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ATBS demand outlook robust; realizations firm

* Oil drilling activities remain vigorous globally as the countries move away from their dependence on Russian oil and gas. Average global rig counts have risen 10% since the Russia-Ukraine conflict started in Mar’22.

* In line with the above, Vinati Organics (VO)’s management outlook for ATBS remains robust and it has announced a 50% capacity expansion to 60ktpa (from 40ktpa), which is likely to come online in 2HFY24. ATBS primarily caters to the oil and gas industry.

* Exports form a major part of VO’s overall revenue and according to our database, volumes remain steady YoY. Implied blended realizations in USD/kg have also been firm and move in line with the Brent prices over a longer period of time, according to our research.

* We expect RoE to improve to 26% for FY24 from 21% in FY22. The stock is trading at 32x FY24E EPS and 25x FY24E EV/EBITDA. We reiterate BUY on the stock, and value it at 35x Dec’24 EPS to arrive at our TP of INR2,740

ATBS demand to remain strong in the near term….

* ATBS is a unique versatile compound having a variety of end-user industry applications such as in water treatment chemicals, paints & coatings, adhesives, textile chemicals and personal care. However, its most important use is in the enhanced oil recovery industry.

* According to Baker Hughes, the global rig counts have increased to an average of 1,747 in CY22 from an average of 1,361 in CY21 with North America’s rig count being at an average of 897 in CY22 v/s an average of 606 in CY21. Average rig counts in Europe have risen 47% to 115 in Dec’22 v/s Mar’22 level.

* ATBS demand is likely to stay strong as oil drilling activities remain robust with the US, Europe and the world at large trying to move away from their dependence on Russian oil and gas after the Russia-Ukraine conflict started, which created volatility in the global oil markets.

* The global ATBS market stood at USD7.7b in CY21 and it is expected to increase to USD17b by end-CY28, reporting ~12% CAGR during the period. In line with all the above, VO has announced an expansion of its ATBS capacity by 50% to 60ktpa (>65% global market share) from 40ktpa, which is likely to come online in 2HFY24, although the upcoming domestic competition could be a worry.

…with exports realization moving in line with Brent prices

* Exports accounted for 69% of VO’s overall revenue in FY22. ATBS is the largest product of VO and currently contributes 48% to its overall revenue (53% in FY22). VO also enjoys >65% global market share in IBB, which is one of the main raw materials used in production of Ibuprofen. Demand for both remains strong after a lackluster FY21 and FY22.

* VO reported export sales of 13,359mt in 3QFY23, down 10% QoQ and 3% YoY. Average rig counts fell in North America during the quarter and that might have been one of the reasons for this decline. Export sales for 9MFY23 at 43,353mt were similar to that of the 9MFY22 level.

* As per our database, overall export realizations for VO stood at ~USD3/kg in 3QFY23, flat v/s 2QFY23. During the same period, Brent has corrected 11% QoQ to USD88.4/bbl. That being said, if we look at a much longer period, our research suggests that the realizations move in line with Brent prices (Exhibit 7).

* Though global oil market volatility persists due to concerns on both demand and supply, we believe that near-term ATBS demand should remain strong and VO’s realizations would be healthy in the export market. Our Brent assumptions too stand at USD98/USD90/USD90 for FY23E/FY24E/FY25E, respectively

Valuation and view

* ATBS demand outlook remains quite strong going forward in FY24E. Veeral Organics Pvt. Ltd. (a wholly owned subsidiary of VO) is also set to commence production of MEHQ, Guaiacol, and Iso Amylene in 1HFY24E, which should propel VO into the next leg of its growth story.

* Veeral Additives has commenced production of AOs and awaits customers’ approvals. Post-amalgamation, VO would become the largest and the only doubly integrated manufacturer of AOs in India. Currently, AOs are being imported and the domestic market is seeing huge demand for PP, LLDPE, etc. (which is likely to grow at 8% YoY).

* The stock is trading at 32x FY24E EPS and 25x FY24E EV/EBITDA, with return ratios of 23-26%. It had a fixed asset turnover of 2x as of FY22. We value the company at 35x Dec’24E EPS to arrive at our TP of INR2,740. Reiterate BUY.

* Key risk to our call is the upcoming competition in ATBS, which could hurt VO.

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