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New product launches to drive the next leg of growth

* Vinati Organics (VO)’s FY23 Annual Report highlights its long-term relationships with clients as well as its focus on R&D expertise. These have helped the company amplify the value for all its stakeholders, despite cyclicality and macro headwinds.

* VO is facing demand challenges in its key product, ATBS, due to inventory build-up by customers because of high offtake during 2HFY23. However, management expects the launch of new products in FY24 and healthy demand in rest of the products to partially offset the ATBS weakness.

* Even in the face of short-term challenges encountered by the company, the longterm prospects continue to remain bright. Hence, we reiterate our BUY rating on the stock with a TP of INR2,150 (premised on 40x FY25E EPS of INR54).

Near-term weakness in ATBS…

* With a capacity of 40ktpa at end of FY23, VO is the largest producer of ATBS in the world. It commands a global market share of 65%.

* ATBS demand is likely to remain weak in the near term owing to inventory build-up by customers during 2HFY23. However, long-term outlook remains bright as demand is expected to rebound gradually with normalization of global ATBS inventory levels.

* Further, the phenomenon of inventory destocking is witnessed only in oil and gas end-markets that account for 30-40% of global ATBS consumption. The balance 60-70% demand comes from other sectors like personal care, mining and water treatment where demand is likely to remain steady.

to be partially offset by new product launches

* Although VO is facing headwinds on ATBS front, the demand for its other key product, IBB, witnessed strong growth in FY23. The momentum is anticipated to sustain in FY24 as well.

* Veeral Additives Private Ltd. (VAPL) has commenced commercial supply of antioxidants in domestic as well as international markets and these will start contributing to revenue from FY24 onwards. The installed capacity of antioxidants is twice the domestic demand, which enables VAPL to cater to the global market. Therefore, it is a significant global player in addition to being an import substitution play.

* Further, the company is also set to commence production of MEHQ, Guaiacol and Iso Amylene derivatives by Mar’24 through Veeral Organics Pvt. Ltd. (VOPL), a wholly owned subsidiary of VO. The total capacity of Anisole will be 5ktpa and that of MEHQ and Guaiacol combined will be 3ktpa.

Valuation and view

* VOPL is set to start production of MEHQ, Guaiacol, Anisole and Iso Amylene by end-FY24, which should propel VO into the next leg of its growth story.

* VAPL, on the other hand, has commenced the commercial supply of AOs and management expects to complete the amalgamation by Dec’23. Post the amalgamation, VO would become the largest and the only doubly-integrated manufacturer of AOs in India

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