITDA stood at INR 1,017mn, -18.7/+22.5% YoY/QoQ. Higher realization for ATBS and gross margins (as RMC declined) drove the QoQ jump in EBITDA. The company took a price hike in ATBS in 4Q following the increase in RMC in 3Q (fluctuations in RMC are passed on with a 3-month lag). For FY20, VO clocked EBITDA of INR 4,139mn (-3.3% YoY).

ATBS: The product contributed 58% to the Q4 top-line (57% in FY20) and the plant is currently operating almost at its full capacity of 26ktpa. The brown field expansion of 14ktpa has been pushed back to 2QFY21 (earlier: 4QFY20). This is owing to its slowing demand by the Oil and gas industry, which forms 25-30% of the global ATBS demand.

Butyl Phenols: The Butyl Phenol plant (capacity 35ktpa) was commissioned in Sep-19. However, in 2HFY20, the plant was running at low capacity utilisation and contributed marginally to the top-line given its low demand. We expect slower than estimated ramp-up in production as the plant needs further modifications and demand remains muted owing to the pandemic. It is expected to contribute ~INR 1bn to the topline in FY21E.

Iso Butyl Benzene (IBB): Revenue contribution remained muted at ~15% in 4Q. However, traction is expected to pick up in FY21 as the company has acquired new customers and BASF has resumed production of Ibuprofen. We expect healthy volume growth in FY21.

Outlook on EBITDA margins: Margins from Butyl Phenols will be ~15% vs. blended margins of 40.2% in FY20. As contribution from these products in revenue increases over FY21/22, blended EBITDA margin will decline. We expect EBITDAM to reduce to 38.6/38.1% in FY21/22.

View on the balance sheet: VO's cash and equivalents jumped 2.8x YoY to INR 2,811mn and total borrowings reduced by 85% YoY to INR 6mn taking its net cash position to INR 2,805mn from INR 963mn in FY19. In the absence of any significant capital outlay in the near future, these levels are dragging the company's RoE and RoCE down.

Change in estimates: We tweak our FY21/22E EPS estimates by -2.3/-2.7% to INR 29.5/32.1 to incorporate the company's performance in 4QFY20.

Shares of VINATI ORGANICS LTD. was last trading in BSE at Rs.996.85 as compared to the previous close of Rs. 1028.65. The total number of shares traded during the day was 7506 in over 1193 trades.

The stock hit an intraday high of Rs. 1025 and intraday low of 968.7. The net turnover during the day was Rs. 7470402.

Source : Equity Bulls

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