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Vinati Organics Q3 FY12 results update by Nirmal Bang

Contributed by Nirmal Bang

Results above expectations

Vinati Organics reported better than expected results for Q3FY12. Sales grew by 16.2% qoq and 34.4% yoy at Rs 118 cr. On back of lower raw material cost and other expenses, EBITDA margin has improved by 718 bps qoq and 193 bps yoy at 24.9%. However, due to higher interest cost, tax and forex loss, PAT margin has declined on yoy basis to 13.6% in Q3FY12 as compared to 16.3% in Q3FY11.

Key Highlights

- The company continue to witnessed strong demand in its legacy business of IBB. The company sold 3900 MT of IBB during the quarter at the rate of Rs 120 per kg as compared to 2900 MT in Q3FY11 with selling price of Rs 89 per kg, which helped in improving the EBITDA margins 24.9% in Q3FY12 from 23.0% in Q3FY11. In consideration of high demand in IBB, the company has debottlenecked its existing capacities of IBB to 16000 from 14000 earlier. However, the company couldn’t give any specific reason for the sudden uptick in the demand of IBB (was sluggish till Q1FY12) and was also not sure about the sustainability of the same.

- ATBS sales declined during the quarter from 3000 in Q3FY11 to 2700 in Q3FY12. Management has said that due to break down in ATBS plant, sales was impacted for 10 days, which resulted in lower sales.

- However, our cause of concern is the expansion plan for which the company took debt from IFC in Nov’10. The company has yet again delayed the plan by two quarters and expected to be operational by June’12 now. (original plans to start the plant was May’12). Management keeps pushing the plan in every quarter (5th time in a row)

- The company was expected to come out with the results of ongoing trails of its new technology PAP in December. However, the company has not yet given any specific details about the outcome nor shared any outlook the possibility of future actions confirming our skeptical view about the success of the technology.

Valuation & Recommendation

We had initiated coverage on Vinati Organics on 17th June 2010 at Rs 70 with target price of Rs 100 which was reduced to Rs 95 in May’11. The stock price was moved to Rs 94 after our initiated coverage.

At CMP of Rs 79 the stock looks fairly valued (6x FY13E) on fundamentals considering the full benefit of planned expansion would be visible in FY14. We recommend REDUCE the holding in the stock considering lack of limited near term upside triggers.