Vinati Organics Limited - High input costs dent margins - HDFC Securities

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

Our SELL recommendation on Vinati Organics with a discounted cash flow-based target price of INR 1,600 (WACC 10%, terminal growth 4.5%) is driven by a shift in the revenue mix towards lower-margin iso butyl benzene (IBB) and butyl phenol as compared to ATBS, which has a higher margin. In the absence of a new product pipeline, we believe the current valuation is high at ~37x FY23E EPS. Q1 EBITDA/PAT were 18/8% below our estimates, owing to significantly higher-than-anticipated raw material cost and higher-than-expected finance cost, but the same was offset by higher-than-anticipated other income.

Financial performance: Q1 revenue grew 38/67% QoQ/YoY to INR 3,864mn whereas EBITDA grew 2/5% QoQ/YoY to INR 1,015mn. EBITDA margin fell by 916/1,569bps QoQ/YoY to 26.3% (35.4/42.0/36.9% in Q4FY21/Q1FY21/FY21), on account of significantly higher phenol, toluene and acrylonitrile prices, and higher freight costs, owing to logistical disruptions in the quarter.

ATBS: Demand for ATBS has been robust due to pent-up demand, and increased demand by the oil and gas industry that forms 25-30% of its global demand. Other end-user industries such as water treatment and personal care are reviving too, adding to ATBS' demand. It contributed 50% to the Q1 topline (47% in Q4). ATBS segment witnessed ~20% YoY volume growth in Q1. The new capacity is currently running at a 70% utilisation rate and is expected to run at full capacity in three years.

Iso butyl benzene (IBB): Revenue contribution came in at ~15% in Q1, given reduced demand for Ibuprofen. The plants are running at surplus capacity and the company doesn't plan on carrying out any expansion for IBB.

Butyl phenol: The butyl phenol segment clocked in an INR 0.4bn revenue in Q1, and is expected to clock in INR ~2bn in FY22. Butyl phenol is gaining good traction. The margins of this segment were adversely impacted in Q1 due to elevated phenol prices.

Change in estimates: We cut our FY22 EPS estimate by 7.1% to INR 36.8 to factor in lower gross margin courtesy higher raw material prices, offset by a higher crude oil price assumption. We raise our FY23 EPS estimate by 2.8% to INR 52.6 to factor in the higher crude oil price assumption.

Shares of Vinati Organics Ltd., was last trading in BSE at Rs. 1974 as compared to the previous close of Rs. 1925.35. The total number of shares traded during the day was 5374 in over 842 trades.

The stock hit an intraday high of Rs. 1974 and intraday low of 1935.6. The net turnover during the day was Rs. 10536308.

Source : Equity Bulls

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