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At the threshold of next-level growth

Vinati Organic (VO)’s FY21 Annual Report highlights its ability to adapt to change, while delivering robust results during the year. Despite these trying times, the company was able to maintain its status as market leader in the ATBS and IBB segments. With the capacity expansion of ATBS, the addition of Butyl Phenols, and ongoing capex for other IB derivatives, the company is confident of delivering growth, along with stronger synergies. We maintain a BUY rating on the stock, with Target Price of INR2,170.

Lower margins and profitability in FY21; confident on robust performance going ahead

* Revenue declined 7% to INR9.5b in FY21 v/s FY20. This was largely due to muted sales from ATBS – the company’s largest product.

* VO’s gross profit declined 6% to INR5.7b in FY21 v/s FY20. Although, gross margins improved 110bps on lower raw material costs.

* Despite GM expansion, COVID-led disruptions resulted in VO seeing higher operating costs and in turn posting a 330bps decline in EBITDAM. VO’s PAT also de-grew, contracting ~19% to INR2.7b v/s FY20.

* The company generated INR2.2b cash from operations, implying decline of 47% v/s FY20. VO incurred capex of INR0.5b, generating FCF of INR1.7b in FY21 (60% higher v/s FY20).

IBB, Butyl phenol, and other products continue strong run in FY21

* IBB recorded its highest sales ever in FY21 and the management expects further growth in FY22 on consistent demand from its end product – Ibuprofen. VO continued to maintain its market share in IBB globally at ~65%.

*  IBB plant is currently operating at 60–65% utilization. It recorded growth in FY21 on higher demand from Pharma – this is likely to continue for a couple of quarters. Debottlenecking could result in capacity expansion to 50ktpa (from 40ktpa currently).

* VO last year commissioned a new Butyl Phenol unit (which is used in fragrance and anti-oxidants) in India, making it the sole producer. It expects incremental annual revenue of ~INR5b in FY24 – Veeral Additives (VAL) would use 50% of this as captive consumption; thus incremental revenue would be INR2–2.5b – with a ramp-up in the utilization rate to 70–75% in FY22 and full capacity in FY23.

* Other products consisting of HPMTBE, PTBBA/PTBMB, Isobutylene, etc. contributed about 25% to overall sales in FY21. They continue to see growth with capex lined up and expected growth in the domestic and export markets

ATBS sees muted FY21 due to global slowdown

* Sales of ATBS – used in the Construction, Water Treatment, Textiles, Paints, and Paper Coating industries – were impacted in FY21 due to the pandemic and general global slowdown during the year. The base was smaller as one of its large customers saw operational closures.

* Although it posted muted sales in the first half of the year, demand for the product picked up in the latter half. The company is seeing a strong uptake for the product across geographies and applications in FY22.

* VO is the largest producer of ATBS in the world, with global market share of ~65%. It recently expanded its capacity to 40ktpa from 26ktpa. The management expects the plant to reach optimal capacity over the next three years, with revenue potential of INR2.5–3b.

* ATBS’ growth guidance for FY22 stands at 80–85% YoY (30–35% growth on FY20). Globally, the ATBS market is growing at 20–25% YoY, and VO is wellplaced to capture the major share of this potential growth.

VO’s growth strategy aligned with VAL merger

* The company is in the process of amalgamating VAL with VO, well in line with its growth strategy. This would result in the forward integration of Butyl Phenol to anti-oxidants (AOs), creating synergies and generating incremental revenue of INR3b by FY24E.

* This would enable better synergies, making VO the largest and only backward/forward integrated manufacturer of AOs. AO demand in India and globally stands at 12ktpa and 300ktpa, respectively (VO’s capacity would be ~24ktpa).

* AOs are currently imported into the country, and the domestic market is seeing huge demand from PP, LLDPE, etc. (which is expected to grow at 8% YoY). Import substitution and export opportunities would aid VO in this niche category.

Valuation and view

* Disruption in various industries has led to demand concerns in ATBS, with a slower-than-expected ramp-up post the lifting of COVID-related lockdowns/restrictions. We expect demand for ATBS to grow 80–85% YoY in FY22 (30–35% on FY20 levels) – in line with the management guidance.

* The gradual ramp-up of expanded capacity over the next three years would drive huge growth for VO, with further development on product molecules currently under R&D. With new products such as AOs and Butyl Phenol resulting in import substitution, we expect the export mix to moderate to ~70% over FY23–24E (from 76% in FY21).

* We expect revenue to grow 2.6x by FY24E (v/s FY21), with ~56% YoY growth in FY22E (in line with the management guidance). The company is confident of being among the top five global players for Butyl Phenol and AOs over the next 4–5 years.

* The stock is trading at 36x FY23E EPS of INR50.5 and 26x FY23E EV/EBITDA, with attractive return ratios of ~25% (+600bps v/s FY21). It has a fixed asset turnover of 1.3x, which is likely to double over the next three years. We expect a 34% EBITDA CAGR over FY21–24E and value the company at 43x FY23E EPS to arrive at TP of INR2,170. We maintain a BUY rating on the stock.

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