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About the stock: Vinati Organics is a leading manufacturer of specialty chemical and organic intermediaries with global market leadership in its two key products- 2- Acrylamido 2 Methylpropane Sulphonic Acid (ATBS) and Isobutyl Benzene (IBB). Starting with IBB and subsequent forays into IB, ATBS, Butyl phenols, the company is now moving towards antioxidants.

* The company has two manufacturing facilities at Mahad and Lote

* In terms of revenue contribution, ATBS constitutes ~40-50% of overall revenue followed by IBB of 20-30% while the rest is from other segments such as IB, Butyl phenols and derivatives

Q2FY22 Results: Revenues were above our estimates while PAT came in lowerthan-expected owing to lower-than-expected gross margins.

* Reported revenue growth of 70% YoY to | 374.1 crore, led by strong growth from ATBS segment

* Gross margins declined 1230 bps YoY to ~47.6% while EBITDA margin contracted 1130 bps YoY to 27%, due to higher RMAT (up 123% YoY) and other operating cost (up 90% YoY)

* EBITDA was up 20% YoY to | 101 crore

* PAT increased 31% YoY to | 81.3 crore owing to higher other income (up 868% YoY)

What should investors do? The stock appreciated at 40% CAGR in last three years

* We retain BUY rating on the back of better growth outlook from ATBS and newer products such as Butyl phenols and antioxidant

Target Price and Valuation: We value Vinati Organics at 50x P/E FY23E EPS to arrive at a revised target price of | 2270/share (earlier | 2300/share).

Key triggers for future price performance:

* Upcoming butyl phenol capex to aid revenue growth further

* Vertical integration into antioxidant expands revenue visibility

* Strong demand from ATBS likely to support group operating margins

Alternate Stock Idea: Apart from Vinati Organics, in our chemical coverage we also like Neogen Chemical.

* Trigger for Neogen Chemical’s future revenue growth would be increasing CRAMS opportunity

* BUY with a target price of | 1570

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