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Vinati Organics: Will additional capacities be a gamechanger?

Vinati Organics: Will additional capacities be a gamechanger?

Vinati Organics: Will additional capacities be a gamechanger?
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By Sonal Bhutra  Aug 7, 2018 3:29:50 PM IST (Updated)

Chemicals company Vinati Organics' stock has seen gains of 20 percent this year and was locked in the upper circuit on August 6 and touched a 52 week high on August 7.

Chemicals company Vinati Organics' stock has seen gains of 20 percent this year and was locked in the upper circuit on August 6 and touched a 52 week high on August 7.

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The company is the producer of ATBS (2-Acrylamido-2-Methylpropane Sulfonic Acid), IBB (Iso Butyl Benzene) and IB (Iso Butylene) products. While ATBS is largely used to manufacture dispersants in water chemicals, adhesives, textile companies, mining etc, IBB is used as a pharma intermediate for Ibuprofen which is used as a painkiller. IB has its applications in the fragrance industry and is used as a fuel additive. These three products contributed close to 80 percent of the company’s topline in FY18.
Also Read: Vinati Organics eyes 20-25% revenue growth; to fund capex via internal accruals
Apart from that, the company also has some production in terms of TBA (Tertiary Butyl Acrylamide), TOA (N-Tertiary Octyl Acrylamide) and TB amine, that are IB derivatives and contribute around 6-7 percent of the company’s topline.
The company reported a strong set of Q1FY19 earnings with revenue surging 25 percent, earnings before interest, taxes, depreciation and amortisation (EBITDA) grew by 41 percent and profit after tax (PAT) grew by around 24 percent.
This was largely led by the growth in ATBS segment which saw revenue growth of around 50 percent. This happened because the biggest competitor Lubrizol exited the ATBS market. It also took the company’s market share to 65 percent globally against 45 percent last quarter. The company is adding more capacity in this product and expects the performance in this segment to improve further.
On the IBB segment where the company enjoys 70 percent market share, the shutting down of the BASF facilities (biggest IBB client) in the US  has led to higher Ibuprofen prices but has lowered the offtake for Vinati. The company expects lower offtake from IBB in Q2 and Q3 of FY19 due to shut down of these capacities.
On the IB segment, the company enjoys 80 percent market share and sell entire products in the Indian markets.
Vinati is also coming up with additional capacities for PAP (Para Amino Phenol) a key intermediate for paracetamol, where they have planned to invest Rs 600 crore in Maharashtra with a capacity of 30,000 tonne per annum (TPA).
The company has initiated a pilot project for this product by investing around Rs 20 crore, and management told CNBC TV-18 that they are facing some teething issues and plan to sort the same out.
Vinati is also coming up with a facility for Butylated Phenols (39,000 TPA) which is used to make plastics explosives such as picric acid, and drugs such as aspirin. The company expects this product to add close to Rs 200 crore to topline by FY20. It is going to fund all these expansions through internal accruals and will not take any additional debt.
The management maintains its guidance of 20-25 percent revenue growth in FY19 and 30-35 percent growth in profits. Also, the current promoter shareholding stands at 74 percent and management would not mind taking it further to 75 percent.
The overall capacity of the company currently is 64,000 TPA (ATBS+IBB+IB+TBA) and in the ATBS segment Vinati is working at full capacity.
In terms of valuation, it is trading at 28.6X FY20 EPS (earnings per share) and 15X EV/EBITDA. It is not very cheap but strong earnings and positive management guidance keeps the investor interest active in the company because the ROE (return on equity) of the company has been around 19.5-20 percent levels.
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