Vinati Organics


(Abhinav Mehrotra) #251

Q1FY19 Conference Call Notes: Notes in Italics are emphasis mine.

1st call after 5 years.

ATBS

Largest product with 50% of sales. FY18 finished with strong growth due to increased usage as applications of this product is growing. Used to make polymers that go into water treatment, EOR and personal care products. Lubrizol’s exit helped us as well. ATBS grew at 35% in value terms and 25% in volume terms in FY18 over FY17. Overall market size is growing.

In FY19 we command global market share of more than 60%. We expect to grow more than 30% on volume basis. Have added new customers and have renegotiated pricing contracts. It is a very difficult monomer to manufacture and we have proprietary technology, we do not see any new competitors entering the market. These kind of margins are expected to continue in the coming years.

Capacity expansion is underway that will take capacity from current 26000 TPA to 40000 TPA. Expected to be completed by April 2019 with a CAPEX of 75-80cr. Expect to grow ATBS volumes by 25% for next 2-3 years. We will need this 40000 TPA to service the market for next 3-4 years. 40000 TPA utilization for the next 5 years is achievable. Reaching full capacity will take 3 years.

FY18 Capacity Utilization - 100%. Have started running at 100% from April this year, as Lubrizol exited in Jan. So yoy basis 30% volume growth over FY18.

For Lubrizol, this was not a core product, they had less than 1% revenue share from ATBS, they had 20% market share. Benefit for us is increased volumes at better prices. Earlier there was a supply surplus, now there is a shortage. This has increased margins and it is a difficult product to manufacture and we do not see any new competitor coming up. We have formula based pricing with our customers, as crude prices go up, our RM prices go up, so do our end product prices but the margins are not affected by crude price. (Margins per volume $/Kg not margins per Revenue.)

There are no inventories in the market due to current situation. This will be a brownfield expansion. Have a Japanese and Chinese competitor, they are not expanding capacity as per our knowledge.

Midyear debottlenecking has been shelved.

IBB

2nd largest product for us. Q1 sales were stable, Q2 will be slightly slower due to shutdown by one of largest customers. Expect to make up for this in Q3 & Q4. Already increased IBB capacity from 16000 to 25000 TPA, this will take care of demand for the next 3-5 years. Last year customer took shutdown to increase capacity, that would have meant 25% growth this year, but unfortunately due to technical failure customer has taken a 3 month shutdown, so this year we will see a 3-5% growth. In FY20 we expect double digit growth (15%) over FY19 as global demand is increasing and customer has already expanded.

IBAP project is on hold because the customer we were making it for is not interested anymore in sourcing IBAP from us.

FY18 Capacity Utilization - 60%

Only 5-6 customers for IBB.

IB & MTBE

Have fared well, and keep growing yoy. IB capacity is at 30000 TPA, it has been increased to cater to BPs. Currently running at 50%. For every KG of ATBS we need 0.35 KG of IB, We sell 6000-7000 TPA of IB in the domestic market.

12000 TPA will go for BPs and 12000 TPA for ATBS rest 8000 TPA we will sell in domestic market.

Customized Products

Delivering as per Expected. We do get queries from customers for customized products because a lot of our processes can be replicated to make other smaller products. They are small in terms of revenue share but much higher in terms of profit share. These being specialized products we get much higher margins here.

BPs

CAPEX to finish by April 2019. Has 4 products. PTBP & OTBP are used as intermediates in resins and perfumes. DTBP are used as RM in anti-oxidants, which are used as additives in plastic manufacturing. CAPEX of 240 cr. Will result in sales of 350-400 cr. In FY20 we expect 60-65% capacity utilization and from FY21 at 100%.

Mostly imported into India from Korea and Singapore. They are not made in India because they do not have the necessary RM which is IB. Since we are the largest manufacturer of IB in India it makes sense to forward integrate and make these products in India. We work on a ROI of 15-20%, so on a CAPEX of 240 cr we can calculate the margins. They will be lower than ATBS but we still expect a payback in 5 years. At 400 cr our market share in India will be 80-90%. 24-25000 TPA are already imported and we are going for a 36-37000 TPA capacity. We will also be exporting some BPs. Globally market size is in lacs of TPA. We are competitive globally as well. We are backward integrated with IB and that gives us a cost advantage. There is scope for increase in capacity and selling products outside India.

For every KG, we need 2/3rd phenol and 1/3 IB for their production. Phenols are readily available in our country and imported as well. We will source it locally. Margins will be similar to IBB. 15-20%. Our costs will be similar to other manufacturers, customers in India will not have to pay for international freight. Usage of products in which BPs are used is growing, that is why we feel our excess capacity will be able to cater to expanding demand. BPs end use market could be growing at 10-12%.

With all of the above we expect to grow by 25% CAGR for next 3 years.

PAP

Have set up a prototype pilot plant. Proprietary technology developed by NCL has been successfully demonstrated at the lab level. Trials on the pilot plant will take 3-6 months. Will take a decision on commercialization only when pilots are successful for 6 months. That is why we haven’t mentioned it in our CAPEX plans. Having teething problems right now, have ordered new equipment.

If commercialized, it would have an asset turnover of 1 and EBITDA margins of 20%.

An analyst asked that with 20% EBITDA margins, we have WC and D&A to pay for, how does it qualify 20% ROI? The answer was, "Do not take PAP into your projections, even we are not. Saying this to all analyst, none of us here are taking PAP into our projections for the next 3-5 years also because we are not sure we are going to do this."

FY09 PAP pilot plant was with different technology with 4 cr investment. Market conditions changed and so did our process.

Now we have made changes to the process, improvised it more. This is a different pilot plant. We were successful in that process. (But then why not take it further, why new process?)

Q&A

FY19 EBITDA margins will be at 35%. ATBS is higher margin product and higher volume as well but with BPs coming online we expect same blended margins for next 3 years at EBITDA level.

We do not import anything from China, most of the imports are coming from USA, Korea and ME.

New products beyond PAP

For us to commercialize one product we have to study 10-15 different products at various stages of the RME pipeline. At any given time, we are working at 15-20 products, developing new chemistries, one ex. is that we could further integrate from BPs to make anti-oxidants. It is too premature to talk about any of them. This is what keeps us busy. Our products have a limited market size so to keep growing we need to keep adding new products.

Our criterion for new products is beyond revenue potential, we have set rules:

  1. we look for 20% ROI,
  2. it should be a clean and green process,
  3. there should be a barrier to entry through a unique process, or there is an integration for us with our existing products.

Right now our biggest endeavour is to close on PAP, one way or the other. Once we decide that, then we will make a pilot plant for the new product and go from there. So any new product is at least one year away from the announcement.

Dividend Payout

We will have healthy cash flows of 400 cr on revenues of 1000 cr this year. We prefer to reinvest capital into our business as that gives us the best returns. Payout will stay at 20%. We need these reserves to pay for our projects via internal accruals without taking on debt.

Growth

Excluding PAP this year we will see an increase in bottom-line by 35-40%, for the next 3 years we will see our profits growing at 25-30%.

CAPEX

FY19 around 300 cr on account of BPs and ATBS. FY20 we do not have the figure as it is mainly dependent on PAP.


(Abhinav Mehrotra) #252

Based on the guidance in Conference Call,

FY18 PAT was at 144 cr. Management guides for 35-40% growth in PAT in FY19 which comes to 194.4 to 201.6 cr.

Revenue guidance for FY19 is 1000 cr that means PAT margins will be at 19.4 and 20.1% respectively.

Next 3 years guidance which is upto FY22 is at 25-30% at PAT level. I am taking four cases with the two FY19 PATs above and two different 3 year growth rates given.

Taking FY22 Exit Multiples of 15,20 & 25 we get the following Market Caps.

Market Cap Sensitivity Analysis
Growth NI/ Exit Multiple 15 20 25
25% 379.69 5695.31 7593.75 9492.18
30% 427.10 6406.45 8541.93 10677.42
25% 393.75 5906.25 7875 9843.75
30% 442.92 6643.728 8858.30 11072.88

Will not choose/favor an exit multiple here as it will become a topic of endless debate as it has in the DMart thread.

Individuals can pick their preferred exit multiple and calculate their 4 year CAGR from the current 7000 cr odd market cap.

PS: This is the story as of now. We will know in 6 months if PAP needs to be added to these projections.


(Julian) #253

The cash flow of 138 crore in 2018 is expected to increase to 400 crore in 2019. This is a massive increase and might be responsible for the increase in share price. I beleive that Lubrizols exit is going to lead to a massive increase in realisations in the current year, which might be the reason for the sudden con call. I missed HEG and graphite and dont want to miss this one. This is a super star speciality chemicals champion performer and I have initiated a good investment for long term. Good work @hack2abi


(Abhishek Basumallick) #254

Lubrizol had a ~15% market share in ATBS. Vinati’s market share in ATBS has gone up from 40-45% to 60-65%, meaning they have captured most or all of the space vacated by Lubrizol. Also, their market shares in IB & IBB are all extremely high.

I am trying to understand where the future growth will come from?

  1. It could come from more use of ATBS. But ATBS being a stable chemical it use will more or less be in tune with its user industries and is unlikely to shoot up dramatically. Same for IB & IBB.

  2. BP can lead to some growth. But can it be 25-30%?


(Abhishek Basumallick) #255

I think it is not prudent to take management forecast very seriously unless we are sure that the management has a history of being conservative in its forecasts and planning. The need is to question rationally where the expected growth is going to come from.

See the link in the beginning of this thread where the company is saying that they are expecting revenues of 1000cr in next 4-5 years. This was in 2011. They closed FY18 around 750 cr.


(Abhinav Mehrotra) #256

I know about that interview with Mr Saraf, Abhishek. Thanks for sharing it. But that is just one of the many more pointers.

The PAP pilot plant they have set up now was set up in FY09 as well in another location with another process. After that, there was no mention of PAP until FY18. I pointed this out in the recent con call and asked about the history and result of those pilot tests.

Even with ATBS, after commercializing from the pilot plant it took them 4 years to stabilize the quality of their product to sell commercially.

I shared the calculation of those projections because one they do not contain the PAP project. If PAP was included I would not be so sure of the accuracy of those calculations. Butyl Phenols as such is a forward integration for VOL, with the same process as used globally. There is not much technological and commercial risk there being an import substitution product.

Second, even taking the best case scenario guided by the management, I wanted to share with the fellow forum members, how much of the growth is already discounted in the current prices and what buying now means for their investment returns up to FY22.

You are also right, to say we should not take this guidance at face value, but it would be prudent to take management guidance with a pinch of salt when it was not priced in already. In this case, I feel we need to be more prudent of the price we enter in and consider what is priced in first and then on guidance.

We are both being careful, just from different vantage points.

Disclosure: Not Invested.


(nil_71) #257

Management clearly mentioned in the concall, that Please Keep revenue from PAP out. They are also not considering it


(jirohit) #258

assuming fy19 sales to be 1000 cr and ATBS is 50% of sales so 500 cr. co increasing capacity from 26k ton to 40k ton by apr 19. by by apr 2022, 250 cr additional topline from ATBS( assuming same pricing)- ATBS demand going higher due to higher oil prices as well as used in deep sea oil exploration and assuming mgmt will increased capacity on demand/earning visibility, 350-400 cr revenue expected from butyel phenol and balance growth to come from IBB and other products( ibuprufen demand going higher and vinati already increased capacity to match the same). so,mgmt guidance looks fine assuming the above plays out till 2022 revenues going from 750 cr to 1500 cr plus… if co goes ahead with PAP expansion, that could be the optional value in next 3-5 years.


(Vivek Mashrani, CFA) #259

ATBS has been historically gaining market share since there are only 3 players and Vinati is having lowest cost with very good quality.

  1. Given the exit of Lubrizol, now market share shift will be slightly slower but logically will increase pricing power since now there are only 2 players. Apart from this I believe it will track underlying industry growth. Similar is case with IB and IBB. Infact there might be some competition here.

  2. BP and there are few more new products coming on steam which will provide near term growth. As @hack2abi rightly pointed out, even if PAP successfully happens, the current valuation still seem to have discounted next 2-3 years growth. As such 25% CAGR (bottomline) looks achievable given current pipeline.


(Vivek Mashrani, CFA) #260

They have got excellent execution track record. But currently I feel management is having bit bullish tone in terms of guidance. Let’s see how it pans out.


(lastgenesis) #261

There may be a shortage situation in the market but that need not necessarily extrapolate to the kind of growth that has happened in graphic electrodes. Firstly I’m sure that management has also assumed some price increase in their profit growth assumptions and if after that they are guiding for 30% profit growth, I am not sure we should be more optimistic than them…

The company is already priced quite highly, even if one assumes an EPS of 50 this year (annualizing JQ EPS - an assumption which has its own issues) we are still looking at a FY19 PE of 27. Company is fundamentally good and I am long term optimistic on the speciality chemicals space but not sure there is a lot of upside at these levels, though I may be wrong.

Disc - was holding for 3-4 years, exited this week. May look at reinvesting at lower levels


(Ampi) #262

IB price’s jump 30% in international market due to supply crunch.


(Abhishek Basumallick) #263

There is no benefit for Vinati, as per my understanding, due to this price rise. BASF is restarting operations on a bigger scale and that may lead to some additional orders coming to Vinati.


(narmad) #265

IICT TOT to M/s Vinati Organics Ltd, Mumbai

The institute has developed technologies for continuous production of PTBT and PTBBA and transferred the patented technologies to M/s Vinati Organics Ltd, Mumbai (VOL). PTBT is a specialty chemical that is not manufactured on a large scale by any Indian industry. PTBBA prepared by oxidation of PTBT is also a speciality chemical, which is used extensively in manufacture of sun screen lotions through its ester, and polymer industry, for production of anti-oxidants, rust inhibitors in resin coatings and lubricating oil. There is no dedicated capacity for production of PTBBA in the country.


(Julian) #266

The reason for the stock price rise today. The Management has upped it’s guidance.


(S_Banerjee) #267

There is also a report published in an international stock analysis forum(taking name may be against forum policy so avoiding it) yesterday which is quite positive and may result in today’s rally.