Update on the Indian Equity Market:
On Wednesday, NIFTY50 ended in green at 16,345 (+2%). Among the sectoral indices, MEDIA(+4%), REALTY(+2.9%), and AUTO (+2.8%) were the top gainers, whereas METAL (-0.4%), was the only loser. Among the stocks, ASIANPAINT (+6%), RELIANCE (+5.5%), and BAJFINANCE (+5%) were the top gainers while SHREECEM (-2.6%), ONGC (-2.5%), and POWERGRID (-2%) led the losers.
Excerpts of an interview with Ms. Vinati Saraf Mutreja, MD, Vinati Organics (VINATIORGA) with CNBCTV18 on 8th March 2022:
- Raw materials come from refineries and are crude dependent. As crude prices increase, VINATIORGA’s raw material prices will also increase. It has a pass-through clause for most of its products as they have formula-based pricing and can pass on these raw material price hikes to its customers to a certain extent.
- Exporters like VINATIORGA are facing logistical issues like the unavailability of containers and this is expected to be a serious challenge going forward.
- On a positive note, VINATIORGA is witnessing good demand. Its main product Acrylamide Tertiary-butyl Sulfonic acid (ATBS) which is used in oil and gas and oil drilling is witnessing positive demand from North America and Europe.
- Ibuprofen which was very slow last year has started picking up. Butyl Phenol is also experiencing a breakthrough in the market.
- Ms. Mutreja expects the EBITDA margins to be maintained between 28-30%. EBITDA per kilogram remains more or less constant because of the formula pricing. It sometimes does not necessarily capture some of the fixed expenses like utility costs, fuel costs, overheads, and general inflation. These expenses get hedged as capacities get expanded and utilization levels improve owing to better demand.
- VINATIORGA saw very high logistics costs in CY21 which eventually started tapering down by Dec-21-Jan 22. After the Russia-Ukraine war started in February, the costs have gone up again. Obtaining bookings and container availability has become a challenge for the entire industry, especially in North America, Europe, and Southeast Asia.
- Costs have gone up 20-30% for US and Europe bookings in Jan-Feb 22.
- VINATIORGA is foraying into the production of niche chemicals through Veeral Organics (a subsidiary) at a total capex of Rs 2,500 mn. It involves different products one of which has application in the fragrance industry, one is used as a polymer additive, one is used in the pharmaceutical industry. This is a greenfield project and is expected to be completed in 15 months. Total revenue of Rs 3,000 mn is expected from this project.
- Veeral Additives is another project which is a merger with VINATIORGA. It is subject to NCLT approval which is causing some delay. This anti-oxidants plant which is used in resins and plastics is expected to come on stream later in March-22.
Asset Multiplier Comments
- Earlier, customers had stocked Ibuprofen due to Covid-19 related concerns. Due to the lower-than-expected consumption and higher inventory, demand for IBB has also reduced. The demand for IBB may pick up again from March 2022.
- The new capex for Veeral Organics involves the manufacturing of five new products. The company may target 10% of the total market size of Rs 25 bn.
- The headwinds of high raw material costs and higher logistic costs may keep the company’s margins under pressure for the next 2 quarters. We expect the EBITDA margins to normalize back to around 30% level by September 2022.
Consensus Estimate: (Source: Marketscreener and Investing.com websites)
- The closing price of Vinati Organics was ₹ 1,858/- as of 08-March-2022. It traded at 58x/42x/33x the consensus earnings estimate of ₹ 32/44/56 for FY22E/FY23E/FY24E respectively.
- The consensus target price of ₹ 2,052/- implies a P/E multiple of 36x on FY24E EPS estimate of ₹ 56/-
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