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Gliding its way forward
We maintain BUY on Vinati Organics (VO) after beat on our estimates. Our target is Rs 2,034sh (25x Mar-21E standalone EPS).
HIGHLIGHTS OF THE QUARTER
* The company reported another strong quarter with sales jump of 39.5%YoY to Rs 2.96bn driven by volume growth 20%+ in ATBS. Sales in IBB that were impacted by the closure of the BASF plant in 3QFY19 resumed taking volumes and is expected to normalise in ensuing quarters.
* ATBS plant capacity augmentation from 26ktpa to 40ktpa will be completed by the end of 2QFY20 with a capex of Rs 1.1bn. We expect volume growth at ~20% CAGR over FY20-22E based on growth in global demand coupled with a shortage in supply.
* Butylated phenol plant will be commissioned in 1QFY20. We expect gradual ramp-up in production over FY20-21E and expect it to contribute ~Rs. 1.3bn to the topline by FY21 and Rs 4bn at peak utilisation (expected in FY23E).
* Since the utilisation of the Butylated phenol plant will be lower in 2HFY20 and FY21, the operating leverage will be lower. As a result, EBITDA margins from these products will be lower compared to that of others. As contribution from these products in revenue increases, blended EBITDA margin will decline so we expect EBITDA margin to reduce to 35% in FY20/21E from 40.4% in 4QFY19.
* Near-term outlook: ATBS is expected to contribute significantly to earnings. Butyl phenols start contributing to revenue from 2QFY20
Strong traction in ATBS will continue owing to robust demand and shortage of global capacity. VO is expanding its ATBS capacity by ~46% to reap the benefit of the situation. Besides, the company will add Butylated Phenols to its product basket. This too, will drive volume growth in FY20/21. VO has been commanding a premium in valuations due to an impeccable history of product selection, best in class return ratios (ROE and RoIC for FY20/21E will be 27.9/26.5 and 26.1/28.6%). Therefore, we value Vinati Organics at 25x Mar’21 EPS with a target price of Rs 2,034/share.
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