Vinati Organics - 2QFY19 - Raising FY19E Estimates, Growth to Continue in FY20E

India Equity Value investor, Trivikram Consultants

Prashant Vaishampayan

India Equity Value investor

Picking Long Term Multi-bagger stocks

Trivikram Consultants

Trivikram Consultants is an equity research service founded by Prashant Vaishampayan, a registered Research Analyst with SEBI in India. Prashant has done equity research since 1992.  He worked with Jardine Fleming, SG Securities, UBS and Kotak Securities. Since 2010, he is managing his portfolio and doing outsourced equity research for institutional clients. A team of six professionals helps him in equity research. We focus on pharma, agro-chemicals, auto and auto components, banks and financial services, specialty chemicals and niche manufacturing sectors.   

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/4621" target="_blank" data-smartkarma-citation="entities:4621:1">Vinati Organics (VO IN)</a> is among the largest specialty chemical companies in India, with global market leadership in key products. Producing aromatics, monomers, polymers and other specialty products, VO delivers high quality products to clients on India and around the world. VO is present in 31 countries worldwide, and exports products to customers across the US, Europe, and Asia. VO works with the vision to be a global leader in manufacturing niche specialty products adopting eco-friendly technologies. Its aim is to emerge as a globally competitive organization for all its products in terms of cost and quality.</p>
<p>VO could be a part of the long-term portfolio because:</p>
<ul class="">
<li>VO enjoys global leadership in Isobutyl Benzene (IBB) and Acrylamido 2 Methylpropane Sulfonic Acid (ATBS) and domestic leadership in Isobutylene (IB) and High Purity- Methyl Tertiary Butyl Ether (HPMTBE). VO has a 55% market share of ATBS, 65% market share of IBB and 70% domestic market share of IB. (Source- VO Annual Report FY18).</li>
<li>We are expecting CAGR growth over FY18-20E of 37%/52%/49% for revenues/EBITDA/PAT respectively. We expect EBITDA margins to expand ~ 660 bps to 35.0% in FY20E from 28.4% in FY18 and PAT margins to expand ~ 370 bps to 23.1% in FY20E from 19.4% in FY18.</li>
<li>VO generated a free cash flow of Rs. 3.6 Bn in FY16-18. However, owing to capEx of Rs. 3.2 Bn in FY19E to ramp up production volumes it will likely report negative FCF. From FY20E, we expect to see positive results from this capital expenditure and we estimate VO will report FCF of Rs. 3.1 Bn in FY20E rising to Rs. 4.6 Bn in FY21E.   </li>
<li>We expect RoE to expand ~780 bps to 27.3% in FY20E from 19.5% in FY18 and RoCE to expand ~1040 bps to 36.4% in FY20E from 26.0% in FY18.</li>
</ul>
<p><strong>We initiate coverage on VO with the fair value of Rs. 1,765/- representing a potential return of 42% in the next 12 months. We arrived at the fair value by applying 25x multiple to September 20E EPS of Rs 70.6. </strong><strong>As on Current price of Rs 1,240 (as on 22/10/2018), the stock trades at 29x and 20x its earnings estimates for FY19E and FY20E respectively.</strong></p>
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 172px;">Rs in mn</td>
<td style="text-align: right; width: 164px;">FY17</td>
<td style="text-align: right; width: 165px;">FY18</td>
<td style="text-align: right; width: 173px;">FY19E</td>
<td style="text-align: right; width: 173.97px;">FY20E</td>
</tr>
<tr>
<td style="width: 172px;">Revenue</td>
<td style="text-align: right; width: 164px;">     6,663</td>
<td style="text-align: right; width: 165px;">     7,433</td>
<td style="text-align: right; width: 173px;">      9,337</td>
<td style="text-align: right; width: 173.97px;">    13,890</td>
</tr>
<tr>
<td style="width: 172px;">PAT</td>
<td style="text-align: right; width: 164px;">     1,392</td>
<td style="text-align: right; width: 165px;">     1,439</td>
<td style="text-align: right; width: 173px;">      2,168</td>
<td style="text-align: right; width: 173.97px;">      3,210</td>
</tr>
<tr>
<td style="width: 172px;">EPS (Rs.)</td>
<td style="text-align: right; width: 164px;">       27.0</td>
<td style="text-align: right; width: 165px;">       27.9</td>
<td style="text-align: right; width: 173px;">        42.1</td>
<td style="text-align: right; width: 173.97px;">        62.3</td>
</tr>
<tr>
<td style="width: 172px;">PE (x)</td>
<td style="text-align: right; width: 164px;">46</td>
<td style="text-align: right; width: 165px;">44</td>
<td style="text-align: right; width: 173px;">29</td>
<td style="text-align: right; width: 173.97px;">20</td>
</tr>
</tbody>
</table>
<div class="content-caption">Source- VO Annual Report FY18, Trivikram Consultants Research as on 22/10/2018</div>

Vinati Organics (VO IN) is among the largest specialty chemical companies in India, with global market leadership in key products. Producing aromatics, monomers, polymers and other specialty products, VO delivers high quality products to clients on India and around the world. VO is present in 31 countries worldwide, and exports products to customers across the US, Europe, and Asia. VO works with the vision to be a global leader in manufacturing niche specialty products adopting eco-friendly technologies. Its aim is to emerge as a globally competitive organization for all its products in terms of cost and quality.
VO could be a part of the long-term portfolio because:

VO enjoys global leadership in Isobutyl Benzene (IBB) and Acrylamido 2 Methylpropane Sulfonic Acid (ATBS) and domestic leadership in Isobutylene (IB) and High Purity- Methyl Tertiary Butyl Ether (HPMTBE). VO has a 55% market share of ATBS, 65% market share of IBB and 70% domestic market share of IB. (Source- VO Annual Report FY18).
We are expecting CAGR growth over FY18-20E of 37%/52%/49% for revenues/EBITDA/PAT respectively. We expect EBITDA margins to expand ~ 660 bps to 35.0% in FY20E from 28.4% in FY18 and PAT margins to expand ~ 370 bps to 23.1% in FY20E from 19.4% in FY18.
VO generated a free cash flow of Rs. 3.6 Bn in FY16-18. However, owing to capEx of Rs. 3.2 Bn in FY19E to ramp up production volumes it will likely report negative FCF. From FY20E, we expect to see positive results from this capital expenditure and we estimate VO will report FCF of Rs. 3.1 Bn in FY20E rising to Rs. 4.6 Bn in FY21E.   
We expect RoE to expand ~780 bps to 27.3% in FY20E from 19.5% in FY18 and RoCE to expand ~1040 bps to 36.4% in FY20E from 26.0% in FY18.

We initiate coverage on VO with the fair value of Rs. 1,765/- representing a potential return of 42% in the next 12 months. We arrived at the fair value by applying 25x multiple to September 20E EPS of Rs 70.6. As on Current price of Rs 1,240 (as on 22/10/2018), the stock trades at 29x and 20x its earnings estimates for FY19E and FY20E respectively.



Rs in mn
FY17
FY18
FY19E
FY20E


Revenue
     6,663
     7,433
      9,337
    13,890


PAT
     1,392
     1,439
      2,168
      3,210


EPS (Rs.)
       27.0
       27.9
        42.1
        62.3


PE (x)
46
44
29
20



Source- VO Annual Report FY18, Trivikram Consultants Research as on 22/10/2018

Vinati Organics - Increasingly Profitable Global Leader in Niche Chemicals