SELL on Vinati Organics - At an inflexion point - HDFC Securities

Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities.

Our SELL recommendation on Vinati Organics with a discounted cash flow based target price of INR 820 (WACC 10%, terminal growth 3%) is driven by (1) demand slowdown for the high margin 2-Acrylamido 2-Methylapropane Sulphonic Acid (ATBS) that contributed ~60% to its revenue mix in FY20, (2) shift in revenue mix towards lower margin Iso Butyl Benzene (IBB), which formed ~32% of the mix in 1Q versus 16% in FY20, (3) slow ramp-up in the recently-commissioned Butyl Phenol product line. In the absence of new product pipeline, we believe current valuations are high at 30.5x Mar-22E EPS. 1Q EBITDA/PAT were 41/125% above estimates owing to better-than-anticipated traction in IBB and lower than the built-in tax rate.

Financial performance: 1Q EBITDA stood at INR 972mn, -19/-4% YoY/QoQ, led by higher sales volume for IBB. Despite sluggish demand for ATBS in the quarter, EBITDA margin expanded to 42.0% (41.3/41.4/40.2% in 1QFY20/4QFY20/FY20), driven by a customised order.

ATBS: The product contributed 40% to the Q1 topline (59% in Q4FY20). The brownfield expansion of 14ktpa has been pushed further to 2HFY21 (earlier: 1HFY21) as current demand for the product can be met by VO's existing capacity of 26ktpa. The demand slowdown for ATBS is owing to its reduced demand by the oil and gas industry that forms 25-30% of its global demand.

Iso Butyl Benzene (IBB): Revenue contribution spiked to ~32% in 1Q. The product should witness good offtake in FY21 as the company has acquired new customers and BASF (a key customer) has resumed production of Ibuprofen, whose production requires IBB as an intermediate.

Takeaways from our call with the management: The Butyl Phenol plant (capacity 35ktpa) that was commissioned in Sep-19 continues to run at low capacity utilisation in 1HFY21, given its muted demand amidst the pandemic. It was expected to contribute ~INR 1bn to the topline in FY21E, which now seems unlikely. Demand for ATBS should continue to remain muted in FY21. IBB should drive volume growth in the fiscal year.

Change in estimates: We cut our FY21/22E EPS estimates by -4/-2% to INR 28.9/32.1 to factor-in a sales mix shift towards lower margin IBB from (high margin) ATBS; EBITDA margin estimate cut by 28/71bps to 39.6/37.4%.

Shares of VINATI ORGANICS LTD. was last trading in BSE at Rs.980 as compared to the previous close of Rs. 983. The total number of shares traded during the day was 2301 in over 388 trades.

The stock hit an intraday high of Rs. 994 and intraday low of 972. The net turnover during the day was Rs. 2258576.

Source : Equity Bulls

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