Vinati Organics

vivek_mashrani · February 11, 2019, 5:42pm

Recent management interview on CNBC:

vivek_mashrani · April 11, 2019, 3:05am

An article on Vinati Saraf…

vivek_mashrani · May 11, 2019, 10:06am

Yet another excellent quarterly results from Vinati…

Some of the key points to note:

Work on Butyl Phenols and ATBS expansion projects is on track and both are expected to be complete by 30th June, 2019 and 30th September, 2019 respectively. This clearly indicates possibility of incremental market share in ATBS
Balance sheet clearly reflects CWIP of ~190 crores without any traces of debt on the balance sheet implying entire capex being funded by internal accruals
The short term loan (working capital loan) has also now come to negligible ~3 crores and they have announced dividend of INR 7 which roughly translates to ~35 crores of payout (boy I like this, heavy capex from internal accruals + healthy dividend combination), signs of efficient capital allocation

Would be interesting to know from management regarding split of contribution of incremental earnings from ATBS and other products as well as any updates on PAP.

Disclosure: Invested

ca_pawan · May 11, 2019, 10:18am

Yes…excellent numbers. Revenue as per expected line , PAT is better than expected. Good run of stock will continue.

SD007 · May 11, 2019, 10:28am

Thanks for posting the results Vivek. Agree with you on the point above. In fact I was also thinking that one should ask the management about the split of incremental income from ATBS segment i.e. what percentage of ATBS caters to demand in the Oil and drilling sector and what % in personal care products because if one observes, ATBS is also used in personal care products check this : WeylChem | Fine Chemical Products & Services | Fine Chemical Company - WeylChem - WeylChem. Demand from personal care products can grow multiple times in future, and can help us evaluate the company’s potential better. Let me know your thoughts in case you already have this information.

vivek_mashrani · May 11, 2019, 10:35am

You are right about applications of ATBS outside oil and drilling. Though as per my understanding the growth rate is in single digits if we talk about volumes.

Current uptick is due to one of the competitor Lubrizol exiting the business, due to which there are two impacts in near term:

Vinati taking incremental market share and implying steep volume growth (driven by existing sector demand much more than incremental demand)
Since now its duopoly and another player has much less capacity, Vinati has become proxy of monopoly in terms of price they can charge

However, I feel once they capture near to entire market vacated by Lubrizol, the volume growth will again moderate and price might also go down slightly (though might remain much more than earlier scenario when Lubrizol was present)

Again, I may be wrong here, this is just my thesis and understanding (some derivation of practically using porters five forces). Please do your own due diligence and study.

SD007 · May 11, 2019, 10:41am

Though an old one but a very comprehensive report on Vinati and the chemical products it manufactures :

Vinati Initiating cov.pdf (647.4 KB)

vivek_mashrani · May 11, 2019, 10:43am

There was one more detailed report from Ambit last year. I had posted it on this thread. Quite good.

jirohit · May 11, 2019, 10:45am

across various research reports as well as recent forbes article on vinod shraf indicate that commercial production is still away as they were facing issue with the same. below excerpt from forbes article and link to article:

"He’s also set up a pilot plant for para amino phenol, a raw material for paracetamols, but admits that he’s still got some way to go before this can be scaled up. "

vivek_mashrani · May 11, 2019, 10:47am

Yes, agree. PAP is tough one and they have been working on them for several years now. If this one clicks then it will be very big incremental contributor to revenues and can provide visibility for next few years. As per management commentary, plan is ~500 crores capex on PAP alone.

SD007 · May 11, 2019, 10:51am

gneop84 · May 12, 2019, 6:40pm

Vivek, could you please share it again ? was not able to find it .

vivek_mashrani · May 13, 2019, 1:04am

Ambit has now removed from website it seems.

Nirmal · May 13, 2019, 7:19am

vinati-ambit pdf.pdf (1.6 MB)

was in my evernote .Very exhaustive report.

vivek_mashrani · May 13, 2019, 5:16pm

Latest interview of Vinati Saraf on BQ

gneop84 · May 13, 2019, 7:43pm

Thanks vivek and nirmal.
Also any thoughts on valuation ? MC/sales is 8x and MC/op is 21 times. Are such valuation justified for future growth or is the growth priced in ?

Invest at 900 , go out at 1600 …not sure at this point…

Nirmal · May 14, 2019, 4:05am

I think Vinati is a long term story looking at the razor sharp focus and patience of the management in developing products for the global market and being the number one supplier in terms of market share in each of its categories.The runway for next 3 years is very clear and as Vinati would add another 50%capacity in atbs and another 350-400 cr from butylated phenols .The management in most counts has underpromised and over delivered.Reg valuations one has to take a call based on ones assement of understanding the business and the margin of safety it offers at these prices.I intend to add Vinati somewhere around 1400-1500 levels and my avg purchase price is rs.350 .Announcement of PAP would be a real trigger for the stock but still seems always another 2 years .

Disc-invested

vivek_mashrani · May 14, 2019, 5:35am

I feel valuation is always a grey area and very subjective. Its an art and not a science.

Having said that, some of my thoughts around it are below:

First we need to understand that this is B2B business so after few years if they are not able to add more products, then it will come back to normalized multiple which a quality B2B company should get
Chemical industry has its own knockout risks, say any major accident occurs and overnight it can shut down, so giving it very high multiple doesn’t make sense (again this high could be 50x, 40x, 30x based on one’s judgment of what is high )
There is definitely visibility for 1-2 years in terms of growth which partly justifies such high multiple, given that if they achieve this growth, the forward multiple will still be very decent
Another angle to look at it is PAP optionality; This is a big value add if they are able to commercially start producing it; It can infect take the company into another trajectory altogether and the multiple might start looking cheap if we consider revenue potential
One more angle to look is sustainability of margins; Historically they were around 20-25% margin; Currently they have achieved 40% operating margins and management guidance is they can achieve ~35% in steady state; Question is what if it goes down to say 30% or 25%, and we have seen what happens if such margin compression scenario happens in many other companies.

So one has to think about different scenarios and its consequences before taking decision to buy, add or sell. I believe in averaging up if visibility increases and they are able to crack PAP, but as I said its individual choice and call on valuation comfort.

Disclosure: Invested

basumallick · May 14, 2019, 6:23am

I think we should not look at PAP at all. Vinati has been trying to get it right for many years now and have been consistently unsuccessful. Other than management coming and talking about it and spending 20crs in the pilot plant, nothing tangible has happened. So, let’s ignore it for now. If something good comes, even then it will take time to stabilize production and make it commercially available.

Nirmal · May 14, 2019, 11:20am

what I get to understand is they identified PAP in year 1998(correct me if I am wrong).