1. NATVERLAL RESEARCH
M
Vinati Organics Limited
ACCUMULATE
BSE Code 524200
NSE Code VINATIORGA
Bloomberg Code VO:IN
Current Price 400
Target Price 437
Mcap ` bn 20.6
Mcap US mn 312.7
52 wk H/L 668/361
Face Value 2
2 wk avg vol (000) 27
Financial Snapshot
` Mn FY15 FY16E FY17E
Net sales 7,717 6,259 7,061
% ch 10.9 (18.9) 12.8
EBIDTA 2,009 2,096 2,294
%ch 24.0 4.3 9.4
PAT 1,158 1,228 1,367
%ch 34.4 6.1 11.3
EPS 22.4 23.8 26.5
BV 84.1 103.5 124.9
P/E 17.8 16.8 15.1
EV/EBIDTA 10.5 10.1 9.0
Shareholding Pattern
Sameer Dalal
Sameer@natverlal.com
91-22-42134444
Gaurav Singh
gaurav.singh@natverlal.com
91-22-42134421
Creating a niche and growing well in the space
Vinati Organics Limited is a specialty chemicals company established in the year 1989
based in Mumbai. The company manufactures organic intermediates and monomers. It
manufacturers “Isobutyl Benzene” (IBB), “2 Acrylamido 2 Methylpropane” (ATBS),
‘’Isobutylene’’ (IB) and derivatives of ATBS and IB which find its application in the
industries ranging from pharmaceuticals to water treatment plants to oil recovery plants to
agrochemicals to adhesives to construction chemicals to medical hydrogels.
Growing users and applications of ATBS and its derivatives: The flagship product ATBS for
which he has a 45% global market share, a distinct specialty monomer used as co-
monomer in polymerization processes which finds application in industries ranging from
water treatment chemicals, oil & gas recovery, construction chemicals, medical hydro-gels.
This has been the growth driver for the company because of its special properties for
polymer making and also because of its numerous and diverse applications which seem to
be getting more acceptance. With the growing demand of this niche monomer and
increase in customization, the company has successfully developed several derivatives of
ATBS to meet the growing needs.
Technological advantage on a unique product: VOL is only the third manufacturer in the
world to develop “2 Acrylamido 2 Methylpropane” their brand name ATBS. The plant is a
flow reactor that manufactures ATBS in one continuous process from raw material stage to
recovery and recycling of waste products to packaging of the finished product. The plant
recovery process has been patented by National Chemical Laboratories with whom they
have a 7 year exclusivity deal. Further, with time the base technology has been improved
and has undergone changes making the process more efficient and difficult to replicate.
World’s largest manufacturer IBB: The company manufactures Isobutyl Benzene (IBB)
which is a raw material for making ibuprofen, a non steroidal inflammatory drug. VOL is
the largest manufacturer of (IBB) and controls 65% of the global market share. Ibuprofen
is a matured drug which has sustained demand hence the growth rate is low but
consistent.
Increased product portfolio and cost control through vertical integration: Over the years
the company has developed various derivatives of ATBS due to demand for its various
grades and purity used across various industries. Further the company has vertically
integrated and now manufactures IB the biggest raw material for ATBS which enables cost
efficiency. It not only manufactures IB for captive consumption but also sells it to major
agrochemical industry which is poised for good growth in the future. VOL has also
developed many derivatives of IB to diversify product portfolio. VOL has consistently
increased its gross margin which is a reflection of its sustained effort to control cost and
this has further led to increased margins and returns.
Valuations: At the current price the stock is trading at a P/E multiple of 16.8x and 15.0x, a
P/BV 3.8x and 3.2x, and EV/EBIDTA of 10.0x and 9.0x for FY16E and FY17E respectively.
We initiate coverage on the stock with a ‘ACCUMULATE’ rating for the near term as our 1
year target price is `436 implying an upside of only 9%. Since we are bullish from the
FY18E point we believe any correction towards the `375 would be a great buying
opportunity for the stock from a 1 year point and even from a longer investment horizon.
Promoter
72.31
DII 7.35 Retail
18.58
Others
1.76
Natverlal Research
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2. NATVERLAL RESEARCH Vinati Organics Limited
Investment Rationale:
Growing users and applications of ATBS: “2 Acrylamido 2 Methylpropane” (ATBS), a
monomer used as co monomer in the polymerization process was developed in
partnership with National Chemical Laboratory, Pune because of its capability to alter
the chemical properties of wide variety of anionic polymers and also because of its
numerous and wide applications across various industries. It is used in dye-pick up
applications for synthetic fibres such as poly (acrylonitrile) fibers. It is also used in water
treatment chemicals, construction chemicals, hydrogels for medical applications,
personal care products, emulsion coatings, adhesives and in enhanced oil recovery. The
company was the third manufacturer of this unique monomer and with the passage of
time became the largest manufacturer in the world. With the efflux of time numerous
and diverse applications of ATBS were discovered and this was the key factor in the
growth of the demand for this monomer. The company with its increased focus on
product improvement and enhancement developed derivatives of ATBS for various
grade, purity and quality to cater to its existing customers and attracting new customers
by customization. ATBS and its derivatives has seen a phenomenal growth over the years
and is expected to grow at a good rate although we saw a dip in the FY16 because of its
usage in shale gas which has been impacted with no new investments.
Largest manufacturer of ATBS, IBB and IB: Vinati Organics is the world’s largest
manufacturer of ATBS. The company has expanded to 26000 mtpa from 1200 mtpa in
FY02. It has a huge 45% of the global market share and ATBS has a highest contribution
to the revenue. With the rise in the usage of this specialty monomer, because of
growing users and also its application in numerous and diverse industries, it stands to
benefit the most because of its dominant position in the market. It is also the largest
manufacturer of Isobutyl Benzene (IBB), another product which contributes immensely
to the revenue of VOL. IBB is an organic intermediate used as raw material by the
pharmaceutical companies for making Ibuprofen, a pain management drug which has
minimal growth as it is a saturated and mature market. Therefore the revenue stream
would be consistent. The company is also the largest manufacturer of Isobutylene (IB), in
India which is used for making ATBS and the surplus as an intermediate which finds its
applications in agrochemical industries, food additives and antioxidants. The below
charts shows the sales growth of ATBS, IBB, IB and market share of ATBS and IBB
respectively.
FY 11 FY 12 FY 13 FY 14 FY 15
1,109
1,488 1,536
1,780
2,349
1,018
1,539
2,047
2,426 2,322
126
346
560
867 887
Sale of products (in millions)
ATBS IBB IB
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3. NATVERLAL RESEARCH Vinati Organics Limited
Increased product portfolio and cost control through vertical integration: The company
has developed various grades and qualities of ATBS like ‘’Sodium Salt of 2-acrylamido-2-
methylpropane sulphonic acid (NA-ATBS), ‘’N-Tertiary Butyl Acrylamide (TBA), ‘’N-
Tertiary Octyl Acrylamide (TOA) over the years because of increased customization and
differentiated application OF ATBS. Going forward, the company expects more revenues
coming from derivative based ATBS. The company use to source IB, an important
ingredient for ATBS from Europe, China and Taiwan but as the company increased
capacity for ATBS, it established in house capacity to produce IB. The company now
meets its internal requirements and with the surplus being sold to mainly agrochemical
companies. It has again developed derivatives of IB like ‘’High Purity- Methyl Tertiary
Butyl Ether (HP-MTBE) which is sold to domestic players. The company expects to
generate considerable amount of revenue from derivatives of ATBS and IB in the future
to diversify its product portfolio. VOL with its backward integration in ATBS has
increased profitability and margins. This reflects the company’s commitment to reduce
cost and become cost efficient to attain higher margins and remain competitive. The
chart on the left show the contribution of products to the total product portfolio.
Technological advantage on a unique product: The technology to produce this specialty
monomer was invented by Lubrizol with the name AMPS more than 30 years ago.
Because of its numerous and diverse application, AMPS was identified as one of the
potential product. VOL in partnership with National Chemical Laboratories (NCL) started
working on this product with the idea of innovating a novel process which could be
commercialized by the company. VOL came with the name ATBS as AMPS had a
trademark with Lubrizol. In October, 2012 the plant spread across 25 acres was built to
international safety standard equipped with remote operation technology was
commissioned. The plant is a flow reactor that manufactures ATBS in one continuous
process from raw material stage to recovery and recycling of waste products to
packaging of the finished product. NCL-VOL team has received much praise from their
competitor Lubrizol for installing such a well streamlined and compact plant. While
Lubrizol struggled with the recovery and recycling of acrylonitrile that has not been
converted (around 85%). VOL is successfully utilizing the recovery process invented by
the NCL team. Due to their uniqueness, the plant and the recovery process have been
patented by National Chemical Laboratories with whom VOL now have an exclusivity
deal which still has more time to lapse. With the passage of time the company has
further streamlined the production process and the base technology has undergone
changes. This gives them the competitive advantage not only in terms of technological
breakthrough but also with the competitive pricing. As long as this product demand
remains intact VOL will be a big benefactor over the long run as utilization of its plant
increases along with the uses of the product.
Isobutyl
Benzene31
ATBS31
NA-ATBS15
Isobutylene
12 Others12
Productcontributiontorevenue
0
10
20
30
40
50
60
70
FY 11 FY 12 FY 13 FY 14 FY 15
30 30
40 40
45
60 60 60 60
65
Market Share (%)
ATBS IBB
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4. NATVERLAL RESEARCH Vinati Organics Limited
Steady profits and margins: VOL has gone from strength to strength in terms of all
financial parameters. The revenue grew from `3.2bn in FY 11 to `7.7bn in FY15 at a
CAGR of 24% reflecting its strong growth in sales over the years. Operating profit in the
same period has increased from `0.6bn in FY11 to `2bn inFY15 a CAGR of 28% which
shows the ability of the company to control cost and keep profitability intact. In the
same period VOL margins on CAGR basis have improved by 350 basis points.
In the FY16 the company is expected to post a decline in revenue by approximately 19%
partly because of the decline in prices of its raw material crude which had to be passed
on to its end user. In addition ATBS which is used in shale gas extraction has been
affected as fall in crude prices has led to lower demand from the sector. However
operating profits are not expected to decline as its raw materials are all crude oil
derivatives which have led to a massive increase in operating profit margin as the profit
margin per tonne of the product remain the same. The below chart shows the revenue,
operating profit and operating profit margin from FY11 to FY16E.
Growth of specialty chemicals sector: The specialty chemicals sector market size in
terms of value is projected to reach $470bn by the year 2020 growing at a CAGR of
5.42% between FY15 and FY20. VOL has its products which are mainly used in
pharmaceutical industry (IBB) and water treatment, construction chemicals, coatings,
surfactants, oil field recovery, medical hydro-gels and agrochemicals. There will be huge
demand from Asia Pacific region and growth in end user industries such as construction,
automotive and electronics. Pesticides are the other major type of specialty chemicals.
This sector will grow because of decreasing arable land, growing population and
improvements in crop yields. The demand for construction chemicals is increasing on
account of the growing construction sector in the major emerging economies such as
China, India, South Korea and Brazil. VOL stands to benefit with the growth in the above
end user industry because of its products finding its application and also because of its
leadership position.
Strong balance sheet: VOL is a debt free company and has a strong cash balance to meet
its capital expansion of nearly `2bn over the next two years. It will not need any external
financing to facilitate its current expansion plans and with the continued free cash flows
and low maintenance capex they would be well placed for future capex too if required. It
will be setting up power plant which will reduce its power cost and is expected to save
nearly `100mn annually giving it a RoCE of near about 20%. Increasing profitability
through volumes and product expansion and vertical integration coupled with a strong
balance sheet are a great investment case.
-
5
10
15
20
25
30
35
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
FY11 FY12 FY13 FY14 FY15 FY16E
Revenue Operating Profit OPM %
Natverlal Research
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5. NATVERLAL RESEARCH Vinati Organics Limited
Valuations:
At the current price the stock is trading at a P/E multiple of 16.8x and 15.0x, a P/BV 3.8x
and 3.2x, and EV/EBIDTA of 10.0x and 9.0x for FY16E and FY17E respectively. We have to
value this company based on its different product range as there are multiple products
of which one is a commodity for which although they are a global leader is a commodity
product while the other business is a specialty chemical for which we believe margins
could be lucrative given the limited supply of the product in the market and the ever
increasing uses for the product.
The return ratios too are quite good with the company delivering a RoCE of 34.0x and a
RoE of 23.04x for FY16E, this might dip a little in the near term as the new capex gets
commissioned which would probably have slightly lower Returns than the current
business. However the return ratios are still quite strong implying a quick pay back on its
investments. As discussed the growth for the next couple years could not come without
any further expansions leading to good free cash flows as the maintenance capex is
relatively small. This gets further supplemented by the de leveraged balance sheet which
gives us an even more positive view on payouts in the future.
Based on these all the factors mentioned we value the commodity business of IBB at 8x
P/E multiple and the varied products with specialization at a P/E multiple of 20x. Taking
the respective revenues of the sectors we arrive at a blended P/E multiple of 16.5x its
FY17E. Although we value it on the FY17E at present there is expected strong profit
growth in FY18 as this will be the full year of operations of its captive power plant and
the new product range which will add significantly to revenue and profitability. In view
of these we initiate coverage on the stock with a ACCUMULATE rating for the near term
as our 1 year target price is `436 implying an upside of only 9%. Since we are bullish
from the FY18E point we believe any correction towards the `375 would be a great
buying opportunity for the stock from a 1 year point and even from a much longer point
of view.
Natverlal Research
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6. NATVERLAL RESEARCH Vinati Organics Limited
Risk Management:
Substitutes: The biggest threat for specialty chemicals industry is substitutes. This
industry evolves continuously and hence factors like technological improvement, better
pricing, quality up gradation plays a very important role in changing the dynamics of the
market. VOL is well suited against such risks because technological improvement is taken
care by constant improvement and advancement in products. Derivatives of ATBS are
prime example of improvement in the base product to widen the product portfolio. The
company’s core strength is vertical integration and this enables company to control
costs and keep pricing competitive. Also the offering of products in various grades,
purity and quality is a key factor to increase users and uses. Additionally we can draw
some safety from the fact that a tested product would always have a preference for
many businesses rather than a new product which could give us some visibility for the
next few years.
Crude oil price: Crude oil prices have had hit the rock bottom in FY15 and from there we
have only seen marginal increase till now. The company’s raw materials are all crude oil
based derivatives and thus had faced sharp fluctuations. This sharp decline in the energy
prices led the company to pass on the benefit to the end customer even through they
have a unique product to ensure it does not allow competition to enter. Although the
company has so far managed crude volatility well it would be important to see that they
continue to do so over the longer term.
Currency risk: Exposure to volatility in foreign currency exchange rates poses a threat to
the company as 65%-70% of its sales are exports sales. The company enters into contract
with the customers to share the foreign exchange risk. Further, the long term loans of
the company are in USD terms and this acts as natural hedge. Lastly with most of the
exports being done in US$ is not as risky as supplying to multiple emerging market
currencies.
Government regulation: The chemicals sector is highly regulated and most business in
the sector monitor supply chain risks very closely. Health and safety and environment
risk is closely monitored by government to keep a check on companies. VOL considers
health and safety as one of the integral operational priorities. It seeks to continually
monitor and find ways to improve the risk management framework.
Quality risk: Quality standards and control pose a risk to the chemicals sector. VOL holds
the most credible certifications for quality and environment like ISO 9001:2008, ISO
14001: 2004 and ISO 18001: 2007. Customers carry out environment health and safety
audits (EHS) at the premises in addition to stringent quality control.
Natverlal Research
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7. NATVERLAL RESEARCH Vinati Organics Limited
Financials
Profit & Loss Balance Sheet
In ` million FY15 FY16E FY17E FY18E In ` million FY15 FY16E FY17E FY18E
Net sales 7,717 6,259 7,061 8,398 Equity capital 103 103 103 103
YoY (%) 127 (19) 13 19 Reserves 4,237 5,235 6,332 7,743
Total expenses 5,800 4,253 4,873 5,591
EBIDTA 1,918 2,006 2,188 2,807
YoY (%) 31.6 4.6 9.1 28.3 Total Borrowings 653 561 368 184
EBIDTA (%) 24.8 32.0 31.0 33.4 Non current liabiliti 390 390 390 390
Other income 91 87 91 94 Current liabilities 609 702 835 1,004
PBIDT 2,009 2,093 2,279 2,901 Total Liabilities 5,992 6,991 8,028 9,424
Depreciation 177 190 244 328
PBIT 1,833 1,902 2,036 2,573
Interest 98 73 39 23 Net Assets 3,273 3,494 5,251 4,973
Exceptional Item 0 0 0 0 CWIP 200 800 50 50
PBT 1,735 1,830 1,996 2,550 Non current assets 112 241 299 372
(-) Tax 577 604 639 790 Current assets 2,407.30 2,455.81 2,427.99 4,029.18
Tax/ PBT 33 33 32 31
Minority interest 0 0 0 0
PAT 1,158 1,226 1,357 1,759
YoY (%) (24.4) 5.9 10.7 29.6 Total Assets 5,992 6,991 8,028 9,424
Cash Flow Key Ratios
In ` million FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
Net profit 1,158 1,226 1,357 1,759 EPS (Rs) 22.4 23.8 26.3 34.1
Depn and w/o 177 190 244 328 CEPS (Rs) 27.1 27.5 31.0 40.5
Deferred tax 63 0 0 0 Book value (Rs) 84.1 103.5 124.7 152.1
Change in wrkg cap (123) 318 (153) (240) DPS (Rs) 3.5 3.7 4.2 5.6
Other income 91 87 91 94 Debt-equity (x) 0.2 0.1 0.1 0.0
Operating cash flow 1,182 1,648 1,356 1,753 ROCE 38.4 34.0 32.2 35.0
Other income 91 87 91 94 ROE 26.7 23.0 21.1 22.4
Capex (511) (1,012) (1,250) (50)
Investments 0 (473) 400 (1,200)
Investing cash flow (420) (1,398) (759) (1,156) Valuations
Dividend (217) (228) (261) (348)
Equity 4 0 0 0 PE (x) 17.8 16.8 15.2 11.7
Debt (963) (92) (193) (184) Cash PE (x) 14.8 14.6 12.9 9.9
Change in long term (39) (129) (59) (73) Price/book value (x) 4.8 3.9 3.2 2.6
Financing cash flow (1,215) (449) (512) (605) Market cap/sales 2.7 3.6 3.0 2.5
Others 297 0 0 0 EV/sales (x) 2.8 3.7 3.0 2.5
Net change in cash (156) (199) 86 (8) EV/EBDITA (x) 10.5 10.1 9.1 7.1
Disclaimer
The information provided in the document is from publicly available data and other sources, which we believe are reliable. It also includes analysis and views expressed
by our research team.
The report is purely for information purposes and does not construe to be investment recommendation/advice. Investors should not solely rely on the information
contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. Efforts are made to try
and ensure accuracy of data however, Natverlal Research. And / or any of its affiliates and / or employees shall not be liable for loss or damage that may arise from any
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document.
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Natverlal Reserach. Fairy Manor, 13 Rustom Sidhwa Marg Fort Mumbai 400001 Tel 91-22-42134444 Email research@natverlal.com
Natverlal Research
7