Recommendation from Chemicals Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

ALL SET FOR ORGANIC GROWTH- VINATI ORGANICS LIMITED

HERE IS WHY
☛Good market position
☛Reduced raw material prices
☛Healthy financial parameters.

Vinati Organics Limited (VOL) is one of India’s leading manufacturers and exporters of specialty organic intermediaries, monomers and polymers. It is one of the world’s leading manufacturers of Isobutyl Benzene (IBB) and 2-Acrylamido 2-Methylpropane Sulfonic Acid (ATBS) with existing manufacturing capacity of 25,000 TPA and 26,000 TPA respectively. The company caters to pharmaceuticals, water treatment and personal care sectors.

The exit of Lubrizol (a global competitor) helped Vinati Organics see a surge in its product demand. VOL witnessed revenue growth of around 50 per cent in FY19, primarily driven by increase in sale of ATBS. The exit of Lubrizol Corporation, VOL’s biggest competitor, was the main reason for the high growth in revenue from the ATBS segment. In line with this, VOL had planned capex towards expansion of its ATBS facility from 26,000 MTPA to 40,000 MTPA. The company expects revenues out of that plant coming in FY21. This will help the company increase its revenue by catering to the demand gap that has now been created. Vinati Organics has its own Isobutylene (IB) manufacturing unit that is used in the manufacturing of ATBS. This backward integration helps it cushion input cost to a certain extent. This has helped the company to be cost-efficient and thereby post healthy profit margins.

At present, in the nationwide lockdown, the Isobutyl Benzene (IBB) producing plant is running at maximum capacity as it is the primary raw material for manufacturing Ibuprofen, an antiinflammatory drug. The ATBS producing facility has permission for only 10 per cent manpower but the company expects relaxation of up to 50 per cent going forward. So the revenue would be coming in the coming quarters too.

Healthy cash flows from operations have helped VOL fund its capex mostly from internal accruals. This has resulted in bare minimum debt. Minimum debt has been protecting the company in the current environment. It has healthy interest coverage ratio of above 100x. Crude derivatives are the key raw materials required in the manufacturing process of IBB and ATBS. With crude at low levels, the company might see reduction in prices of these key raw materials and this would help reduce expenditures.

For the quarter ended December 2019, the gross sales decreased 21.31 per cent to Rs 238.47 crore in Q3FY20 from Rs 303.05 crore in Q3FY19. PBIDT, excluding other income, showed a decrease of 22.03 per cent to Rs 82.99 crore in Q3FY20 from Rs 106.44 crore in the same quarter last year. PAT for Q3FY20 stood at Rs 66.83 crore as against Rs 70.68 crore in the same quarter last year, showing a decrease of 5.45 per cent. The PAT margin for Q3FY20 stood at 28.02 per cent as against 23.32 per cent in Q3FY19. This increase in PAT margin was due to increase in other income and a reduction in taxes. The full year ROCE for FY19 stood at 45 per cent. High ROCE indicates efficient use of capital by the company. The stock is trading at a PE multiple of 29.64x. By virtue of these factors, we recommend our reader-investors to BUY this stock.