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Concocting The Chemistry Of Growth


Vinati Organics Ltd (VOL) is a specialty chemical company producing aromatics, monomers, polymers and other specialty products. VOL has been able to deal effectively with the cost advantage of Chinese counterparts in the recent past. Technological advance and economies of scale have helped the company to become a key producer of specialty chemicals. VOL is amongst the largest producers of 2-acrylamido 2 methylpropane sulfonic acid (ATBS), IBB (iso butyl benzene) and IB (iso butylene) products in India. While ATBS is widely used to manufacture dispersants in water chemicals, adhesives, textile companies, mining etc, IBB is used as a pharma intermediate for Ibuprofen, which is generally used as a painkiller. IB has its applications in the fragrance industry and is used as a fuel additive. These three products contributed about 80 per cent of the company's topline in FY18.

Apart from these three products, the company also has some production in terms of TBA (tertiary butyl acrylamide), TOA (N-tertiary octyl acrylamide) and TB amine, that are IB derivatives and contribute about 6 to 7 per cent to the company's topline. The company owns and operates two manufacturing facilities at Mahad in Raigad district and Lote in Ratnagiri district in Maharashtra. VOL has presence in over 22 countries worldwide and exports its products to customers across Asia, USA and Europe.

Sector dynamics

Backed by increase in volumes, the chemical sector continued to maintain its strong performance in the first quarter of FY19. The performance was driven by the increasing competency of Indian players as the disruption of the chemical market in China continued to persist. However, as the crude oil prices had been fluctuating during the quarter, companies dealing in crude derivative products witnessed a shrinkage in their gross margins. 

The specialty chemical sector, in which VOL operates, accounts for around 20 per cent of the chemical industry in India. Specialty chemicals are low volume and high value products that are sold on the basis of their quality and utility. In the specialty chemical sector, the focus is on value-addition to end products and technical specifications of the chemical.

Supported by low oil prices and strong domestic as well as export demand, a double digit growth was recorded by the specialty chemical industry in India between FY13 and FY17. With the growth in downstream industries, the chemical industry in India is expected to grow at an increased pace in the coming years. The Indian chemical industry is expected to grow at a CAGR of 8 to 10 per cent to become a $300 billion industry by 2025, while the specialty chemical sector is expected to grow at a CAGR of 10 per cent and almost double its market size by 2025. It is expected that specialty chemical industry will witness a high growth in demand from the end-user industries. The specialty chemical industry is expected to get a boost with government's focus on affordable housing, agriculture, and infrastructure development.

Robust growth in ATBS segment

Having started with a modest production capacity of 1000 TPA for ATBS in 2002, VOL is currently among the world's largest producer of this speciality chemical with production capacity of 26,000 TPA. The company witnessed strong traction in its ATBS business, driven by the exit of its biggest competitor Lubrizol from the ATBS market. This took the company's market share to 65 per cent globally as against 45 per cent in the last quarter.

Going forward, ATBS will continue to drive overall revenue growth and profitability led by strong demand and incremental volumes on the back of exit of its competitor from the business. The company is working at full capacity in the ATBS segment. Significant demand for the ATBS comes from North America and Western Europe due to the presence of various industries that use ATBS in these regions.

Besides, Asia-Pacific has emerged as a prominent producer of ATBS owing to the rise in production in India and China. Various other countries such as the US, Canada, France, Germany, Norway, Sweden, etc. have witnessed a huge demand in personal care products, paints and coating agents, which helps in market expansion of ATBS. 

Ongoing capex

The company is undergoing expansion in its ATBS capacity from 26,000 TPA to 30,000 TPA which is expected to be completed by September 2018. VOL is also coming up with additional capacities for para amino phenol (PAP), a key intermediate for paracetamol, where it plans to invest Rs.600 crore in its plant in Maharashtra with a capacity of 30,000 tonnes per annum (TPA). The company has initiated a pilot project for this product by investing around Rs.20 crore. Further, a capex of Rs.240 crore for commissioning butylated phenol, which is used to make plastic explosives such as picric acid and drugs such as aspirin, is expected to be completed by April, 2019. The company expects this product to add close to Rs.200 crore to the topline by FY20. The company is going to fund all these expansions through internal accruals itself without taking any additional debt.

Financials and valuations

On the financial front, VOL posted over 34 per cent increase in its revenue to Rs.264.75 crore in the first quarter of FY19 as compared to Rs.196.94 crore in the same quarter of the previous year. The company's PBDT increased by 94 per cent to Rs.103.66 crore from Rs.53.33 crore in the first quarter of FY19 on a YoY basis. The net profit of the company soared by 106 per cent to Rs.64.26 crore in the first quarter of FY19 as compared to Rs.31.10 crore in the same quarter of the previous fiscal. Higher sales of ATBS, IBB and customised products helped gross margins to improve, whereas higher scale and operating leverage supported further margin expansion. 

On the annual front, the company posted about 7 per cent growth in its revenue to Rs.755.87 crore in FY18 as compared to Rs.706.87 crore in FY17. The PBDT of the company remained flat at Rs.226.74 crore in FY18 as against Rs.226.01 crore in the previous fiscal. However, the company posted an increase of 3.3 per cent in its net profit to Rs.143.88 crore in FY18 on a YoY basis.

On the valuation front, the company is trading at a price-to-earnings ratio of 38.93x as against its peers Atul Ltd (28.07x) and BASF (31.9x) . The company has return on equity (ROE) and return on capital employed (RoCE) of 19.5 per cent and 30.54 per cent, respectively. The company is virtually debt-free. The company had delivered poor growth of 6.05 per cent over the past five years. Also, the company has reported 14 per cent CAGR in EBITDA, whereas 16 per cent CAGR in net profit in the last 5 years.

The long term outlook of the company is robust on the back of the launch of new products and capex initiated by the company. The management has maintained its guidance of 20 to 25 per cent revenue growth in FY19 and 30 to 35 per cent growth in profits. However, the stock has already risen by about 40 per cent during last month. Hence, we recommend our reader-investors to HOLD the stock.

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