VISIT NOTE 27 AUG 2014 Vinati Organics NOT RATED Well placed We met with the management of Vinati Organics Ltd to get insights on the business and outlook. Vinati organics (VOL) is a mid-size specialty focused company having a concentrated portfolio (3 products contributing ~90% to revenues). Vinati has delivered a strong 30% CAGR in revenues/PAT over FY09-14 driven by strong demand for its products, capacity expansions and few product additions. Focused approach : VOL’s product selection approach is driven by three key philosophies, (1) niche product with a high technological barriers. (2) ability to be globally competitive on both quality and cost. (3) Production based on clean and green technology with nil environmental hazards. VOL follows stringent due diligence to narrow down on product section based on the given three parameters and hence has a very concentrated product basket, total 14 products with top 3 contributing ~90% of revenues. Global leadership : Post product launch VOL aims to be the global leader through quality and cost efficiencies, it is this vision which has led to VOL’s global leadership in three products. VOL is globally the largest producer of two products (Isobutyl Benzene - IBB and 2-acrylamido 2-methylapropane sulphonic acid - ATBS) and the largest Indian manufacturer for one product (Isobutylene - IB). Through enhancing the quality and cost efficiency VOL aims to provide the product at competitive prices. Growth drivers : ATBS and IB (~54% of revenues) will be the main drivers going ahead for VOL. The ATBS market is witnessing a growth of ~10-15% globally. Moreover, with increase in customer base as well as higher demand from existing customers will lead to ~20% CAGR in ATBS revenues for VOL over the next three years. VOL entered into IB as a backward integration for ATBS. IB is a gas based product and VOL is the only Indian manufacturer currently. VOL is witnessing huge surge in demand for IB , the overall market in India which hovered around 4,000 metric tons in 2012-13 stands a ~7,000 metric tons as of date. Outlook and valuation : VOL commands premium over peers due to its best in class return ratios and strong growth visibility. VOL currently trades at ~14x FY16E (Bloomberg est.) EPS of Rs 29. The stock is currently NOT RATED by us. FINANCIAL SUMMARY YE Mar (Rs mn) FY11 FY12 FY13 FY14 Net Revenues 3,226 4,475 5,529 6,961 Growth (%) 39.2 38.7 23.6 25.9 EBIDTA 761 978 1241 1621 EBIDTA margin (%) 23.6 21.9 22.4 23.3 APAT 520 548 687 862 EPS (Rs.) 10.5 11.1 13.9 17.5 P/E (x) 38.3 36.3 29.0 23.1 EV/EBITDA 27.2 21.8 17.7 13.0 RoE (%) 36.2 29.3 28.5 27.8 Source: Company, HDFC sec Inst Research INDUSTRY SPECIALITY CHEM CMP (as on 26 Aug 2014) Rs 403 Target Price NA Nifty 7,905 Sensex 26,443 KEY STOCK DATA Bloomberg VO IN No. of Shares (mn) 49 MCap (Rs bn) / ($ mn) 20/328 6m avg traded value (Rs mn) 17 STOCK PERFORMANCE (%) 52 Week high / low Rs 416/74 3M 6M 12M Absolute (%) 54.5 52.9 331.3 Relative (%) 47.5 26.9 288.8 SHAREHOLDING PATTERN (%) Promoters 75.00 FIs & Local MFs 1.15 FIIs 2.75 Public & Others 21.10 Source : BSE Meeta Shetty, CFA [email protected]+91-22-6171-7338 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
VISIT NOTE 27 AUG 2014
Vinati Organics NOT RATED
Well placed We met with the management of Vinati Organics Ltd to get insights on the business and outlook. Vinati organics (VOL) is a mid-size specialty focused company having a concentrated portfolio (3 products contributing ~90% to revenues). Vinati has delivered a strong 30% CAGR in revenues/PAT over FY09-14 driven by strong demand for its products, capacity expansions and few product additions.
Focused approach : VOL’s product selection approach is driven by three key philosophies, (1) niche product with a high technological barriers. (2) ability to be globally competitive on both quality and cost. (3) Production based on clean and green technology with nil environmental hazards. VOL follows stringent due diligence to narrow down on product section based on the given three parameters and hence has a very concentrated product basket, total 14 products with top 3 contributing ~90% of revenues.
Global leadership : Post product launch VOL aims to be the global leader through quality and cost efficiencies, it is this vision which has led to VOL’s global leadership in three products. VOL is globally the largest producer of two products (Isobutyl Benzene - IBB and 2-acrylamido 2-methylapropane sulphonic acid - ATBS) and the largest Indian manufacturer for one product (Isobutylene - IB). Through enhancing the quality and cost efficiency VOL aims to provide the product at competitive prices.
Growth drivers : ATBS and IB (~54% of revenues) will be the main drivers going ahead for VOL. The ATBS market is witnessing a growth of ~10-15% globally. Moreover, with increase in customer base as well as higher demand from existing customers will lead to ~20% CAGR in ATBS revenues for VOL over the next three years. VOL entered into IB as a backward integration for ATBS. IB is a gas based product and VOL is the only Indian manufacturer currently. VOL is witnessing huge surge in demand for IB , the overall market in India which hovered around 4,000 metric tons in 2012-13 stands a ~7,000 metric tons as of date.
Outlook and valuation : VOL commands premium over peers due to its best in class return ratios and strong growth visibility. VOL currently trades at ~14x FY16E (Bloomberg est.) EPS of Rs 29. The stock is currently NOT RATED by us.
Isobutyl Benzene (IBB) Pharmaceutical. A key raw material used in Ibuprofen
VOL is the largest manufacturer globally and commands ~60% market share. IOL Chemicals & Pharmaceuticals and SI Group, both Indian companies, are the competitors.
Various applications ranging from water treatment, paints, textiles, fibre, detergents, oil field, mining chemicals and construction chemicals
VOL commands ~40% market share globally. Lubrizol (~15000 tpa) and Toagosei (~8000 tpa) are the only two competitors
26,000
Isobutylene (IB) An intermediate used in chemicals, food additives and antioxidants
VOL is the largest Indian manufacturer and commands ~70% market share in Indian market. VOL markets IB only in domestic market. Savita Chemicals Ltd is the only other India manufacturer with a small capacity.
12,000
Source : Company, HDFC sec Inst Research
VOL exports majority of IBB and ATBS to US and EU (~40% each) and rest goes to Asian markets IB is marketed only in domestic market, VOL is the only large player with 70% market share
57 5133 40 43 35
38 43
57 48 4141
4 8 1013
5 6 6 4 6 11
0
20
40
60
80
100
120
FY09 FY10 FY11 FY12 FY13 FY14
IBB ATBS IB Others
Page | 2
VINATI ORGANICS : VISIT NOTE
Dominant market share in key products VOL product basket has evolved from mere 2
products in FY01 to 14 as of FY14. Company’s stringent product selection has restricted the product basket compared to peers (Atul Ltd – 1,400 products). VOL’s top three products contribute ~90% of revenues. IBB and ATBS are the highest contributor for VOL with 41/35% contribution.
IBB – Isobutyl Benzene (35% of FY14 revenues)
Vinati is world’s largest producer of IBB and its Mahad raigad plant is biggest IBB manufacturing facility in the world. IBB is the basic raw material in manufacture of Ibuprofen. VOL began commercial production of IBB at its factory in Mahad, Maharashtra in 1992, based on technology from the renowned Institute Francais du Petrole (IFP) in France. It has since expanded its capacity in phases to 16,000 tpa and supplies to all major Ibuprofen manufacturers globally.
IBB’s contribution has been coming down from ~57% in FY09 to 35% in FY14 and is expected to slide further driven by higher growth in ATBS and new product launches. IBB market is growing at 5-7% CAGR, we expect the Ibuprofen market to remain subdued as new generation NSAIDS replace older drugs. VOL expects growth in IBB to remain <10% over FY14-16E.
2-acrylamido 2-methylapropane sulphonic acid (41% of revenues FY14)
Vinati Organics is also the largest manufacturer of 2-Acrylamido 2-Methylpropane Sulfonic Acid (ATBS) in the world. ATBS is a specialty monomer with several applications including the manufacture of acrylic fibers, personal care products, water treatment chemical, enhanced oil recovery chemical. VOL began
commercial production of ATBS at its plant in Lote Parashuram, Maharashtra in 2002, based on technology sourced from the National Chemical Laboratories, Pune. VOL has been consistently expanding the capacity for ATBS from ~1000 tpa in 2002 to 26,000 tpa in 2014.
Mgt expects VOL to be the key driver over the next two years driven by capacity expansion and robust demand from enhanced oil recovery (EOR). ATBS is used an important ingredient to manufacture polymers for enhanced oil recovery (EOR). VOL has expanded ATBS capacity from 12,000 in FY12 to 26,000 FY13-14. VOL expects this incremental addition in capacities will add ~Rs 2.0bn revenues over the next two years. Moreover, ATBS market is expanding at ~15% CAGR globally which adds to revenue visibility for VOL.
Isobutylene (IB) (13% of revenues FY14)
VOL entered into IB as a backward integration for ATBS. Vinati Organics commissioned its Isobutylene (IB) plant, the largest in India, in June 2010 with a capacity of 12,000 MT. IB is a hydrocarbon of significant industrial importance. It is used as an intermediate in the production of variety of products. VOL not only uses IB for captive consumption, as raw material for ATBS, but has also derived a revenue stream from selling it in domestic market. IB market in India was restricted at ~4000mtpa due to higher import prices. Post VOL’s commercialization, VOL sells ~7000mtpa apart from captive consumption of ~5000mtpa.
VOL has planned to debottleneck its IB facility and also expects to incur capex ~Rs1.0bn (including debottlenecking exercise for other products). VOL expects IB to grow >30% over the FY14-16E.
driver over the next two years and expects ATBS to remain a large contributor to revenues, mgt is also simultaneously looking to de-concentrate its product basket. Mgt expects its non-core products (curr ~10% of revenues) to con tribute ~20% by FY16E. Moreover, VOL is also focusing on introducing new products by FY16-17E which will further de-concentrate revenues.
Resilient EBIDTA margins VOL enjoys highest profitability compared to peers
led by stringent focus on cost efficiency. Though VOL exports ~80% of revenues and is also prone to crude fluctuations (ATBS cost are linked to crude), company contracts with customers safeguards from these fluctuations. VOL’s pass through arrangement with customers also restricts benefits from favorable crude prices and currencies.
ATBS has the highest profitability (~30%) followed by IBB (~25%) and IB (~15%). As ATBS’s contribution to revenues increases, we expect EBIDTAM to witness expansion over FY14-16E.
Page | 4
VINATI ORGANICS : VISIT NOTE
Revenues have grown at 20% CAGR over FY09-14 EBIDTAM margins have remained steady ~22%
Sources : Company, Industry, HDFC sec Inst Research Sources : Company, Industry, HDFC sec Inst Research VOL has maintained its cash conversion cycle ~80 days Lower asset turns led to dip in return ratios
Sources : Company, HDFC sec Inst Research Sources : Company, HDFC sec Inst Research
Material Exp as % of Net Sales 60.9 55.9 62.6 64.0 65.3 437 127 Employee Exp as % of Net Sales 4.5 4.0 4.1 3.4 4.1 (48) 64 Other Operating Exp as % of Net Sales 20.2 17.2 13.3 9.7 11.1 (914) 135 Operating Margin (%) 14.3 22.9 19.9 22.8 19.5 524 (327) EBITDA Margin (%) 16.8 23.8 22.6 23.2 20.4 360 (275) RPAT Margin (%) 8.6 13.0 13.6 14.2 12.3 374 (191) Tax Rate (%) 32.9 36.0 31.2 32.0 32.6 (27) 62 Sources : Company, HDFC sec Inst Research
VOL repaid debt (~Rs 750mn) in FY14 which led to lower interest outgo EBIDTA margins remain lumpy between quarters due to product mix change
Page | 6
VINATI ORGANICS : VISIT NOTE
Outlook and Valuation VOL has grown at a healthy CAGR of ~35% over FY06-
14 largely driven by exports which posted a CAGR of ~55%, whereas domestic revenues have grown at ~25%. EBIDTA margins have shown a steady expansion from ~11% in FY06 to ~23% in FY14 led by both gross margin expansions as well better operating leverage.
Going ahead management expects ~20% CAGR in revenues over the next 2-3 years driven by ATBS and IB. Growth post FY17 will be driven by addition of new products. VOL’s contracts with the customer’s safeguards against exchange fluctuations and crude price impact, hence VOL has guided for steady EBIDTA margins at ~23% levels over the next 2-3 years. We expect slight improvement in EBIDTA margins in FY15E/16E driven by higher revenue contribution from ATBS (ATBS is a higher margin product compared to IBB).
VOL has a strong balance sheet with Net D/E OF 0.4x and a restricted cash conversion cycle of ~77 days. VOL has also started generating free cash flows from FY14 (Rs 995mn) and is expected to generate positive free cash flows (given the capex guidance of Rs 1.5bn) and steady working capital requirements.
VOL commands premium over peers due to its best in class return ratios (ROE of ~28%, ROCE of ~21%) and strong growth visibility. VOL currently trades at ~14x FY16E (Bloomberg est.) EPS of Rs 29. The stock is currently NOT RATED by us.
Risks and concerns Highly concentrated product basket : VOL’s high
dependence in two products (IBB and ATBS - `76% of revenues) may cause a threat to revenues and profitability. However, VOL has started focusing on increasing product basket and also expects IBB contribution to slide in the overall pie. ATBS, though, is expected to remain a significant contributor.
Client concentration : VOL is highly dependent on its top 5 customers for IBB as well as ATBS as they account ~50% of revenues. For IBB major customers include Shasun, Perrigo and BASF – Germany. For ATBS, BASF, NALCO, Clariant are amongst the large buyers. Any adverse event at customers end or lower demand from these large customers can have a significant impact on revenues.
Anti dumping or any other regulatory concern : VOL derives ~75% of its revenues from export. The key markets include US, EU, China and SEA . Imposing of anti-dumping duties from any of the concerned markets can impact VOL’s financials.
Huge capex : VOL incurred a huge capex in FY12-13, to double its ATBS capacity from 12,000 tpa to 26,000 tpa (funded by debt) which led to a sharp increase in D/E ratio from 0.5x in FY11 to 1.0x in FY13. Though VOL has guided for a capex of Rs 1.5bn over the next 18 months, any incrementally huge capex could lead to increase in debt which may impact the valuations.
Company Background VOL was promoted by Maharashtra Petrochemical
Corporation (MPCL) and Vinati Enterprises- a partnership firm of Vinod Saraf in Jun-89 as a specialty organic chemicals focused company. It started with the manufacturing of isobutyl benzene (IBB) - the prime raw material for ibuprofen - a NSAID drug. VOL came out with a public issue in Nov-91 for the manufacture of 1,200tpa of IBB at Mahad, Raigad. Commercial production commenced in Jul-92. The company has gradually increased the capacity of IBB to 16,000tpa. VOL has technical collaboration with Institute Francais Petrole (IFP) for petrochemical processes and catalyst. In 2000, VOL acquired 22 acre land at Lote Parsuram for Rs15mn. It is then when VOL started focusing on 2-acrylamido -2-methylpropane sulphonic acid (ATBS) with an installed capacity of <2000tpa, as of date VOL has installed capacity of 26,000tpa for ATBS. ATBS is used in industrial water treatment, oil recovery and construction chemicals. VOL is the world’s largest manufacturer of IBB and ATBS. The company manufactures isobutylene (IB) – a key intermediate in the manufacture of ATBS. IB is used in the manufacture of agrochemicals and anti-oxidants. VOL total product basket includes 14 products (inclusive of top 3 products). VOL exports its products to 22 countries.
Key management team Mr Vinod Saraf, Managing director : The founder of
VOL, is an MBA from BITS Pilani and has thorough knowledge of specialty chemicals. Prior to starting his own venture, Mr. Saraf worked for about 25 years in the textile and petrochemical industry.
Ms Vinati Saraf Mutreja, Executive director : An experienced financial consultant, having worked for leading companies in New York, USA, before she joined VOL in 2006. She has completed a dual degree in Bachelors of Science in Economics (Finance) from The Wharton School and Bachelors in Applied Science, Biotech and Pharmaceutical Development from the School of Engineering and Applied Sciences from University of Pennsylvania.
Ms. Viral Saraf Mittal, Director – corporate strategy : She has rich experience of working with organizations like Citi Bank and Ernst and Young. She became a part of VOL in 2009. She holds a Bachelors of Science degree in Economics (Finance and Management) from The Wharton School, University of Pennsylvania.
Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at,
based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC Securities Ltd or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes with out prior written approval of HDFC Securities Ltd . Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HDFC Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HDFC Securities Ltd, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organisations described in this report.
Rating Definitions
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com