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Lower OPEX and employee cost leads to better margin

* VO reported a beat on our EBITDA estimate, with gross margin in line at 46% (-300bp QoQ). Revenue was above our estimate in 4QFY22, with EBITDAM at 28.6% (+340bp QoQ).

* The management has guided at a sales growth of 25-30% YoY each in FY23 and FY24, led by the commissioning of an antioxidant plant and foray into niche chemicals through Veeral Organics (an Agrochemical intermediate). It plans to commission Veeral Additives soon and ramp it up to full utilization in three years.

* We expect margin to be better going forward, with EBITDAM at 29%/31% in FY23/FY24. This will be driven by a captive power plant, decline in raw material cost, as well as the commissioning of higher-margin downstream products.

* Our revenue growth estimate of 66% was in line with the 69% growth it achieved in FY22. We forecast a revenue CAGR of ~27% over FY22-24, translating in an EBITDA/EPS CAGR of 35%/33% over the same period.

* The stock has underperformed in the last six months on the back of margin dilution concerns. A gradual ramp-up in expanded capacity over the next three years will drive growth for VO. We value VO at 40x FY24E EPS to arrive at our TP of INR2,379/share. We maintain our Buy rating.

EBITDAM expands QoQ; gross margin in line

* Revenue was above our estimate at INR4.9b (up 74% YoY and 32% QoQ).

* EBITDA too was above our estimate at INR1.4b (up 40% YoY and 50% QoQ), led by lower employee expenses and OPEX. EBITDA margin stood at 28.6% (v/s 25.1% in 3QFY22 and our estimate of 22.1%). Gross margin was in line at 46% (down 300bp QoQ).

* PAT stood at INR1b (up 43% YoY and 21% QoQ), translating into an EPS of INR9.8 (v/s INR8.1 in 3QFY22).

* In FY22, revenue rose 69% YoY to INR16.2b, with EBITDA at INR4.3b (+23% YoY). Margin fell from 37% in FY21 to 27% in FY22. PAT stood at INR3.5b (up 29% YoY.  The company has declared a dividend of INR6.5/share in FY22.

Valuation and view

* The demand outlook for the ATBS segment remains positive going forward, after a blip for a brief period in FY22. Butyl Phenol is expected to generate INR5b in revenue over the next two years, with VO set to start production of an Agrochemical intermediate through Veeral Organics in FY24.

* Veeral Additives will commence production of AOs from Butyl Phenol, thus resulting in forward integration. Post amalgamation, VO will emerge as the largest and only doubly integrated manufacturer of AOs. The latter is right now imported into India and the domestic market is seeing huge demand for PP, LLDPE, etc. (the same is expected to grow at 8% YoY). The management expects AOs to contribute ~25% of total sales two-to-three years down the line.

* The stock is trading at 33x FY24E EPS and 26x FY24E EV/EBITDA, with return ratios of 23-25%. It has a fixed asset turnover of 2x as of FY22, which is likely to improve to 2.1x by FY24E. We value the company at 40x FY24E EPS to arrive at our TP of INR2,379/share. We maintain our Buy rating.

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