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Strong performance...

Vinati Organics Ltd (VOL) enjoys global leadership in two specialty chemicals, with a market share of 70% in IBB (isobutyl benzene) and 80% in ATBS (2-Acrylamindo 2-Methylpropane Sulfonic Acid).

• Revenue grew by 51% YoY in Q2FY23, exceeding our expectations, driven by its key products ATBs and healthy growth across other segments.

• EBITDA grew by 47% YoY, while margins fell by 80bps YoY to 25.8% due to increase in power & fuel costs. Despite this, PAT grew by 36% YoY.

• Revenue growth momentum is expected to continue, given strong demand for its key products, capacity expansion and higher contribution from new products.

• Synergies owing to backward & forward integration, strong cash flows, healthy balance sheet and ROCE & ROE of above 24% (5yr avg.), instills confidence.

• We value VOL at a P/E of 38x on FY24E. Given strong earnings outlook, we upgrade VOL to BUY from Accumulate with a target price of Rs. 2,360.

Revenue growth momentum strong...

Q2FY23 revenue grew by 51% YoY, led by a strong contribution from the ATBS business, and healthy demand across products. ATBS witnessed strong growth led by higher realization and healthy volume. The IBB segment continues to witness a revival led, by traction from its key customers and we expect this growth momentum to continue given the improved outlook for Ibuprofen. Overall demand across products has seen healthy growth. Going ahead, ATBS will continue to be benefitted by current high crude oil prices. VOL is expanding its ATBS capacity from 40KTPA to 60KTPA. Integration of Veeral Additives (VAPL) is likely to contribute Rs.700cr to topline at full capacity. Additionally, Veeral Organics' production of five niche specialty chemicals will also contribute to topline growth. Overall, long term growth outlook has significantly improved, led by introduction of new products, product synergies through backward & forward integration. We expect revenue to grow at a 32% CAGR over FY22- FY24E.

EBITDA growth robust..

Q2FY23 gross margin improved by 250bps YoY to 45.0%. EBITDA grew by 47% YoY, while EBITDA margin declined by 80bps bps YoY to 26.2% on account of higher power costs. PAT grew by 42% YoY to Rs.1,16cr. We lower our EBITDA margin estimates by 60bps & 50bps for FY23E & FY24E, given near term inflationary pressures. Consequently, our EPS estimates for FY23E & FY24E have been reduced by 0.7% & 0.3%, respectively. We expect PAT to grow at a 36% CAGR over FY22-24E.

Valuations

We maintain a positive stance on VOL given its focus on introduction of new products by leveraging growth opportunities in existing portfolio, strong balance sheet and healthy RoE & ROCE of above 24% (avg. last 5years). We value VOL at P/E of 38x on FY24E, and given strong earnings outlook, we upgrade VOL to Buy from Accumulate with target price of Rs.2,360.

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