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ATBS demand weak...earnings revival in FY22

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).

* Q3FY21 revenue declined by 6% YoY on account of lower contribution from ATBS business, as oil & Gas sector was subdued.

* EBIDTA margins fell by 250bps YoY to 32.3% due to lower contribution from high margin ATBS is the sales mix and higher cost.

* Going ahead, revenue & profitability to see upward trajectory in FY22 led by contribution from new product Butyl phenols, improved off-take from IBB & gradual revival in ATBS.

* Niche product portfolio, new value added products and improving outlook of domestic specialty chemical sector is positive.

* We remain constructive on VOL in the long term given strong cash flows, debt free balance sheet, superior margin profile and ROCE & ROE of above 24% & 24% (5yr avg.).

* We value VOL at a P/E of 32x on FY23E, given strong earnings outlook we upgrade to BUY from Accumulate with a target price of Rs1,539.

Revenue growth to declines...

Revenue de-grew by 6% YoY in Q3FY21 due to lower off-take from ATBS. Revenue growth from ATBS was impacted by decline in oil prices and overall realization on account of pass through of lower commodity prices. ATBS contributes 57% (FY20) of overall sales, while ATBS applications includes Oil & Gas, water treatment, paints & coating, textiles, adhesives. The revenue contribution from ATBs Oil & gas segment is around ~20%. However, Oil & Gas prices are on a upward trajectory in recent times. Considering this we expect revenue from ATBs to improve going ahead starting from FY22. The IBB volumes continued to steady on account of improved off-take due to current pandemic. All other products namely IB, HPMTBE, customized products saw stable demand. The new product Butyl phenols has started to gain momentum. We expect Butyl phenols contribution to overall revenue to improve going ahead starting from FY22E. Company has announced amalgamation of Veeral Additives (VAPL) post statutory approvals, which is expected contribute Rs.500cr to topline at full capacity. VAPL is into the business of manufacturing Antioxidants. Acquisition is forward integration as its new product Bhutyl Phenol is RM for manufacture of Antioxidants. We factor revenue to grow by 34% CAGR over FY21E- FY23E.

Profitability growth to pick-up in FY22E.

EBITDA margin declined by 250bps YoY to 32.3% due to weakness in ATBS segment and higher employee cost. Consequently, profitability declined by 4% YoY to Rs.64cr. Going forward, we expect profitability to improve led by revival in ATBS demand. We expect PAT to grow by 36% CAGR over FY21E-22E led by revival in ATBS, IBB & and Butyl phenols contributing towards overall top-line.

Valuations

We continue to maintain a positive outlook on VOL, given its investment in new capacities for introduction of new products, leveraging growth opportunities in existing product portfolio, strong balance sheet and healthy RoE & ROCE of 24% & 24% (avg. last 5years). The integration of VAPL is likely to add more synergies to its existing portfolio. We value VOL at P/E of 32x on FY23E and upgrade to BUY from Accumulate with a target price of Rs.1,539.

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