Chemplast Sanmar: Regaining the market’s fancy

The fortunes of Tamilnadu-based Chemplast Sanmar changed dramatically in the week gone by as the scrip gained over 65% in just four trading sessions to close at Rs 11.27 on Friday, 25 September ‘09. The commissioning of its longdelayed polyvinyl chloride project brought the market’s fancy back to the company, which had incurred heavy losses in FY09 - first time in its over 40 years of history - wiping out more than three years of profits. On Tuesday, 22 September ‘09, the company announced the completion of its 170,000-tonne per annum polyvinyl chloride (PVC) plant at Cuddalore at a capital cost of Rs 600 crore, which will more than triple its PVC capacity from the existing 65,000 tpa. At the current market prices of PVC, this plant can generate revenues of Rs 850 crore on an annualised basis. Chemplast’s first PVC plant, running now for 42 years, is the only one of its kind in India using molasses or alcohol to produce ethylene. The company suffered in FY09 from high prices of molasses and alcohol due to a fall in sugar production. As against this, the new plant will produce PVC from imported vinyl chloride monomer (VCM). Chemplast is also expanding its capacity to manufacture PVC pipes, which contributed nearly 11% of its revenues in FY09. The company set up its third pipe plant in Maharashtra with 22,000-tpa capacity in December ‘08. The company ended FY09 with its debt at Rs 1,244 crore, nearly 6.7 times its shareholder funds of Rs 186 crore. However, the company made a rights issue of shares in April ‘09, raising Rs 160 crore, which brought down the debtequity ratio to 3.6. Fitch downgraded the company’s debt by one notch in July ‘09 to BBBgrade. The current capacity expansion is sure to bring in substantial additional revenues and boost profits. However, the high leverage and associated interest burden continues to remain a major concern.

Shiv Vani Oil & Gas: Oiling The Wheels

Growing order book and healthy financials make Shiv Vani Oil an attractive long-term investment

SHIV VANI Oil & Gas Exploration Services (SVOL) grossly underperformed the markets last year despite its excellent performance in FY09. This offers a great opportunity for long-term investors to accumulate the scrip, as the company enjoys strong cashflows and a bulging order book.

BUSINESS: Shiv Vani Oil (SVOL) is India’s largest integrated service provider for onshore petroleum exploration and production. Its services start from collection and analysis of seismic data till actual extraction of petroleum and include services such as well logging, cementing, mud engineering, directional drilling, well testing, etc. It presently has 10 seismic equipment sets, 350 shot-hole rigs and 40 drilling rigs - the largest in India.
The company has also emerged as the leading integrated provider of services for coal-bed methane (CBM) development in India, owning eight sets of modern directional drilling equipments. It is executing a long-term contract in Oman for PDO and Shell, which has no expiry clause. The contract generates annual revenues of $18 million. More than 98% of the company’s domestic revenue comes from national oil companies, which provides great visibility on its future earnings.

GROWTH DRIVERS: SVOL is currently carrying an unexecuted order book of nearly Rs 4,000 crore, which is 4.5 times its FY09 revenue. While nearly Rs 750 crore of these orders relate to the contract in Oman to be executed over the next 10 years, the rest will be executed over the next three years. The company won a three-year Rs 1,610-crore contract from ONGC last year, which, after a year of delay, has started getting implemented recently.
Additionally, the recently launched eighth round of NELP bids and fourth round of CBM bids will ensure that the company continues to receive a steady flow of orders in the years to come.
SVOL last year added 16 new drilling rigs to its fleet, for which FY10 will be the first full year of operation. The impact of these additional assets will reflect in the company’s earnings going forward. Since almost all of the company’s assets are now deployed for the next three years, it can consider buying new equipment based on new order flow.
For this purpose SVOL has passed a resolution enabling it to raise up to Rs 600 crore while increasing the authorised equity capital to Rs 75 crore from present Rs 63.5 crore and raising the ceiling on investment by FIIs to 49% of paid-up equity capital from 24%.

FINANCIALS: After three consecutive years of negative operating cashflows, SVOL reported substantially strong cashflows in FY09 despite the economic turmoil. In the last five years, the company’s profits have grown at a compounded annual rate of 94.7%, as against a CAGR of 59.2% for net sales. As a result, the net profit margin has been continuously improving and reached 22.1% in FY09.
The company’s expansion spree last year has left it with a debt-equity ratio of above two and bulging interest and depreciation costs. However, the burden on profits has come down to just 35.2% of the company’s operating profits in FY09, down from 62.7% in 2004.

VALUATION: At the current maket price, the scrip is trading at a P/E multiple of 8.9 on a consolidated basis. Considering the current unexecuted order book position and the capacity creation of last year, the company’s profits next year are likely to touch Rs 203 crore with revenues of Rs 1,090 crore. As a result, the FY10 forward P/E works out to 7.4, which is attractive for long-term investors.

A-Pac sees premium long-term LNG deals

Demand Outstrips Supply As Major Consumers Bid Aggressively For Future Supplies

NOTWITHSTANDING the crash in natural gas prices and low prices of liquefied natural gas (LNG) in the spot market, fresh long-term deals in the Asia-Pacific region are being struck at very high prices.
Last month, Petronet LNG announced a tie-up for 1.5 million tonne of LNG from an Australian company for its upcoming Kochi terminal. Although none of the parties have officially declared the prices, the 20-year contract is reportedly valued at $20.5 billion, which translates in a price of $13.5 per million metric British thermal units (mmBtu).
“Prices in the spot market and long-term contracts, which are typically for 20-25 years, are not comparable,” said Amitava Sengupta, finance director at Petronet LNG, India’s largest importer of LNG.
“Spot prices are currently low due to the economic downturn, however, they will pick up sooner or later,” he said, adding that prices will rise further as long-term LNG demand is expected to outstrip supply. In India, gas prices have been hugely controversial because of the disputes between RIL and NTPC and RIL and RNRL. Domestically-produced gas costs in the range of $1.8 -$5.5 per mmBtu. The value of long-term contracts for Australia’s Gorgon LNG project, signed recently by its three consortium members — Chevron, Exxon Mobil and Shell — is estimated to be $200 billion. The 15-MT per annum LNG project is expected to come up in western Australia by 2014 at an estimated investment of $37 billion. The US Henry Hub natural gas prices have dropped over 33% since the beginning of 2009 to $3.45 per mmBtu, a period when the crude oil prices more than doubled. At the same time, the spot LNG cargoes, which had scaled up to $19-20 per mmBtu last year, have come down to $4-5 levels currently.
In the Asia–Pacific region, where nearly 90% of the international trade in natural gas happens by way of LNG, demand for LNG far outstrips supply and it is purely a seller’s market. It has been worsened due to a clutch of dominant buyers, including Japan, South Korea and Taiwan, which together consume 62% of world’s LNG, bidding aggressively for future supplies. “Japan, which is importing LNG since 1969, has a number of LNG import deals struck at pretty low-prices 5-10 years back when the crude oil prices were very low. As a result, the aggressive pricing of the current contracts hardly adds to their overall gas cost,” said a high-ranking official with a national oil company.
As a result, the relatively smaller LNG consumers in the region, such as India, have to accept the high prices in order to secure future energy supply. The US and European countries, where the natural gas imports take place predominantly through pipelines, import LNG only to meet their peak demand, and hence, are not affected by the spike in LNG prices. The key question is whether Indian consumers would buy gas at such steep prices.
“Today, the new long-term LNG contracts are linked directly to the crude oil representing around 14%—16% of the per barrel prices without any floor or ceiling limits. Even though this appears very high in the current scenario, LNG is still cheaper compared to the liquid fuels, such as naphtha or oil, and beneficial to the final consumer. Hence, we are not worried about its marketing,” said the official from the national oil company.
In simple terms, with benchmark crude oil prices at $70 per barrel, LNG will cost around $9.8 – 11.2 per mmBtu on FOB basis, depending on the pricing formula agreed upon in individual contracts. It will rise to $14–$16, if the benchmark crude prices rise to $100 a barrel. Japan, being the largest LNG consumer, Japanese crude cocktail (JCC), as determined by prices of the country’s imported crude oil, is generally taken as the benchmark in such LNG deals. The direct link to the crude oil prices is making import of LNG in future costlier, particularly when crude oil prices are expected to move up in the foreseeable future. For the Indian consumers, who will primarily replace their liquid fuel consumption with this imported LNG, the proposition will still make sense. Industry experts believe Indian demand for gas to grow in tandem with the supply and there will always remain a gap to be filled with imported LNG.

Reliance Industries: Richie gets richer

India’s largest company by market capitalisation Reliance Industries, sold off 1.5 crore equity shares held as treasury stock, raising Rs 3,188 crore on 17 September ‘09 at an average price of Rs 2,125 per share. In the September ‘08 quarter, eight promoter group companies holding 9.55 crore equity shares of RIL became whollyowned subsidiaries of RIL, when the company converted its loans to these companies into equity. As such, the company currently carries treasury stock of 8.97 crore shares with the Petroleum Trust and 9.55 crore shares under these eight subsidiaries, together valued at above Rs 38,000 crore. The company is expected to sell these shares over a period of time to raise funds for its investment plans.

The company also obtained necessary approvals for merging its subsidiary Reliance Petroleum with itself. The company will be issuing one share of RIL for every 16 shares of RPL on the cut-off date of 29 September ‘09. The entire episode starting from RPL’s IPO in April ‘06 to its merger with RIL, proved unprofitable for IPO investors who would have earned better returns by investing in RIL instead. It may not be in terms of capital appreciation, as even on 20 April ‘06, when RPL’s IPO closed, RIL’s shares were trading nearly 16 times the IPO allotment price. But in terms of the cumulative dividend of Rs 34 per share that RIL paid from April ‘06 till date, RPL did not pay any dividends in the four years of its existence.

This merger entails RIL issuing 6.93 crore new shares expanding its equity to Rs 1,643.1 crore. In the last five years, on an average, RIL has distributed around 13% of its net profit as dividends. Considering this past trend, RIL’s dividend payout for FY09 is likely to be around Rs 2,000 crore, translating to Rs 12 per share of dividend on the expanded equity.

The RIL scrip lost 2% during the week to end at Rs 2,098.7 on BSE as against last Friday’s close of Rs 2,140.95, valuing the company 22.3 times its earnings for trailing 12 months.

Time Technoplast: Continuing to expand and BPCL: Exploring for growth

Continuing to expand

The Mumbai-based plastic goods manufacturer Time Technoplast continues with its fast-track growth plans defying worries related to global economic growth as it initiated the acquisition of an LPG cylinder manufacturer in the Czech Republic. The $5.2 million deal is expected to consummate by end-October ‘09. The company, which has been expanding its capacities relentlessly over the last two years, has added several new products to its portfolio such as plastic fuel tanks for automobiles, HDPE pipes, prefab structures, autodisable syringes, returnable packaging etc. This acquisition will help it manufacture another novel product for the Indian market viz. polymer compositebased LPG cylinders. The acquisition cost appears reasonable; it is just 1.4 times the acquired company’s PBDIT of $3.75 million in ‘08. The company named Kompozit-Praha had net sales of $15 million and net profit of $1.8 million in ‘08. Time Technoplast is also investing around $6 million in China for a greenfield unit to manufacture containers and drums. Unlike India, where the company has a technology tie-up with Germany’s Mauser for these products, the company will be going solo in China that will enable it to introduce other products over a period of time. Besides, the company is also expanding the capacity of packaging products in India at various locations. The company’s 50:50 joint venture with Netherlandsbased Schoeller Arca Systems to manufacture special packaging and material handling products obtained its first order of Rs 20 crore. The JV is investing euro 10 million to set up four manufacturing plants across the country. Despite these developments, the Time Technoplast scrip has underperformed the broader market since the start of September ‘09 gaining 2.1%, as against a 4.6% gain in the Sensex. The scrip has remained a laggard over the last one year, losing over 31.5%, while the Sensex gained 13.5%. The company is holding its AGM on 19 September in Mumbai, to approve the dividend of Rs 0.35 per share of Re 1 for FY09. At the current market price of Rs 47.30, the scrip is trading at a price-to-earnings multiple (P/E) of 12.5. The ongoing capacity expansions and the recent acquisition are likely to keep the company on a sustained growth track in the coming years.

Exploring for growth

India’s second largest oil marketing company Bharat Petroleum (BPCL), recently announced a farm-in arrangement in the Nanuken offshore exploration block in Indonesia with 12.5% stake for $11.1 million. This became the 27th exploration block in which BPCL holds a stake through its wholly-owned subsidiary Bharat PetroResources (BPRL) now. With this arrangement, BPCL now holds stakes in more number of exploration blocks compared to its peers - Indian Oil (21 blocks) and HPCL (26 blocks). At the same time, unlike its peers, which hold a majority of their exploration blocks within the country, a majority of 18 of BPCL’s exploration blocks are outside India, whereas only 9 blocks are in India. BPCL will also gain a 2.5% stake in Oil India, which produces over 68,000 barrels of oil and 6.2 million standard cubic metres of gas daily, with the government diluting its stake post IPO. BPCL’s September ‘08 acquisition of 50% stake in EnCana Brazil, which held non-operator stakes in 10 deep water blocks in Brazil, played a key role in expanding its portfolio of overseas exploration assets. The company continues to remain an active non-operator in most of its E&P assets trying to build the necessary skills to become an operator. So far, only in one onshore Rajasthan block awarded under the seventh round of NELP (New Exploration Licensing Policy), the company enjoys joint operatorship with Hindustan Oil Exploration Company. The company’s six million tonne petroleum refinery at Bina in Madhya Pradesh at a capital cost of Rs 10,378 crore, is set to achieve mechanical completion by end’09. The project also includes infrastructure for importing, storing and transporting crude oil, viz. a single point mooring on the western coast, a tank farm and a 934-km pipeline from Vadinar port on Gujarat coast to Bina. The project, in which BPCL holds 50% stake, is expected to come out with an initial public offer in the next few months. Although the global outlook on the refining industry continues to remain negative with weakness in GRMs (gross refining margins), BPCL is likely to do well in the coming quarters, provided its marketing losses are made good. The company’s earnings per share (EPS) will improve to Rs 139 after the September ‘09 quarter results, even if it posts zero profit, as it had incurred a net loss of Rs 2,625 crore in the September ‘08 quarter. The current market price of Rs 560 is just four times BPCL’s estimated EPS after the September ‘09 quarter. Considering the likely IPO of the Bina Refinery in the near future, which will unlock value of BPCL’s investments therein, and its focus on E&P, BPCL shares appear attractively priced currently.

Treasure in the Backyard

Several investment and holding companies continue to trade well below their net asset value. ETIG’s Ramkrishna Kashelkar suggests longterm investors to go value picking

While the stock markets are soaring and the investors are wondering at the pricey valuations of leading companies, one will be surprised to know that a bunch of companies are actually trading substantially below their fair value. Here, an ‘argumentative Indian’ may intervene saying “but valuation of a company is so subjective…” Well, not in case of these companies, we would say. And you don’t even need to indulge into deep valuation models, profitability analysis or scenario building for finding their real worth. The investment made by these companies in the shares of listed companies alone is many times more valuable than their current market capitalisation. ET Intelligence Group brings you a list of such companies that figuratively looks like a treasure buried in your backyard — a chunk of value, waiting to be unlocked.

The companies we are referring to are generally classified as ‘holding companies’, which are created to promote or control other operating group companies. One excellent example is Tata Sons, which is the controlling entity or the promoter for majority of the leading Tata Group companies such as Tata Steel, Tata Motors, Tata Power and TCS among others. Unfortunately, although a number of Tata Group entities are listed on stock exchanges, Tata Sons is unlisted. Apart from the Tatas, several other business houses, too, have their holding companies. The other type of companies that figure in our list are investment companies. Long term investing in other companies is their business — an example could be Tata Investment Corporation, while a few others carry on their own distinct businesses apart from the investment portfolios. For example, more than half the market capitalisation of Murugappa Group’s EID Parry is represented by the market value of its investment (i.e. shareholding) in Coromandel Fertilisers. In other words, the company’s core business is valued much cheaper compared to its peers.

NOT A MIRROR-IMAGE

The market capitalisation of these companies does reflect the ups and downs in the value of their investment, although they are not in perfect sync. This offers attractive arbitrage opportunities. For example, Vardhman Holdings gained only 35% during last one year, as against 64% jump in the share price of Vardhman Textiles, in which it holds 26.7% stake. Similarly, Uniphos Enterprises lost over a quarter of its value last year, substantially higher than United Phosphorous that lost just 3%. In the same period, Binani Industries lost nearly 10% of its market capitalisation, even as the share price of its 65% subsidiary Binani Cements is up 16%. Last six months have seen an excellent run-up in these companies, most of which have jumped two to four times since then, outperforming the 85% gain in Sensex.

VALUATION PROBLEMS

Despite being somewhat similar to close-ended mutual funds that also invest in listed equities, the holding companies’ always trade at a discount to the net asset value of their investments. The price movements in the investee companies rarely reflect in the share prices of the investor company. In Search Of Value THEreason being that the shareholders of the investor company, unlike in case of a mutual fund, can’t force the management to liquidate the investment and distribute the profits to shareholders. Their direct gain is restricted to the cash flows that the investor companies get from its investment in the form of dividends and other such nonoperating incomes.

At the same time, the holding company concept is still in its infancy in India and is not fully appreciated by the stock market, unlike in the developed world where a vast majority of large corporations are nothing but holding companies with business operations housed in scores of listed or unlisted subsidiaries. The most famous example, perhaps, is Warren Buffett’s Berkshire Hathaway, which holds stakes in a vast number of diverse corporates. In India, however, the holding companies have never gained market favour, probably due to the lack of comfort felt by Indian investors. As a rule of thumb, 50% discount to the asset value of their portfolios is considered fair. But their valuations do dip below this threshold from time to time, which creates opportunities for value pickers. For example, RPG Group’s CHI Investments, which was demerged from Ceat Limited in 2007 is currently valued at Rs 63 crore on the stock markets. This is just one-sixth of its investment portfolio worth nearly Rs 390 crore, which includes 8.4% stake in KEC International, 1.7% stake in CESC and 9.3% stake in Zensar Technologies. The company is currently seeking shareholder approval for amalgamating itself into RPG Itochu along with three other entities.

Maharashtra Scooters, a Bajaj group company, which was earlier manufacturing scooters, is now reduced to the production of dies, jigs and fixtures for the auto industry. The company’s investments in Bajaj group companies is valued over Rs 710 crore, which is four-times its current market capitalisation. Some companies do have their independent business, apart from the investments. Munjal Group’s Majestic Auto manufactures two-wheeler components and spare parts and holds a 0.81% stake in Hero Honda valued at over Rs 250 crore. Still its market value is just Rs 70 crore — 15 times its earnings for trailing 12 months.

Seed manufacturing company J K Agri Genetics underperformed the markets due to losses in FY09. However, its holdings in other group companies including JK Lakshmi Cement, JK Tyre and JK Paper is valued three times its current market capitalisation. It does not feature in our list due to the outstanding net debt of Rs 44 crore. After three quarters of losses, the company posted 44% growth in net profit for the June 2009 quarter to Rs 15 crore. The company has long been trying to separate its seed and investment businesses.

A few of these companies have decided to focus solely on their investment business and grow there. For example, Bajaj Holdings and KK Birla group’s SIL Investments have applied for licenses from the Reserve Bank of India to operate as non-banking finance companies (NBFCs). The promoter group of Bajaj Holdings recently subscribed to 1 million warrants pumping in additional cash and emphasizing their intent to grow in the finance industry.

CONCLUSION

This goes on to show that a lot of value remains locked in these holding or investment companies, which is not fully reflected in their share price right now. And, one cannot hope to unlock the entire value in such companies in a short while. A retail investor should, however, keep looking for chronically undervalued firms or arbitrage opportunities that can generate healthy returns in the long run.

NUMBER GAME

We have chosen only such companies, whose investments in Indian listed companies as on 1st September 2009 were valued more than twice their market capitalisation plus outstanding net debt. The substantially low valuations leave lot of headroom for capital appreciation in the long run.

Oil India: On A Strong Footing

Oil India’s valuation at this offer price is closer to ONGC’s, which could limit its upside in the short term. But long-term investors may subscribe to it

THE IPO of Oil India offers an investment alternative to those seeking to gain from India’s oil sector. The valuation is similar to that of ONGC, which means investors cannot hope for much short-term gains. However, the company appears great for a long run investor.

Business:

Oil India (OIL) is a Category-I Miniratna public sector petroleum exploration and production (E&P) company operating out of India’s North-eastern region. Its daily production of crude oil at 68,358 barrels and natural gas at 6.2 million cubic meters represented nearly 10% of India’s total crude oil and 7% of natural gas production in FY09. Apart from its fields in the upper Assam basin, OIL holds stakes in 24 NELP exploration blocks domestically and 17 blocks overseas. The company’s proved petroleum reserves are estimated at 284.9 million barrels (mb) of crude oil and 39.2 billion cubic meters (bcm) of natural gas. The company also operates 1,157-km crude oil pipeline which can transport 44 mb oil annually. It also holds 26% stake in Numaligarh Refinery, 10% stake in the Brahmaputra Cracker project and 23% stake in Duliajan-Numaligarh pipeline project.

Over last five years, the company’s oil production has increased at a compounded annual growth rate (CAGR) of 2.8% to 24.95 mb, whereas, the natural gas production grew at 3.1% during the same period to 2.27 bcm in FY 09. For the Jun 09 quarter, the production stood at 6.34 million barrels of oil and 0.6 bcm of gas .

IPO Details:

The company is offering 2.4 crore equity shares of Rs 10 each to raise up to Rs 2,777 crore. The government of India, which currently owns 98.1% in the company, will sell an additional 10% stake to three oil marketing companies bringing down its stake to 78.4% of the post-issue equity. The company plans to invest around Rs 4,560 crore over FY10 and FY11 in E&P business. Out of this, Rs 752 crore will be spent on seismic data acquisition, Rs 2,075 crore on drilling a total of 73 exploratory wells. Another Rs 997 crore will be spent on drilling 90 developmental wells. Besides, the company will invest Rs 686 crore in equipment and creating infrastructure facilities.

Financials:

Oil India’s net profit has increased at a CAGR of 19.5% during FY05 to FY09 period, while the sales grew at 16.5%. OIL is a debt-free company carrying over Rs 6,500 crore of cash, which has resulted in 43% of its net profit coming from other income. The company enjoys substantial operating cash-flows, which exceeded Rs 2,900 crore in FY09.

In other words, the IPO proceeds will just add to the company’s cash pile and boost other income in the near term. Too much cash on the books will however depress the return on networth and thus act as a drag on the stock price. Oil India’s earnings are more sensitive to the movement in oil prices as its subsidy burden is substantially lower compared to ONGC. During FY09, Oil India had to offer just $26.1 per barrel discount as compared to $38.5 for ONGC.

Valuations:

At the higher price band of Rs 1,050, the company will be valued at 12 times its earnings for the 12-month period ended June 2009. ONGC, which is nearly 10 times bigger to Oil India, is currently trading at 12.8 times its consolidated annual profits. Amongst others, Cairn has just commenced production from its Rajasthan fields making its financials incomparable, while Hindustan Oil Exploration and Selan Exploration are too small for comparison purpose.

Risk Factors:

All the company’s petroleum reserves are concentrated in the upper Assam basin and are in a natural decline phase. The company has been highly conservative in expanding its reserve pool depending on small and medium size discoveries to ensure future production growth. Volatility in the crude oil prices will be an important concern going forward. Similarly, the subsidy share of Oil India could fluctuate wildly due to its ad-hoc nature.

Vinati Organics: On A Growth Path

Vinati Organics’ capacity expansion should help improve its profits steadily

VINATI Organics, a Mumbai-based manufacturer of specialty chemicals, is set for strong growth after completing capacity expansion and working on a backward integration project. Stable business, healthy cash flows and a strong balance sheet make this small niche player a good long-term investment.

Business:
Vinati Organics makes niche chemicals that have strong technological entry barriers. Over the last 20 years, it has become world’s largest producer of isobutyl benzene (IBB) and secondlargest producer of specialty monomer ATBS.
IBB is the basic raw material to produce ibuprofen, the widely used anti-inflammatory drug. ATBS is used to manufacture watersoluble polymers needed in water treatment and petroleum extraction. Ithas an IBB plant in Mahad with annual capacity of 14,000 tonnes per annum and an ATBS plant at Lote with an expanded capacity of 10,000 TPA. The Lote plant is an exportoriented unit (EOU) since last year. Besides IBB and ATBS, the company also manufactures several niche chemicals based on specific customer needs and also from treating its effluents.
IBB contributed nearly 58% of the company’s FY09 revenues and 36% came in from ATBS. Other niche chemicals represented the rest. Vinati Organics has entered into several long-term supply contracts with global chemical majors, which insulate it from raw material price fluctuations.

Growth Drivers:
The company has recently doubled the capacity of its ATBS plant to 10,000 tonnes. ATBS earns a higher margin compared to IBB. Its capacity addition will lead to higher revenues and better operating margins. ATBS, mainly used in the enhanced oil recovery (EOR) methods in petroleum extraction, is in strong demand. Vinati Organics is also setting up a backward integration project to manufacture 12,000 tonnes of isobutylene, which is a raw material for ATBS. This will help the company reduce freight cost on isobutylene imports and also make available half the quantity for other domestic customers. The project costing Rs 38 crore is expected to be complete by March 2010. The company plans to add a new product — para-amino phenol (PAP) a key ingredient in manufacture of paracetamol — to its portfolio using a new domestically developed technology. Although the company is building a pilot plant for this purpose, the actual project will be undertaken only in FY11.

Financials:
In the last five years, Vinati Organics’ net profits have grown at a cumulative annual growth rate (CAGR) of 155.7% while the net sales grew at 40.9%. The company’s debt-equity ratio for year ended March 09 stood at 0.87. The return on capital employed (RoCE), which had jumped to 40% in FY08, eased to 26.2% in FY09. The company also has a strong history of operating cash flows, which stood at Rs 26.8 crore for FY09.

Valuations:
At the current market price of Rs 189.50 the scrip is trading at 6.3 times its earnings for trailing 12 months. Other comparable specialty chemical companies such as Avon Organics, Chembond Chemicals and Dai-ichi Karkaria are trading at P/E multiple of 8 to 10. We expect Vinati Organics to report a net profit of Rs 42 crore for FY2010, which translates in a forward P/E of 4.5 at the current market price.