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Got the right formula

We initiate coverage on Valiant Organics, a chemicals manufacturer having a modest but niche product portfolio, with a BUY and TP of Rs2,100. Valiant’s proven expertise in niche chemistries, agile manufacturing and innovative product selection strategy have helped it stand out in a congested chemicals space. Its remarkably large market shares in small but critical products undergirds its indispensability to clients. Our conviction is further bolstered by its sustainably high margins, superior return ratios and low leverage, and at the same time, relatively undemanding valuations.

Strong foothold in existing chemistries:

Valiant’s dominance in its existing chemical processes (chlorination, ammonolysis, and hydrogenation) demonstrates its capabilities, thanks to its distinctive way of doing business, technical expertise, and long-term connections. Valiant’s already completed capital investment endeavors of ~Rs4.7bn during FY19-21, driven by heightened demand for existing products, opportunity to expand product portfolio, and high utilization of plants, should steer revenue growth of ~21.9% CAGR during FY21-24E. Valiant also stands to gain on demand due to growth in end-user industries, significant changes in global dynamics, and emerging gaps in the supply chain.

Commercialized production of Para Amino Phenol (PAP), one of the first in India:

Valiant’s indigenous manufacturing of PAP is a testament to its deep understanding of chemistries given PAP’s complex production technique. Where others have failed or got considerably delayed, Valiant has built a 12,000 MTPA capacity of PAP, which should, at peak utilization, incrementally contribute Rs3-4bn to revenues.

Product selection strategy, integrated model boosts margins:

Valiant’s integrated model combined with its product selection strategy helps the company capitalize on niche market opportunities. Its presence across value chain and multipurpose plants creates flexibility on types of products and quantities, effectively allows Valiant to better manage demand cyclicality and unprecedented scenarios while custom synthesis creates dependence of clients on the company. Valiant’s forward and backward integrated model drives margin expansion as it attempts to move up the value chain.

Valuation & Risks:

We assign EV/EBITDA multiple of 18x on June’23 EBITDA post which we arrive at a target of Rs2,100. Our downside case suggests a potential TP of Rs1,250 driven by delay in PAP process stabilization and high RM prices implying limited downside, on the flip side higher realization of PAP and paracetamol can lead to a possible TP of Rs2,630 (upside case). We believe Valiant’s unique product portfolio coupled with integrated supply chain management and healthy financials deserves a higher valuation compared to generic chemical companies and bridging the gap with valuations of specialty companies. We believe that the risk-reward balance at CMP is demonstrably in its favour. Key company-specific risk to the thesis: stabilization of PAP production.

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