This fortnight we have selected a speciality chemicals stock which has not been hit hard by the current global stock markets’ meltdown. While most stocks have lost 30-50 per cent from their 52-week high levels, this stock has shed only 13 per cent and rules over 19 per cent above its 52-week low level. It is Vinati Organics, a leading manufacturer of speciality chemicals and organic intermediates with a sustained market presence in 35 countries. Since its inception in 1989, it has evolved from being a single-product manufacturer to an integrated business offering a wide range of products to some of the largest industrial and chemical companies across the US, Europe and Asia. If we take individual items, the company is the world’s largest manufacturer of IBB and ATBS. The company can boast of unique expertise in blending innovation with chemistry to deliver value-added products to its varied clientele.

With the rising demand for its products at home as well as abroad, the company has made rapid strides on the financial front. During the last 12 years, its sales turnover has expanded more than 5 times – from Rs 323 crore in fiscal 2011 to Rs 1,616 crore in fiscal 2022, with the profit at net level shooting up more than six times – from Rs 52 crore to Rs 347 crore during this period. The company’s financial position is very strong, with reserves at the end of March 2022 standing at Rs 1,818 crore – over 181 times its tiny equity capital of Rs 10 crore. Vinati is a virtually debt-free company and its interest burden in fiscal 2022 was nil.

GLOBAL LEADER

But we have not picked up this company as the Fortune Scrip for its past laurels. We strongly feel that its growth prospects going ahead are all the more promising. Consider:

• Vinati operates in niche segments and has an exceptional product basket with a significant marketshare in its products globally. The company is the largest manufacturer of ATBS (acrylamido tertiary-butyl sulfonic acid) and IBB (iso butyl benzene) worldwide and enjoys a 65 per cent marketshare globally in each product. As a result, the company is able to generate a significantly higher margin profile. The company exports around 75 per cent of its production of ATBS and IBB and has around 300 customers. Global chemical manufacturers like Dow Chemical, BASF and Ecolab are among its major clients. It procures major raw material at home from Reliance Industries, BPCL and GAIL, and imports acrylonitrile and butyl phenol from Deepak Nitrite.
• The demand for the company’s products is picking up across sectors and geographies like oil and gas, water treatment and agrochemicals. According to Managing Director and CEO Vinati Saraf, the next growth is going to be from butylphenols, which are used in antioxidant and fragrance industries. ATBS will continue as the main product and has applications in mining, water treatment, oil and gas, and personal care, while IBB is used largely in pharmaceuticals

ANTIOXIDANT FOCUS

The company has merged Veeral Additives Pvt Ltd (VAPL), a group company engaged in the manufacture of antioxidants, at a cost of Rs 200 crore. This is a step in the right direction as the merger has provided Vinati an entry into antioxidants – a road to forward integration for Vinati. Veeral’s plant is being revamped to commence production of antioxidants from butyl phenol, thus resulting in forward integration for Vinati. Production of this antioxidant, which is an agrochemical intermediate, is expected to start in fiscal 2024. With this merger, Vinati will emerge as the largest and only doubly integrated manufacturer of antioxidants in the country. As this product is currently imported into India, this will be a case of import substitution. The company management expects antioxidants to contribute around 25 per cent of total sales two to three years down the line.

• As of today, ATBS contributes 40-50 per cent of overall revenues of the company, with IBB contributing 20-30 per cent and the balance coming from other segments such as butyl phenols. The growth outlook for all these products, including butyl phenols and antioxidants, is highly promising going ahead. Demand for ATBS, IBB, butyl phenols and antioxidants is steadily growing in Europe and the US. Though demand is good from Asia too, shipping issues and longer lead times have restricted exports. Around 65 to 70 per cent of the company’s production is being exported and there are chances for further improvement in the near future. As the company’s products are of high quality and highly competitive in the global market, the ‘China +1’ policy of global MNCs will give a big boost to its top as well as bottomline. Research analysts tracking the speciality chemicals segment expect the company’s sales turnover to touch the Rs 2,000-crore mark within a year and cross the Rs 2,500-crore mark within the next 3 years
• With rising demand for the company’s products at home as well as abroad, it is busy expanding its production capacity. It has undertaken an expansion of its PTBBA plant (these speciality chemicals are being used for the agrochemicals sector and plastic additives) at an estimated cost of Rs 200 crore. At the same time, it has embarked upon an expansion programme for ATBS, involving a cost of around Rs 120 crore.
• After taking over Veeral Organics and making it a fully owned subsidiary, Vinati is spending Rs 250 crore to manufacture several niche chemicals and speciality chemicals. This merger will lead to forward integration as Vinati’s butyl phenols will be used to make antioxidants. This capex is expected to be completed by March 2023 and will add around Rs 200-250 crore to the company’s turnover. According to analysts at Anand Rathi, after the completion of the capex programme of Rs 675 crore by fiscal 2024, the company will have cash and investments of Rs 250 crore in fiscal 2024. The management may then continue to find fresh avenues to invest this accumulated cash for investment, paving the way to further growth.
• The company can boast about a clean and healthy balance sheet as it is a debt-free. As the company operates in niche segments and have an exceptional product basket with a significant market share (around 65 per cent each in ATBS and IBB) globally. Hence the company is able to generate significantly higher margin profile. This along with debt-free stature helps the company to generate superior return ratios.
• Prospects for the Indian speciality chemicals industry are highly promising. According to CRISIL Research, the Indian industry is expected to outpace its Chinese counterpart and almost double its global market share - from 3 to 6 per cent by the fiscal 2026. Much of this growth will be powered by solid export tailwinds due to a shift in the global supply chain driven by the China+1 policy of global venders and demand.
• Stockholding pattern of the company reveals that stocks of the company are need in strong hands. While promoters hold 74.06 per cent, (and not a single stock is pledged), Foreign Institutional Investors (FIIs) hold 4.68 per cent and DIIs 7.86 per cent. The fact that institutional investors hold responsible stake in Vinati Organics indicates that the company has a certain degree of credibility in the investment community.

Prospects are all the more better going ahead. As the capacity expansion of ATBS, rising domestic demand for PP, LLDPE and the acquired company – Veeral Additives – commencing production of antioxidants after a year or so. The company’s pace of growth will be around Rs. 1975. Discernible investors should accumulate these stocks around the current level and at every decline in order to reap rich benefits in the long run.