IGI Logo

ATBS drives yet another quarter; demand remains strong

* VO reported higher-than-estimated revenues (9% above our estimates) in 2QFY23. However, gross margin declined to 45% (down 50bp QoQ). EBITDA was in line, with EBITDAM at 26.2% (up 40bps QoQ). The company was, however, able to maintain its EBITDA/kg margin during the quarter (as per the management).

* The management is focusing on its already announced capacity expansion to 60ktpa from 40ktpa (expected commissioning in 3QFY24), while Ibuprofen demand also remains strong. Butyl Phenols segments has also come back well after a lackluster FY22 and the management expects a strong 2H for both IBB and BP.

* VO has guided for a sales growth of 25-30% YoY in FY23E and FY24E, led by the ramping up of the antioxidant plant, and the company foraying into niche chemicals through Veeral Organics (MEHQ, Guaiacol, and Iso Amylene). The sales mix for 2QFY23 stood at 48% for ATBS, IBB (15%), Butyl Phenol and other derivatives (16%), Customized products (8%), IB and HPMTBE (9%), and the rest was others.

* We expect EBITDAM at 27%/31% for FY23/24E, respectively. This would be driven by captive power plant, decline in raw material costs, and freight rates as well as commissioning of higher margin downstream products. We forecast revenue CAGR of ~29% over FY22-24, translating into an EBITDA/EPS CAGR of 38%/36% over the same period, respectively.

* The stock has underperformed the Nifty-50 index by 10% over the last six months. A gradual ramp-up in expanded capacity over the next two years will drive growth for VO. We value the stock at 40x FY24E EPS to arrive at our TP of INR2,500. We reiterate our BUY rating on the stock.

EBITDA and PAT in line; miss on margins

* Revenue was above our estimate at INR5.7b (up 51% YoY, up 12% QoQ) in 2QFY23.

* EBITDA was in line at INR1.5b (est. of INR1.5b up 47% YoY, up 13% QoQ) in the quarter.

* EBITDA margin came in at 26.2% (v/s 25.8% in 1QFY23 and 27% in 2QFY22) in the quarter.

* Gross margin was at 45% (down 50bp QoQ, down 250bp YoY) in 2QFY23, led by higher RM cost.

* PAT was at INR1.2b (est. of INR1.1b, up 43% YoY, up 15% QoQ) – translating to EPS of INR11.3 (v/s INR9.8 in 1QFY23) in 2QFY23.

* For 1HFY23, revenue was up 41% YoY at INR10.7b with EBITDA at INR2.8b (up 38% YoY). PAT came in at INR2.2b (up 34% YoY) in 1HFY23.

* EBITDAM was flat YoY at 26% (26.6% in 1HFY22) in 1HFY23.

Valuation and view

* The demand outlook for the ATBS segment remains quite strong going forward in 2H as well as FY24. Veeral Organics Pvt. Ltd. (wholly owned subsidiary of Vinati Organics) 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 samples are being sent to customers for approval. 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 expected to grow at 8% YoY).

* The stock is trading at 32x FY24E EPS and 25x FY24E EV/EBITDA, with return ratios of 24-26%. It had a fixed asset turnover of 2x as of FY22. We value the company at 40x FY24E EPS to arrive at our TP of INR2, 500. We reiterate our Buy rating on the stock.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer