Vinati Organics Ltd - Stock Valuation and Financial Performance

Vinati Organics:  Scale and Cost Efficiencies

About the company

Vinati Organics Limited (VOL) is an Indian Specialty Chemicals Manufacturer with 2 subsidiaries, Veeral Organics (VOPL) and Veeral Additives (VAPL). Vinati Organics is the world’s largest producer of IBB (Iso butyl benzene) and ATBS (2-acrylamido 2-methyl Propane Sulphonic Acid) with a global market of 65%+ and India’s largest producer of Isobutylene with 70% domestic market share. Isobutylene is a raw material for ATBS, which helps lower the cost for manufacturing ATBS while also allowing the company to enter various other downstream products such as butyl phenols. The company also has India’s largest manufacturing capacity of Antioxidants (utilization ~25%). ATBS manufactured by the company is used in multiple industries such as oil & gas, mining, adhesives and paint. The company earns more than 60% of its revenue from international operations. VOL has deep rooted partnerships with major chemical and industrial players across USA, Europe, and Asia. Some of their customers are BASF, NALCO and Dow Chemicals. 

The strategy for Vinati Organics is to be the largest and lowest cost player in the world in niche chemistries with limited buyers and suppliers. Such a strategy leads to low competitive pressures over the long run. The strength of this strategy is based on the low capital and operating costs inherent to India. 

How has the company performed historically?

Between FY18 and FY23, the company has grown its revenue at an annualised rate of 23% and Profit after Tax at an annualised rate of 26%. However, FY24 is expected to be a challenging year for the company due to destocking of ATBS inventory from the Oil and Gas Sector which contributes about 30% of the ATBS consumption. The company expects demand to normalise by end of FY24, but the revenue for FY24 is expected to be lower than the revenue for FY23. 

Can Vinati Organics maintain its margin profile?

                The company has guided that newer products would have a lower margin. The company’s high margins were primarily due to ATBS, which has EBITDA margins of more than 30%. While the company will increase its ATBS capacity from 40,000 tonnes per annum (tpa) to 60,000 tonnes per annum by Q3FY25, the margin profile of the other growth drivers, antioxidants and other IB derivatives will command EBITDA margins of around 20%, which would lead to margin dilution. Since Vinati Organics already commands the largest market share of ATBS in the world, substantial growth from this chemical seems extremely unlikely. The company has guided an EBITDA Margin level of 25-27%, which is lower than the average historical EBITDA Margins. 

What are the capex plans for Vinati Organics?

Vinati Organics is under a capital expenditure phase, with around Rs. 800 crores to be invested in FY24 and FY25. 

The company will increase its ATBS capacity from 40,000 tonnes to 60,000 tonnes annually and this capacity would be used to primarily serve existing customers. This increase in capacity will cost around Rs. 300 crores, and would commercialise by Q3FY25.

In VOPL, the company has undertaken capital expenditure of about Rs. 480 Crores mainly consisting of MEHQ (4-methoxyphenol), Guaiacol, Iso Amylene derivatives and Anisole. MEHQ and Guaiacol are expected to commence operations in Q1 of FY25 with capacities of 2,000 tonnes and 1000 tonnes respectively. 4-MAP (4-Methoxy Acetophenone) and Anisole are expected to commercialise in H2FY25 with capacities of 1000 tonnes and 5,000 tonnes respectively. The TAA (Tertiary Amyl Alcohol) and PTAP (p-tert-Amylphenol) capacity is a total of about 10,000 tonnes, which would commercialise in H2FY25 as well. It is expected that these new facilities would take about 6 months to scale given the requirements for customer approvals.

VAPL, which recently became a subsidiary as a result of NCLT Approval, has recently started production of antioxidants at a 25% capacity utilisation and total capacity of 24,000 tonnes for domestic (8000 tonnes) and international (16,000 tonnes) sales. The current annualised revenue from this subsidiary is Rs. 100-120 crores, and is expected to double next year as demand increases.

What is the update on the recent merger?

The merger of Vinati Organics with Veeral Additives Private Limited (VAPL) is valued at approximately Rs 150 crores given current market prices, and is executed via a share swap agreement. The merger will be applicable from 1^st April, 2021.

The merger will lead to the following changes:

• Loan: Rs. 300 crore loan given to Veeral Additives will be replaced by Rs. 300 crore increase in Gross Block
• Interest elimination: Previously accrued annual interest of Rs. 32 crores from loan to Veeral Additives is no longer applicable
• Depreciation: Annual depreciation will increase by Rs. 15 crores due to asset ownership 
• Butyl phenols internalization: Butyl phenols were sold to Veeral Additives at market price, and the sales that arise from the transaction will cease to exist.

What are the key concern areas?

• Sustained growth over current levels: VOL has grown substantially over the past decade due to its focus on high margin ATBS while being the world’s largest manufacturer of ATBS as well as IBB. The incremental opportunity size for new chemistries may be lesser than that of existing ones given the company’s focus on niche products and high revenue base. While the company’s growth was based on 2 main chemistries, future growth at the same level would require the company to enter multiple new products simultaneously or focus on larger opportunity sizes which may be more competitive. VOL had previously benefited strongly from the inclusion of BASF, the world’s largest Ibuprofen manufacturer, to its IBB client list and the exit of Lubrizol from the ATBS market. However, such benefits for the new product divisions are uncertain.
• Margin volatility: The new product divisions would have lower gross margins and subsequently lower EBITDA margins compared to ATBS. Therefore, the impact of changes in raw material prices would have a higher impact on profitability. While the company has historically been able to pass raw material costs to consumers, the ability of the company to continue this strategy for the new products remains to be seen.