Fortune Scrip     

Published: Apr 15, 2023
Updated: Apr 15, 2023

VINATI ORGANICS

Vendor of choice to global clients

The unprecedented rush for speciality chemical stocks witnessed during fiscal 2021 and the early part of 2022 is suddenly over and almost all leading speciality chemical stocks have tumbled down from their unbelievable heights. The Russia-Ukraine war, widespread fears of the outbreak of recession in the US and European economies, and a spurt in prices of raw materials for speciality chemicals in their major producing centre of China on account of a sharp drop in production in the wake of government restrictions on grounds of environment protection have adversely affected demand for speciality chemicals and the profit margins of manufacturers of these chemicals. Little wonder that prices of leading Indian speciality chemical stocks fell back sharply by 40 to 50 per cent. Even the lower levels do not attract investors.

There is one stock – Vinati Organics — which plummeted from the 52-week high of Rs 2,373 to Rs 1,693 but knowledgeable investors bought the stock and the price recovered to modest ground of Rs 1,840.

After considering the prevailing situation and future prospects for the product being manufactured by Vinati Organics, we have decided to place the crown of Fortune Scrip on Vinati for this fortnight.

SMALL BEGINNINGS

Mumbai-headquartered Vinati Organics is one of the fast-growing speciality chemicals and organic intermediates maker with a sustained market presence in as many as 35 countries. Today, it is the world’s largest manufacturer of IBB and ATBS. 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. The company blends innovation with chemistry to deliver value-added products to its varied clientele.

The company operates in niche segments and has an exceptional product basket with a significant marketshare in its products globally. It is the largest manufacturer of ATBS (acrylamido testiary butyl sulfonic acid) and IBB (iso butyl benzene) 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.

Thanks to the rising demand for its products, the company is making rapid strides on the financial front. During the last 10 years, its CAGR growth in revenue has been 10 per cent, CAGR growth in profit 20 per cent, and 49 times growth in shareholder wealth. Its financial position is very sound, with reserves at the end of March 2022 standing at Rs 1,818 crore against its tiny capital of Rs 10 crore, with its debt/equity ratio at zero per cent.

ROSY FUTURE

However, we have not picked Vinati as the Fortune Scrip for its past laurels. In fact, of late, market sentiment has been vitiated on account of geopolitical and global economic issues. But it is on the recovery path and its prospects going ahead are highly promising. Consider:

• The demand for the company’s products, which was adversely affected on account of the Russia-Ukraine war, is picking up gradually across sectors (like oil and gas, water treatment and agrochemicals) and geographies. According to Managing Director and CEO Vinati Saraf, the next growth is going to come from butyl phenols, 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.
• As far as ATBS and IBB are concerned, there are around 300 customers including leading global chemical companies like BASF, Dow Chemicals and Ecolab. Demand for these products has also started picking up and the company does not have to depend for its raw materials on China or elsewhere. In fact, it procureS its major raw material from domestic sources like Reliance Industries, BPCL, GAIL and Deepak Nitrite (acryloninitrilo and butyl phenol). Hence, the company’s margins are not adversely affected.
• The acquisition (at a cost of Rs 200 crore) and merger of group company Veeral Additives Pvt Ltd with itself will prove highly beneficial to Vinati as this development has provided Vinati an entry into anti-oxidants – a road to forward integration for the company. Veeral’s plant is being revamped to commence production of anti-oxidants from butyl phenol, thus resulting in forward integration for Vinati. Production of this anti-oxidant – which is an agrochemical intermediate — is expected to start in the current fiscal year ending March 2024. With this merger, Vinati will emerge as the largest and only double- integrated manufacturer of anti-oxidants in the country. According to the management, the anti-oxidant business will contribute around 25 per cent of the company’s total sales within the next two years or so.

HIGH ON EXPORTS

• At present, 65 to 70 per cent of the company production is being exported. This export business is likely to expand considerably going ahead as the demand for ATBS butyl phenols and anti-oxidants in Europe and US is steadily growing. As the company’s products are of very high quality and are highly competitive price-wise in the international market, the China+1 policy of leading global MNCs will give a big boost to Vinati’s topline as well as bottomline.
• In the wake of rising demand for its products at home as well as abroad, the company is chalking out an expansion programme. It is expanding ATBS capacity from the current level of 40,000 to 60,000 tpa, which is expected to go on stream by December 2023. In fact, the company had contemplated an investment of Rs 800 crore, which included the acquisition of Veeral, establishing a butyl phenol factory and expansion of ATBS capacity.
• The strong and rising demand for the company’s products is well reflected in its financial performance. During the last 12 years, its sales turnover has expanded from Rs 323 crore in fiscal year 2011 to Rs 1,616 crore in fiscal 2022, with operating profit shooting up over six times from Rs 70 crore to Rs 435 crore and the profit at net level also surging over six times from Rs 52 crore to Rs 347 crore. The company’s financial position is very strong, with reserves at the end of March 2022 standing at Rs 1,868 crore — over 181 times its tiny equity capital of Rs 10 crore. The company has reduced its debt burden from Rs 237 crore in fiscal 2013 to just Rs 18 crore in fiscal 2022, and totally wiped it out in fiscal 2023, when the interest cost was fractional at Rs 1 crore.

FINE FINANCIALS

Remarkable synergies due to backward and forward integration, strong cash flows, a healthy balance sheet and attractive ROE and ROCE levels (about 24 per cent for a 5-year average) instill tremendous confidence among investors about the company. In the recent downturn of speciality chemical stocks, the stock price of Vinati Organics has come down from Rs 2,373 to a highly attractive level of Rs 1,830. Accumulate at the current level as well as at every decline if any. Discerning long-term investors will reap a rich harvest.