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ATBS, butyl phenols to sustain growth momentum…

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

Q2FY23 Results: Numbers were above our estimates on all fronts, driven by strong performance from both ATBS & Butyl phenols.

* Reported revenue growth of 51.4% YoY to | 566.3 crore, led by strong performance from ATBS & Butyl phenol segments

* Gross margins fell 253 bps YoY to 45% while EBITDA margin contracted 78 bps YoY to 26.2%. Absolute EBITDA was up 47% YoY to | 148.5 crore

* PAT increased 43% YoY to | 116 crore

What should investors do? The stock appreciated at 24.3% CAGR in last three years.

* We change our rating from HOLD to BUY as the strong outlook for ATBS and newer products justifies premium valuation and recent correction provides decent upside

Target Price and Valuation: We value Vinati Organics at 45x P/E FY24E EPS to arrive at a revised target price of | 2320/share (earlier | 2320/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 strong performance visibility

* BUY with a target price of | 1680

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