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Gearing up for next level growth; maintain Buy

* VO has announced a scheme of amalgamation of Veeral Additives (VAPL) into VO, subject to NCLT approval. VAPL is in the business of manufacturing antioxidants for polymers. Following the deal, VO will be the largest and only integrated manufacturer for certain antioxidants in India, with an additional revenue potential of Rs3bn (Rs5bn including Butylated Phenols).

* VO EBITDA came in 12% below estimates on adverse product mix and higher employee and other costs. PAT beat estimates by 12%, led by low ETR (tax adjustments of Rs110mn). Reported revenues were in line with our estimates.

* Despite stable gross margins, EBITDA margins fell ~250bps yoy due to higher employee costs (up 7% yoy on new plant commission) and other expenses. Recently commissioned Butylated Phenol (BP) plant led to higher depreciation, up 16% yoy/flat qoq.

* Strong revenue outlook in IBB, recovery in ATBS and VAPL amalgamation synergies remain key triggers for the stock. We cut our FY22 estimates by 7.5%, factoring in delayed pickup in BP, delayed commencement of new capex and increase in the number of shares post amalgamation. Maintain Buy/EW in EAP, with a TP of Rs1,330 (28x FY23E EPS).

IBB, IB Derivatives and BP register growth; ATBS traction weak: Revenues declined 6.3% yoy to Rs2.23bn, hit by continued weak demand for ATBS (~38% of sales vs. ~56% CPLY) amid sluggish activity in the global oil industry and soft crude prices. With high export exposure for ATBS and strong recovery in crude oil, we expect FY22 growth should be >20%. IBB registered some improvement on a year basis, led by healthy demand from its key customer, BASF. IB derivatives and BP portfolio gained traction and delivered decent growth, albeit with lower margins. Total revenue contribution from ATBS and IBB stood at ~63% in Q3 vs. ~76% CPLY. On the other hand, high margin customized products proportion was a mere 6% vs. 17% CPLY, resulting in EBITDA margin contraction of 250bps yoy to 32.3%, despite steady gross margins (~55%). Higher employee costs and other expenses further weighed on margins.

VAPL acquisition paves way for a monopolistic narrative in certain products: The three antioxidants manufactured by VAPL (Veenox 1010, 1076, 168), primarily cater to the polymers segment by enhancing the wear & tear capacity of the product. VAPL has combined AO capacity of 24kmtpa, with an additional 16kmtpa for captive consumption. Since the critical raw materials required for manufacturing these AO include 2, 4 DTBP & 2, 6 DTBP (BP derivatives), which shall be sourced from VO directly, which would create an efficient backward integration for this chain. Demand for such AO would be driven by increased consumption of plastics such as LDPE, LLDPE, and PP. The plant is expected to commence operations by Sept-Oct’21, with incremental contribution of ~Rs3bn at peak utilization (in 3-4 years) expected. HPL Additives is the only domestic competitor for these products.

Valuation and outlook: Strong revenue outlook in IBB, recovery in ATBS and VAPL amalgamation synergies remain key triggers for the stock. We reduce our FY22 estimates by 7.5%, factoring in delayed pickup in BP, delayed commencement of new capex and increase in the number of shares post amalgamation. Maintain Buy with a TP of Rs1,330 (28x FY23E EPS) and EW in EAP. Key risks: Slower-than-expected recovery in ATBS and a delay in ramping up in VAPL.

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