SELL on Vinati Organics - Muted quarter - HDFC Securities

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

Our SELL recommendation on Vinati Organics with a discounted cash flow- based target price of INR 925 (WACC 10%, terminal growth 3%) is driven by (1) demand slowdown for the high-margin 2-Acrylamido 2-Methylapropane Sulphonic Acid (ATBS) that contributed ~60% to its revenue mix in FY20, (2) shift in revenue mix towards lower-margin Iso Butyl Benzene (IBB), which formed ~25% of the mix in 2Q versus 16% in FY20, and (3) slow ramp-up in the recently-commissioned Butyl Phenol product line (still below 5%). In the absence of a new product pipeline, we believe current valuations are high at ~34x Sept-22E EPS. 2Q EBITDA/PAT were 17/24% below estimates owing to a 12% decline in revenue courtesy lower volumes for ATBS.

Financial performance: 2Q EBITDA stood at INR 841mn, -16/-13% YoY/QoQ, owing to sluggish demand for ATBS and IBB in the quarter. EBITDA margin dropped to 38.3% (40.7/42.0/40.2% in 2QFY20/1QFY21/FY20).

Capex: Apart from the Capex of INR1.5bn for manufacturing four new speciality chemicals and expanding the capacity of PTBBA plant, the board has approved additional Capex of INR0.6bn for new products and expansion. Expected revenue from the total Capex is ~INR3bn at full capacity by FY25.

ATBS: Weakness in demand for ATBS continues in 2Q despite stable crude oil prices. The demand slowdown for ATBS owes to its reduced demand by the oil and gas industry that forms 25-30% of its global demand. It contributed 35% to the 2Q topline (55% in Q1FY21). The brownfield expansion of 14ktpa has been pushed to end FY21 (earlier: 1HFY21) as current demand for the product can be met through the existing capacity of 26ktpa.

Iso Butyl Benzene (IBB): Revenue contribution spiked to ~25% in 2Q. The product should witness a good offtake in 1HFY21 as the company has acquired new customers and BASF (a key customer) has resumed production of Ibuprofen, whose production requires IBB as an intermediate.

Butyl Phenol: The Butyl Phenol plant continues to run at a low capacity utilisation in 2Q, given its muted demand amidst the pandemic.

Change in estimates: We cut our FY21/22E EPS estimates by 6.5/1% to INR 28.3/33.2 to factor in lower-than-anticipated performance in 2Q.

Shares of VINATI ORGANICS LTD. was last trading in BSE at Rs.1104.95 as compared to the previous close of Rs. 1099.65. The total number of shares traded during the day was 6254 in over 803 trades.

The stock hit an intraday high of Rs. 1114 and intraday low of 1101. The net turnover during the day was Rs. 6923704.

Source : Equity Bulls

Keywords