But does the risk-reward look favourable for the stock after tepid third quarter earnings?
An expected improvement in demand for the high-margin ATBS segment, greater utilisation of butyl phenol and amalgamation of antioxidants maker Veeral Additives with itself could address concerns over revenue and margin growth going ahead, say analysts who look at the stock as a solid long-term bet.
For now, the stock hardly offers any upside, they say.
The stock has been resilient within the chemical space, rising 127 per cent from March 2020 lows.
The stock in fact has rallied some 17 per cent in February itself, even as it reported a 4 per cent drop in December quarter profit at Rs 64.14 crore on a 6.3 per cent fall in net sales at Rs 223.47 crore. Ebitda margin at 32.3 per cent was the lowest in 11 quarters.
Technical view
On the technical parameters, the stock recently formed a Cup & Handle pattern, a breakout that validated acceleration of the upward momentum and a fresh entry opportunity from a medium-term perspective.
ICICIdirect said the breakout from the four-month consolidation has made it believe that the stock would rise towards the Rs 1,610 mark in the coming months.
“This level is the confluence of the two-month’s range breakout of Rs 1,378-1,175 projected from the breakout area, placed at Rs 1,580, and the 161.8 per cent external retracement of October-November decline (from Rs 1,419 to Rs 1,087), at Rs 1,624,” the brokerage said.
The price target for the stock at Rs 1,610 suggests up to 8 per cent upside.
Fundamental view
Vinati Organics commands global leadership in two specialty chemicals: IBB (isobutyl benzene) and ATBS (2-Acrylamindo 2-Methylpropanesulfonic Acid). The company enjoys an 80 per cent market share in the former and a 70 per cent market share in the latter.
The drop in third quarter revenues was on account of lower offtake of ATBS, which is a high-margin business.
Geojit Financial Services said revenue from the ATBS segment was impacted by a decline in oil price and the overall realisation on account of pass-through of lower commodity prices.
ATBS contributed 57 per cent of the company’s FY20 sales. It is used in applications such as oil & gas, water treatment, paints & coating, textiles and adhesives. The revenue contribution from ATBS’ oil & gas segment was around 20 per cent.
“However, oil & gas prices are on an upward trajectory in the recent times. We expect revenue from ATBS to improve from FY22. The IBB volumes continued to steady on account of improved offtake due to the Covid-19 pandemic. All other products — namely IB, HPMTBE and customised products — saw stable demand. The new product, Butyl phenols, has started gaining momentum. We expect the contribution of Butyl phenols to overall revenue to improve starting from FY22,” it said.
Amalgamation benefits
The board of Vinati Organics recently approved the amalgamation of Veeral Additives with itself. The latter manufactures antioxidants with an annual capacity of 24,000 tonnes. Brokerage Anand Rathi said the acquisition is a forward integration for Vinati, as its butyl phenols products will be used to manufacture antioxidants.
After the acquisition, Vinati will become the largest and the only integrated manufacturer of such antioxidants in India. Veeral can generate Rs 300 crore revenue and an additional Rs 200 crore by using butyl phenols from Vinati, Anand Rathi said.
“Demand for ATBS picked up from the December 2020 level and returned to the pre-Covid levels in January 2021. The company expects a strong recovery from Q4. We maintain a ‘buy’ rating on the stock, with the same price target of Rs 1,475 at implied price multiples of 30 times FY23 EPS and 21 times FY23 EV/Ebitda,” the brokerage said.
This stock breached that price target in February third week, only to slip later on. The stock currently trades around Rs 1,440 level.
Management guidance
The company management has guided for 10-15 per cent revenue degrowth in FY21. With the rampup in ATBS, butyl phenol and some inputs from Veeral, revenue is expected to grow 20 per cent in FY22 and by a similar measure in FY23. The company management expects to ramp up antioxidants manufacturing in six to eight months after the merger approval.
It said once the Veeral merger is approved by shareholders and NCLT, promoter holding in Vinati Organics will go up to 74.34 per cent from 74.06 per cent.
Temporary blip?
Phillip Capital said Vinati’s December quarter operating performance was a bit below expectation, primarily driven by demand disruption for ATBS and a significant delay in the rampup of new projects (butyl phenol) caused by Covid-19.
“Going ahead, we expect sequential improvement across products led by demand recovery and expansion in ATBS, rampup in butyl phenol, commissioning of new project for the downstream products of butyl phenol. But factoring in margin underperformance, we have finetuned our estimates. That said, we remain optimistic on the medium- to long-term outlook of Vinati, driven by multiple expansion, new projects and, more importantly the integrated product basket. We are also excited about its entry into antioxidants,” Phillip Capital said.
The brokerage sees 29 per cent (CAGR) PAT growth over FY21-23, but has a price target of Rs 1,300 for the stock, suggesting some downside.
“Strong revenue outlook in IBB, recovery in ATBS and Veeral amalgamation synergies remain key triggers for the stock. We cut our FY22 estimates by 7.5 per cent, factoring in delayed pickup in butyl phenol, delayed commencement of new capex and increase in the number of shares post amalgamation,” Emkay said. This brokerage values the stock at Rs 1,330, suggesting some downside from its current level.
Sharekhan, however, sees the stock at Rs 1,550, and cites a pipeline of 12 new products in the R&D phase, and massive export opportunities in the specialty chemicals sector amid the China Plus One strategy being adopted by global customers.
It said concerns over ATBS demand and margins are expected to recede, as a strong global economic recovery has led to a sharp rise in oil price. Sharekhan’s price target suggests a modest upside.
