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Volume pressure in Q1; FY25E numbers downgraded

Vinati Organics (Vinati) reported muted Q1 performance marred by demand challenges in exports market despite product prices being relatively resilient. Exports volumes were impacted due to higher offtake in 2HFY23 which is expected to normalize in 1HFY24E with the ongoing inventory destocking. Resultantly, Vinati’s revenues/ EBITDA/ PAT declined 15%/ 17%/ 18% YoY and 14%/ 28%/ 28% QoQ. ATBS expansion and MEHQ/ Guaiacol projects are on track and likely to be commissioned by end-FY24E. For ATBS expanded capacity, management confided that product offtake is secured from existing customers thus will not impact volumes despite competition coming in. We believe that impact from competition may be felt from FY25E. For FY24E, management guided revenues of ~Rs20bn with 20-25% growth for FY25E. Based on its guidance, we have lowered our earnings estimates for FY24E/ FY25E substantially by 15%/ 21%. Due to weakness in chemical sector, we have lowered our valuation multiples across the sector and Vinati’s P/E multiple from 35x to 33x. Based on our revised estimates and lower multiple, we downgrade the stock from Buy to Sell with a revised TP of Rs1,625 (earlier Rs2,190).

Lower volume offtake impacts Q1 performance

During Q1, Vinati’s revenues declined 14.9% YoY and 14.4%QoQ, of which 90% decline is attributed to lower volumes while the rest due to lower pricing. Product prices remained largely resilient as its key RM; MTBE prices remained largely stable. EBITDA margins declined 50bps YoY and 500bps QoQ at 25.3%. The company indicated that Q2 performance is also likely to be similar to Q1 while ATBS demand is expected to normalize in 2HFY24E.

Margins may remain under check due to lower margins from new products

Vinati earns higher margins on its legacy portfolio; however, new products have lower margins. It guided 15-20% EBITDA margins for butyl phenols and anti-oxidants segments. Considering rising contribution from new products and competition in ATBS, we believe overall margins to remain under check going forward. Management considers 20% RoCE threshold for its new projects/ products.

ATBS, MEHQ/ Guaiacol projects on track to be commissioned by end-FY24E

Vinati’s two major projects i.e. ATBS expansion and greenfield MEHQ/ Guaiacol are on track and likely to be commissioned by end-FY25E. Management remained confident on ATBS volumes from expanded capacity citing secured offtake from its existing customers. Nonetheless, we remain cautious as competition is coming with a sizable capacity which can exert pressure on volumes and pricing.

Substantial downward revision in FY25E earnings, margins to remain under check

Although, Vinati’s new projects are expected to start contributing meaningfully from FY25E, management guidance remained lower than our earlier estimates. Based on management guidance, we have lowered our FY24E/ FY25E revenue and PAT estimates by 8.9%/ 15.5% and 15.0%/ 21.3% respectively. The stock is trading at 46.2x/ 36.9x FY24E/ FY25E EPS of Rs39.3/ Rs49.2. Based on lowered earnings and multiple, we downgrade the stock from Buy to Sell with a revised TP of Rs1,625 (earlier Rs2,190 ). Risks – Competition in ATBS, delayed recovery in exports demand.

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