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.
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.
Yes sir you r absolutely correct Vinati organics is the world leader for ATBS & IBB. also the vinati is showing the CAGR for last 5 years is around 43%+ also after expansion they become no 1 in IBB and i believe if i am not wrong then they r no 3 in ATBS across the globe. I believe the price what the market is showing is very less it should reach upto 400-450 in a years time.
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