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Growth prospects remain strong due to multiple tailwinds

* VO reported 6% lower-than-estimated revenue in 1QFY23. However, gross margin was in line with our estimate at 45.5% (-50bp QoQ). EBITDA missed our estimate, with EBITDAM at 25.8% (-270bp QoQ). The company was, however, able to maintain its EBITDA/kg margin during the quarter.

* ATBS demand has crossed pre-COVID levels and the management has already announced capacity expansion to 60ktpa from 40ktpa (expected to be commissioned in 2HFY24), while Ibuprofen demand has also picked up. These, in turn, led to strong demand for IBB, which is expected to remain strong going forward as well.

* VO has guided for sales growth of 25-30% YoY in FY23E and FY24E, led by commissioning of an antioxidant plant, and foray into niche chemicals through Veeral Organics (MEHQ, Guaiacol and Iso Amylene). The sales mix for 1QFY23 stood at 44% for ATBS, IBB (13%), Butyl Phenol and other derivatives (21%), Customized products (8%), IB and HPMTBE (9%) and the rest was Others.

* We expect margin to be better going forward with EBITDAM at 29%/31% for FY23/24E. 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 ~26% over FY22-24, translating into an EBITDA/EPS CAGR of 35%/33% over the same period, respectively.

* The stock has outperformed the Nifty-50 index by 15% over the last six months. A gradual ramp-up in expanded capacity over the next three years will drive growth for VO. We value the stock at 45x FY24E EPS to arrive at our TP of INR2,680. We maintain our BUY rating.  

Miss on EBITDA and PAT led by higher raw material costs

* Revenue grew 31% YoY and 4% QoQ to INR5.1b (6% lower than our estimate)

* EBITDA grew 29% YoY, but declined 6% QoQ to INR1.3b (13% below our estimate).

* Gross margin stood at 45.5% (est. 45%) in 1QFY23.

* EBITDA margin stood at 25.8% in 1QFY23 v/s 28.6% in 4QFY22.

* PAT grew 25% YoY (flat QoQ) to INR1b (11% lower than our estimate), translating into an EPS of INR9.8.

* EBITDA/PAT miss was led by higher raw material costs due to elevated crude oil prices

Valuation and view

* The demand outlook for the ATBS segment remains positive going forward after a temporary blip in FY22. 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-level of its growth story.

* Veeral Additives will commence production of AOs from Butyl Phenol, thus resulting in forward integration. Post amalgamation, VO would become the largest and only doubly integrated manufacturer of AOs in India. The latter is right now imported into the country and the domestic market is seeing huge demand for PP, LLDPE, etc. (which is expected to grow at 8% YoY).

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