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Robust revenue growth, margins play spoilt sport

We maintain a BUY rating with a revised TP of Rs1,975 (earlier Rs2,100); revision is largely on account of increase in RMAT costs, which has led to downgrade in earnings for FY22E/FY23E. The company posted impressive revenue growth of 64% YoY and 12% QoQ driven by improved realisation rates and increasing utilisation of enhanced capacities; we believe that this strong revenue growth should sustain. However, high RMAT and freight costs impacted EBITDA significantly - which came below our estimates. Given the current global scenario around input costs of chemicals, we have decreased our FY22E/FY23E EBITDA estimates by 15.5/13.4% and consequently PAT estimates by 13.4/10.0% respectively. We believe the company should be able to pass through the impact with lag and considering ramp-up of enhanced capacities and expected stabilisation of PAP manufacturing unit, we continue to remain positive on Valiant Organics’ long term prospects.

* Revenue growth continues to impress: Valiant reported strong revenue growth of 63.9% YoY (11.9% QoQ) to Rs2,732mn which is in line with our expectations. We believe that this impressive revenue growth is attributable to the incremental contribution from enhanced capacities and higher realisation buoyed by disruptions faced by Chinese peers mainly in the Chlorophenols segment. The company showcased its strong execution capabilities, even though a good part of the incurred capex is yet to show steel. We further believe, with the stabilization of PAP and Para Anisidine in Q3FY22, revenue growth is expected to sustain in the coming quarters.

* Commodity price inflation continues to play spoilt sport: Gross/EBIDTA margins witnessed a contraction of 210bps/304bps QoQ (1380bps/1093bps YoY) to 32.4%/17.3% in Q2FY22 due to adverse impact of soaring RMAT prices. Prices of basic input products such as phenol and PAP (para amino phenol) remained high during the quarter (almost doubled from that of 2020), however as the company should be able to pass through the price increase with a lag, we believe the margin pressure is short to medium term.

* PAP colour issue resolved, next step consistent production: The company is currently producing PAP in small quantities (~100MT/m) and is working towards continuous PAP production as the same would result in reduction in overheads. Going forward, the management highlighted that they should be able to scale up manufacturing to ~300MT/m, with focus on moving to continuous manufacturing.

* Valuation and rating: We roll over to Sept’ 23 EBITDA and maintain our target multiple of 18x EV/EBITDA to arrive at TP of Rs1,975. Considering the steep contraction on the margin front, we have revised our FY22/ FY23 estimates and decreased EBIDTA and earnings to account for higher RMAT prices. However, we believe margins should improve in subsequent quarters with cooling-down of RMAT prices and pass through of price increase. Key risks to thesis: Delay in ramp-up in PAP production, commodity price inflation, and an uptick in Chinese production.

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