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Profitability momentum continues...

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 38% YoY in Q3FY23, exceeding our expectations, driven by its key products ATBs and healthy growth across other segments. 9MFY23 PAT was up by 40% YoY.

• EBITDA grew by 77% YoY, while margins expanded by 700bps YoY to 32.2% led by superior revenue growth & better product mix. Consequently, PAT grew by 51% 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 30x as we roll forward to FY25E. Given strong earnings outlook, we maintain a BUY rating on VOL, with a target price of Rs. 2,148.

Revenue growth momentum continues...

Q3FY23 revenue grew by 38% 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 improves...

Q3FY23 gross margin improved by 270bps YoY to 51.6%. EBITDA grew by 77% YoY, EBITDA margin expanded by 700bps bps YoY to 32.2% on account of higher revenue growth and better product mix. PAT grew by 51% YoY to Rs.125cr. We upgrade our EBITDA margin estimates by 90bps for FY23E, given margin expansion in Q3FY23, while maintaining our EBITDA margin estimates for FY24E at 29.3%. We expect PAT to grow at a 24% CAGR over FY23E-25E.

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 30x as we roll forward to FY25E, and given strong earnings outlook and healthy margin profile, we maintain Buy rating with target price of Rs.2,148.

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