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Confident of sustainably enhancing value

VO’s FY22 Annual Report highlights its long-term relationships with its clients and its focus on R&D expertise, which has helped amplify value for all its stakeholders, despite industry cycles and macro headwinds. The management is confident that a niche product portfolio, expansion in its existing capacities, and foray into new products will enable it to keep the revenue momentum strong (that it generated in FY22 after a muted FY21), although macro challenges still remain. We maintain our Buy rating on the stock with a TP of INR2,593.

Revenue and profitability increases, even as margin contracts

* Revenue increased by 69% YoY to INR16.2b, aided by a strong growth in volume as well as price hikes taken in FY22 due to an increase in input costs.

* Gross profit rose 33% YoY to INR7.5b in FY22, while gross margin contracted by ~13pp due to unprecedented raw material cost inflation and a surge in crude oil prices due to a lower base in FY21.

* COVID-led disruptions resulted in higher operating costs due to higher freight costs on account of the shortage of containers and higher power and fuel costs. Consequently, EBITDAM posted a contraction of ~10pp. VO’s PAT grew 15% YoY to INR2.3b.

* Cash from operations fell 42% YoY to INR1.3b. VO incurred a capex of INR1.6b (up 230% YoY) for capacity expansion in FY22.

ATBS sales bounce back in FY22 after a muted FY21

* Sales of ATBS were robust (up 87% YoY) in FY22 owing to strong demand from the Oil and Gas sector. Much of this demand was pent up, as FY21 was a muted fiscal for the Oil and Gas sector.

* ATBS is the largest product for VO in revenue terms, contributing 53% to overall revenue in FY22. VO is the largest producer of ATBS in the world, with a global market share of more than 65%.

* Owing to robust demand from the Oil and Gas sector (to which the segment primarily caters to), VO is expanding its capacity to 60ktpa from 40ktpa currently, which is expected to be commissioned by 2HFY24.

* The demand outlook for the ATBS segment remains strong, with customers being very bullish on their final products. The current plant is running at full capacity. The demand for high purity grade ATBS is high, with demand crossing pre-COVID levels currently.

IBB posts a muted performance, while other products perform well in FY22

* IBB recorded a revenue decline in FY22, led by slower than expected growth in demand for Ibuprofen, as a higher offtake in FY21 resulted in the stocking up of inventory and a shutdown at the Mahad plant in 3QFY22. Nevertheless, VO continued to maintain its global market share in IBB at over 65%.

*  VO commissioned a new Butyl Phenol (BP) unit in FY21 (which is used the manufacture of fragrance and anti-oxidants) in India, making it the sole producer.

* The BP unit contributed 14% of overall revenue in FY22. The management expects to ramp-up the utilization rate to optimum levels in FY23.

* Other products consisting of HPMTBE, PTBBA/PTBMB, Isobutylene, etc. contributed ~23% to overall sales in FY22. The management has lined up capex and continues to see growth in the domestic and export market.

VAL merger and entry into niche chemicals in line with its growth strategy

* The company is in the process of amalgamating VAL with VO, which is expected to be completed by FY23-end, well in line with its growth strategy. This will result in the forward integration of Butyl Phenol to anti-oxidants (AOs), creating synergies and generating incremental revenue of INR3b by FY24E.

* This will enable better synergies, making VO the largest and only backward and forward integrated manufacturer of AOs in India. AO demand in India and globally stands at 12ktpa and 300ktpa, respectively.

* VO also announced a capex of INR2.8b under Veeral Organics Pvt. (a wholly owned subsidiary), with a foray into manufacturing of MEHQ, Guaiacol (combined capacity of 2ktpa), and Iso Amylene (capacity of 30ktpa). These are expected to be commissioned by 1HFY24.

* These products are used in polymerization inhibitors, flavors, fragrances, pharmaceuticals, and pesticides. VO has backward integrated, with MEHQ used as a raw material for ATBS production. The management has guided that revenue from MEHQ will be marginal at present.

Valuation and view

* The demand outlook for the ATBS segment remains positive going forward after a temporary blip in FY22. Veeral Organics Pvt. (a wholly-owned subsidiary of VO) is set to commence production of MEHQ, Guaiacol, and Iso Amylene in 1HFY24, which should drive the next level of growth in VO.

* Veeral Additives will commence production of AOs from Butyl Phenol, thus resulting in forward integration. Post amalgamation, VO will become the largest and only doubly integrated manufacturer of AOs in India. The latter is right now imported into the country, with the domestic market seeing huge demand for PP, LLDPE, etc., which is expected to grow at 8% YoY.

* The stock is trading at 38x FY24E EPS and 30x FY24E EV/EBITDA, with return ratios of 20-24%. It has a fixed asset turnover of 2x as of FY22, which is likely to improve to 2.1x by FY24E. We value the company at 45x FY24E EPS to arrive at our TP of INR2,593. We maintain our Buy rating.

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