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Vinati Organics Ltd 1QFY2010 performance highlights and result update

Contributed by Nirmal Bang

By Nirmal Bang

Robust growth in sales: Vinati Organics Limited (VOL) reported sales of Rs 70 cr, as compared to sales of Rs 50.8 cr in Q1FY10, registering robust growth of 37.6% yoy. ATBS demand drove growth and we expect it to remain strong in future also.

Profitability declined: VOL reported EBITDA of Rs 13.5 cr, a growth of 11.8% yoy. However, EBITDA margins declined from 22.6% in Q1FY10 to 18.9% in Q1FY11. The company had onetime aberrations during the quarter with respect to their Lote plant, which mainly manufacture ATBS. As the company has quarterly contracts in ATBS the pass on of increased raw materials got delayed by one quarter hence the margins got impact. We believe going forward; this would correct taking the company margins to their normal levels of 22-23%.

Key highlights of the quarter

- The company started its IB plant during the quarter. However as the operations commenced at the end of the quarter the impact of margins could not be captured during the quarter.

- The company increased the capex plans from Rs 50 cr fro FY11 to Rs 120 cr, which would mainly be utilize to expand the capacity of ATBS from 10,000 MT currently, to 18,000 MT and for setting up of 6 MW power generation plant for captive usage. Funding of Capex would be through a combination of internal accruals, debt and equity.

Valuation & Recommendations

At the current price of Rs. 79, VOL is trading at a PE of 8.6x FY11 & 6.3x FY12 earnings. The valuations look attractive at current levels given revenue visibility on back of robust demand outlook and profitability improvement. Based on our estimated EPS of Rs 12.5 for FY12E and a target PE multiple of 8x we arrive at a target price of Rs. 100 per share indicating a potential upside of 26.4%. We have not included any upside from other potential product launches like PAP, Acrylamide etc, which presents an upside potential over our estimates. Consequently, We reiterate our BUY rating on the stock with a long-term view.

Key highlights

- In lieu of increasing demand and promising future aspects, VOL has increased its planned capital expenditure for FY11. Now the company intends to spend Rs 120 cr for the year to fund following expansion plans:

 - ATBs: The Company has planned to increase the capacity of ATBs from 10,100 MT to 18,000 MT, which would be operational by May FY12. Post expansion VOL would be the largest manufacturer of ATBs in the world.

 - Co-gen: Vinati Organics would build a 6 MW power generation facility at its Lote plant for its captive use. This would turn into savings of Rs 8 cr per annum for the company. It is expected to be operational by Oct-Nov FY12.

 - TBA: VOL is expanding its capacity of Tertiary Butyl Acrylamide (TBA) manufacturing from 300 MT to 1,000 MT.

 - New products: The company is launching two new products namely - Diacetone Acrylamide (DAAM) & Tertiary Octyl Acrylamide (TOA) with capacity of 1,000 MT and 300 MTrespectively. The facility is expected to be operational by FY11 end.

The funding of the above capex would be through combination of internal accruals, debt and equity.

- To have the benefit of integration the company has backward integrated and commenced production of Isobutylene (IB) during the quarter with an installed capacity of 12,000 MT. With the commencement of this plant, VOL has become the largest manufacturer of IB in India. The company plans to sell IB in domestic markets also besides using it for captive.

- VOL reported EBITDA of Rs 13.5 cr, which grew 14.5% yoy but declined by 11.5% qoq. Although, EBITDA margins declined by 370 bps yoy and by 510 bps qoq. In Q1FY11, one of its big order got delayed hence the margins got impacted which is expected to normalize in Q2FY11. Also, it had better margins in Q4FY10 on back of decline in raw materials which were not sustainable.

Revision in Estimates

- On back of increased capex plans we are changing our estimates. VOL has earlier plans of increasing ATBs capacity to 12,000 MT in FY11 which is now shifted to FY12 with increased capacity of 18,000 MT. This affects the FY11 sales and hence PAT.

Valuation & Recommendation

At the current price of Rs. 79, VOL is trading at a PE of 8.6x FY11 & 6.3x FY12 earnings. The valuations look attractive at current levels given revenue visibility on back of robust demand outlook and profitability improvement. Based on our estimated EPS of Rs 12.5 for FY12E and a target PE multiple of 8x we arrive at a target price of Rs. 100 per share indicating a potential upside of 26.4%. We have not included any upside from other potential product launches like PAP, Acrylamide etc, which presents an upside potential over our estimates. Consequently, We reiterate our BUY rating on the stock with a long-term view.