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Strong revenue growth, margins impacted

We maintain BUY rating and TP of Rs2,100 with no revisions in our FY22/FY23 estimates as we expect revenue and margins to improve in subsequent quarters. Valiant’s revenue growth is in line with our expectations as the company posted revenue growth of 65.5% YoY and 4.3% QoQ. Gross and EBITDA margins witnessed contraction due to non-favorable raw material prices coupled with the loss of production days at the Jhagadia plant.

Going forward, we expect the same to normalise considering company’s ability to pass through price fluctuation with a quarters’ lag. With ramp-up in enhanced capacities, expected stabilisation of PAP manufacturing unit and higher operational efficiencies, we continue to remain positive on Valiant Organics’ long term prospects.

* Robust sales growth on the back of capex: Valiant reported strong revenue growth of 65.5% YoY (4.3% QoQ) to Rs2,441mn. We believe that increase in revenue is attributable to incremental contribution on the back of enhanced capacities despite a virtual lockdown for majority of the quarter. This robust revenue growth further builds our conviction on the execution capabilities of Valiant as it had significantly invested in capex during FY19- 21. As the lockdown is partially lifted in majority states, and end-user industries are witnessing an uptick in demand, we expect ramp-up across its product portfolio to drive revenue growth as Valiant stabilizes operations of a few of its products.

* Commodity price inflation and loss of production days at Jhagadia unit impact margins: Gross/EBIDTA margins witnessed contraction of 913bps/457bps QoQ (1611bps/1132bps YoY) to 34.5%/20.4% in Q1FY22 due to adverse impact of commodity price inflation leading to higher raw material prices of basic input products such as phenol and PAP (para amino phenol) coupled with non-operational days at Jhagadia plant owing to increased number of Covid-19 cases. Going forward, we expect the margins to improve led by higher utilization of newer capacities, higher efficiencies and rationalisation of raw material prices as we believe Valiant should be able to pass on the price fluctuation and that the margin pressure was temporary.

* PAP colour issue resolved, next step consistent production: The company has managed to resolve its colour issue, a big step in the direction of successful commercialization of PAP. Post this, the company is working on consistent production of large batches of the purest grade PAP and expects the same to operationalize in next few months.

* Valuation and rating: We value Valiant at 18x Jun’23 EV/EBITDA to arrive at TP of Rs2,100 and maintain BUY rating. Considering the healthy revenue growth (despite contraction in margins), we maintain our rating along with no change in FY22E/ FY23E estimates as we expect revenue and margins to improve in subsequent quarters due to higher utilization of new products and rationalisation of RMAT prices. Key risks: stabilization of PAP production, commodity price inflation.

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