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New products to drive growth...margin to improve

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

* FY22 revenue grew by 69% YoY led by higher realization, better off-take from Butyl phenols and stable demand from other segments.

* EBITDA grew by 23% YoY, while margins fell by 1,007bps YoY to 27% due to higher input cost. Despite this PAT grew by 29% YoY.

* The long term outlook has significantly improved on account of capacity expansion and new product launches.

* Synergies owing to backward & forward integration, strong cash flows, healthy balance sheet and ROCE & ROE of above 23% (5yr avg.), we have a positive long term outlook on the stock.

* We value VOL at a P/E of 35x (4 year avg.) on FY24E, considering strong earnings outlook we upgrade to Buy with a target price of Rs2,154.

New products to drive growth

FY22 Revenue grew by 69% YoY led by higher realization on account of higher commodity prices, strong contribution from ATBS business and better off take from new products. IBB growth has improved led by traction from its key customers. While Butyl phenol is gaining traction with growth seen in current quarter. Overall demand across products has seen healthy growth. Going ahead, ATBS will continue to benefit by current high crude oil prices. IBB growth is likely to be driven by improvement in Ibuprofen demand and higher capacity utilization from butyl phenols. Further, Integration of Veeral Additives (VAPL) is likely to contribute Rs.700cr to topline at full capacity. While expansion of Butyl phenol capacity from to 50000 TPA, will be used for manufacturing antioxidants. Additionally, manufacturing of 5 niche specialty chemicals through Veeral organics will also add 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 by 27% CAGR over FY22- FY24E.

Input cost hurt margins... margin improvement to be gradual.

FY22 Gross margin declined by 970bps YoY to 47% due to higher raw material prices. Though EBITDA grew by 23% YoY, EBITDA margin declined by 1007bps YoY to 27% on account of higher other expenses, as freight & power cost increased sharply. Supported by higher other income, PAT grew by 29% YoY to Rs.347cr. Given near term inflationary environment, we lower our EBITDA margin estimates by 200bps & 300bps for FY23E & FY24E. Consequently, our EPS estimates for FY23E stand reduced by 3%. Despite downgrade, we expect PAT to grow by 35% CAGR over FY22-24E.

Valuations

We maintain our positive stance on VOL, given its focus on introduction of new products by leveraging growth opportunities in existing portfolio through backward, forward & horizontal integration, strong balance sheet and healthy RoE & ROCE of above 24% (avg. last 5years), instills our confidence. We value VOL at P/E of 35x on FY24E and upgrade to Buy with target price of Rs.2,154.

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