Vinati Organics to Stay on Track, but must Overcome Hurdles

Margins to remain strong as co has a higher share of high-margin products

The strong growth in the past couple of quarters and further investment plans for FY12 indicate that the growth tempo for specialty chemicals maker Vinati Organics will continue. The company's two major products are doing well globally and it is now investing . 100 crore to further raise capacity through FY12.
The second half of FY11 saw Vinati Organics post a 48.8% net profit growth, which was muted at 7.3% in the first half. This was the result of a spurt in revenues supported by improved margins. The company’s operating profit margin for the second half of FY11 was 23.1% against 19.6% in the first half.
The company debottlenecked its ATBS plant in mid-FY11 to add a capacity of 20% to 12,000 tonnes and is expanding it further to 18,000 tonnes. It will also expand capacities of other products — TBA from 700 to 1000 tonnes and industrial polymers from 1500 tonnes to 4,500 tonnes. In addition, it will be setting up a greenfield plant to manufacture 1,000 tonne of DAAM — another specialty chemical used in coatings and personal care industries. All these expansion plans will be completed by March 2012 at a capital cost of . 100 crore. The company has tied up $16 million funding from IFC for this — $11 million of borrowings and $5 million of FCCB — at extremely attractive rates. The rest of the funding will be through internal accruals.
The company needs to overcome a few hurdles on its way. The sales of its erstwhile main product IBB — an input for ibuprofen — could weaken due to emerging competition. Its isobutylene plant, onethird output is internally consumed, is running below optimum capacity due to weak domestic demand. Finally, the lapsed tax benefits of its Lote unit means its effective tax rate will go beyond 30% from around 17% in FY11.
From a turnover of . 317 crore in FY11, the company aims at achieving . 600 crore turnover by FY13 as the full benefits of expansions this year come onstream. The company ended FY11 with a debt-to-equity ratio of 0.54. Its interest coverage ratio too was very comfortable at 17 in FY11. The increasing proportion of high-margin products such as ATBS in total sales means its operating margins are unlikely to weaken substantially. The expansion projects offer a visibility to the company’s steady growth. The scrip is currently trading around 7.2 times its FY11 earnings.