Vinati Organics: Good Performance, Promising Future

 December 2016 quarterly result analysis of Vinati Organics are available in public.

Performance summary

• Total income increased by 8% YoY during the quarter. Net sales increased by 15.3% YoY and other operating income declined by 58.8% YoY. The increase in revenue was led by higher contribution of IBB, ATBS, and volumes from new customised products.
• Operating profits increased by 5.1% YoY. Operating margins stood at 33.5%. Operating margins declined on the back of higher employee cost which has increased by 49% YoY.
• Other income increased by 19.4% YoY. Depreciation increased 15.9% YoY.
• Net profit increased by 7.9%. This is primarily on account of expansion in gross margins and higher other income. The net margin stood at 20.6%.
  
  

  Financial Snapshot

  (Rs m)	3QFY16	3QFY17	Change	9mY16	9mY17	Change
  Net sales	1,372	1,582	15.3%	3,142	3,150	0.3%
  Other operating income	150	62	-58.8%	325	103	-68.4%
  Total Income	1,522	1,644	8.0%	3,467	3,253	-6.2%
  Expenditure	1,017	1,113	9.5%	2,412	2,197	-8.9%
  Operating profit (EBDITA)	505	531	5.1%	1055	1056	0.0%
  Operating profit margin (%)	36.8%	33.5%		33.6%	33.5%
  Other income	15	18	19.4%	27	20	-24.0%
  Interest	20	8	-58.7%	47	19	-59.6%
  Depreciation	46	54	15.9%	92	107	16.1%
  Profit before tax	454	486	7.2%	944	951	0.8%
  Tax	152	161	5.9%	322	289	-10.3%
  Effective tax rate	33.5%	33.1%		34.2%	30.4%
  Profit after tax/(loss)	302	326	7.9%	621	662	6.5%
  Net profit margin (%)	22.0%	20.6%		19.8%	21.0%
  No. of shares (m)					52
  Fully diluted EPS (Rs)*					26.3
  P/E (x)*					27.7

  *Based on a trailing 12-month earnings
  We conducted a conference call with the management to understand the details of the capex plan as well as the future prospects of the business. Here are the highlights.
• Capex Plan: Vinati has been undertaking capex for three major projects. These include:
1. Rs 5 billion capex for Para Aminophenol (PAP): PAP is a raw material for paracetamol. Although, paracetamol is a mature market, the play will be on the process and technology. The company has developed a novel process along with NCL (National Chemical Laboratory) which has a patented technology and Vinati has an exclusive license for it. As per the management, the company would look to replace about 20,000-21,000 tonne of PAP which is currently imported from China. The revenue flow from this project is expended to start from FY20.
2. Rs 1.5-2 billion capex for Butylated Phenols: Butylated Phenols are intermediaries which find applications as raw material for products that go into making perfumes, inks, resins, and plastics. As per the management, revenues are expected from FY19 and the revenue run rate would be about Rs 3-3.5 billion.
3. Rs 2 billion capex for new IB derivatives (PTBT, PTBBA and TB-Amine): PTBT and PTBBA are IB based derivatives which are currently imported into India. These intermediaries are used in the perfume and personal care industries. Sales from these intermediaries are expected from FY18 onwards. TB Amine is used in the rubber and pharma industries. The company started earning revenues from this product in FY17. The full impact on this product on the financials would come in FY18.
4. ATBS volumes: ATBS volumes were significantly affected in FY16 on the back of oil related demand for ATBS. However, going forward, management expects a volume growth of about 10-12% on account of increased usage in water treatment chemicals, and personal care polymers.
5. IBB realisations to improve on the back of forward integration to IBAP: The upgradation of IBB to IBAP, an advanced intermediate for ibuprofen manufacturing, would improve IBB realisations.

What to expect?

Vinati's prudent track record of breaking into new products and the forward and backward integration of existing product is a big positive in our view.
We see a clear megatrend in the coming years with Vinati replacing the supply from China to India. The company will venture into new products which would help to reduce revenue concentration from IBB and ATBS.
At the current price of Rs 727, the stock of Vinati Organics is trading at 27.7 times its trailing twelve month earnings.

Vinati Organics is a long-term growth story. We have a positive view on the business as well as the management. However, the stock has run up significantly in the last few months and has crossed our target price of Rs 740.
We have tentatively updated the FY20 financials for the company. We will finalise the new target price after factoring in the details of the company's capex plan and the likely impact on the financials.
It is important to understand that the payoff from the capex will be back ended in nature i.e. there wouldn't be much immediate gain in FY18. Thus, the run up in the stock price has factored much of the upside.

Disclaimer

Disclaimer : All information given here is for information purpose only. Users are advised to rely on their own judgement or investment advisor when making investment decisions. This blog is not liable and take no responsibility for any loss or profit arising out of such decisions being made by anyone acting on such advice.