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Margin expands marginally QoQ; ATBS outshines

* VO’s reported earnings in 2QFY22 was in line with our estimates, with a marginal improvement in EBITDA margin QoQ to 27% (+70bp QoQ). The YoY decline was largely on the back of rise in raw material prices resulting in gross margin declining from 60% to 48% YoY.

* The management has revised down its EBITDA margin guidance to 30% (from 32- 35% in the last quarter, which was the second downward revision in the recent past) as it expects operating costs to remain around similar levels, with Butyl Phenols being sold at a lower margin as VO is a new entrant in this segment.

* The management has guided at a sales growth of 50% in FY22, and 30% in FY23 - led by a recovery in IBB and commissioning of the antioxidant plant.

* On these lines, we revise down our FY23E/FY24E EBITDA margin to 30-31% from 31-32% earlier. This resulted in an EPS cut of 7%/2%/2% in FY22E/FY23E/FY24E.

* We build in margin improvement hereafter as (a) the pressure of commodity price inflation fades over next 2–3 quarters and (b) Veeral Additives comes on-stream (expected in 4QFY22) – which would consume 50% of Butyl Phenol internally.

* We value the company in line with its peers at 40x Dec’23 EPS (v/s 43x earlier) to arrive at our TP of INR2,160/share, factoring in the aforementioned downward revision in EBITDA margin and likely volatility in the same until the current inflationary and the supply chain disruption environment settles down.

* The stock has underperformed the Nifty by ~10% over the last six months on the back of concerns related to margin dilution. That said, gradual ramp-up in expanded capacity over the next three years would drive huge growth for VO. We forecast ~38% revenue CAGR over FY21-24E (unchanged), translating in an EBITDA-EPS CAGR of 29% over the same period. Maintain Buy.

In line 2QFY22

* Revenue was in line with our estimate at INR3.7b (+70% YoY, -3% QoQ). EBITDA came in at INR1b (+20% YoY, flat QoQ). EBITDA margin stood at 27% (v/s 26.3% in 1QFY22, est. 25.9%). Gross margin expanded to 48% (+300bp QoQ). PAT stood at INR814m (+31% YoY, +1% QoQ), translating into an EPS of INR7.9 (est. INR7.5).  Operations at the Mahad plant were temporarily halted due to unprecedented

* Operations at the Mahad plant were temporarily halted due to unprecedented rainfall and floods in the area in Jul’21. The management has assessed the loss of business interruption and submitted its claim to the Insurance company. The same would be considered in the financial statements after the settlement.

* In 1HFY22, Revenue was up 69% YoY to INR7.6b (on the back of an improvement in the ATBS segment), with EBITDA at INR2b (+12% YoY – on a reduction in EBITDA margin to 27% in 1HFY22 v/s 40% in 1HFY21). PAT stood at INR1.6b (+21% YoY).

Valuation and view – maintain Buy

* ATBS clocked the highest ever quarterly sales in 2QFY22. The demand outlook is positive for 2HFY22 as well. Butyl Phenol recorded a revenue of INR800m in 1HFY22 and is expected to grow to INR2,000m for the full year FY22.

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