Vinati Organics


(Rahul Patil) #21

Hello Siva,

Market wants the results NOW and not couple of years down the line, which probably explains the stock languishing in Rs 70-75 range. I feel this isa good oppurtunity toaccumulate this stock if one is convinced about the long term prospects.

Regards,

Rahul


(Donald Francis) #22

The increased tax outgo will impact margins in FY12. PAT and EPS growth will be marginal. This might be an overhang on the stock.

Also I have relaised the Chemicals sector does not get high valuations. The distinction is not made between Specialty chemicals or Commodity Chemicals. Look at Balaji Amines -same story there although that company has bigger debt concerns overhang and valuations are like 4x.

One reason could be that there is a close correlation with RM price volatility to the fortunes of the business. So despite the good growths registered margins and profitability of the business remains at risk from time to time.

-Donald


(Yogendra) #23

Donald,

Explanationon valuations like this goes a long way in helping newbies like me. If possible can you write an essay on valuation or point some place where I can read and learn. Its always great to gain from other experience.

Love your creation valuepickr.

Thanks,

Yogendra


(Donald Francis) #24

Thanks Yogendra for your words of encouragement. We are glad you like the efforts. I started in 2005 and still learning…there is so much to absorb…yes we can gain from others experience. But we can inform ourselves first much more from what the gurus have written. After that due diligence we are in a position to absorb far more quickly from seniors.

ValuePickr provides concise versions of stock analysis and stock valuation. I believe these are very good starting pieces.

Stock Valuation Framework

Stock Analysis Framework

There is no better way to learn than by doing your own valuation exercises for 10, 20, 50 stocks. ValuePickr Forum provides a good way to contribute with your work and others help pick holes in your arguments. I have learnt only by practice and keep learning more as we analyse one promising stock after another:)

Good luck! If you want to learn serious analysis and valuation I cant give better advise than “Grab a copy of the PAT Dorsey Book TODAY”. This is what one senior Subhankar Ghose told me in Kolkata 3 yrs back and I havent looked back ever since I did my first serious analysis Opto Circuits Stock Analysis completely based on this books framework. Its a much under-rated book compared to the Buffet, Graham and Fischer Books, which are great but when it comes to a Practical-Do-it-Yourself book this book has no peers. That’s as strongly as I can recommend any!!


(Jatin Soni) #25

Donald Francis: And as of now Lubrizol and Toagosei are the only two organized players in this?

Hi donald is Lubrizol same which is nowacquiredby Warren ?


(Akhil) #26

@jatin Yes

Interesting company

Donald Francis: nowacquiredby Warren ?


(Akhil) #27

Hi Donald,

There seems to be reasonable amount of debt on the company, nothing to worry for now.

Will they be able to maintain the ROC as they keep bringing the debt level down.

Any insight into it?

In spite of all these plus points, share price is Rs.72/-. PE is approx 6. Why?


(Donald Francis) #28

@Jatin - yes same Lubrizol!

@Akhil - Given current visibility the company should be able to maintain EBITDA at similar levels. RoCE uses EBIT as the numerator, so that should be okay. Because of higher tax impact I am assuming EPS will see single digit growths in FY12, unless there is huge scale in volumes uptake.

We need to keep watching performance for a few quarters to develop confidence in the stock. This business is difficult to understand. You are dependent mostly on the version put out by Management. I haven’t been able to do any level of secondary verification on the market size, competitive position etc of the company, which is important to do.

If any of you guys can move forward on that, will be good.

Disc: I am in favour of paring my positions in the stock because of poor visibility on profitability and may make an complete exit.


(Jatin Soni) #29

[ Comment too short ]


(Jarvis) #30

Q1 Results show sales growth on track, the reduced PAT growth. However the profit growth was better than expected

Sales at 91cr (up 27%),EBITDA at 17cr (up 35%) and PAT 9.8cr ( up 15%).


(Jatin Soni) #31

Donald what abt pricing power on both of their products IB and ATBS ?


(Donald Francis) #32

Vinati Organics results confirm the heavy impact of increased tax burden on the company.

If net margins remain at 11% levels, there is a danger of degrowth at the PAT level, forget single digit growths, unless there is a huge scale up in volumes in subsequent quarters making up for this.

A look at the past eight or 9 quarters does not give you much confidence. Operating margins have been on a steady decline down to ~20% from 25% plus 2 years back. Despite major increase in volumes, we haven't seen any economies of scale - this points to lower realisations over time - they haven't been able to sell IB as forecasted due to competitive pressures, IBB margins have plummetted, ATBS has not been able to make up for everything.

My take is to exit Vinati completely, given this scenario. Invite comments.

-Donald

Vinati Organics

-12.20%

15.81%

CMP

70

Y-o-Y Sales

y-o-y PAT

operating profit

FY12 target

45.31

Quarterly Results track

24.73%

27.52%

37.68%

19.22%

49.13%

48%

Growth rate

38.37%

28.87%

19.13%

-12.20%

FY12E

1QFY12

1QFY11

2QFY11

3QFY11

4QFY11

FY11

1QFY10

2QFY10

3QFY10

4QFY10

FY10












Net Sales

400

89.20

69.95

72.87

86.24

91.62

320.68

50.81

61.13

57.83

61.99

231.76

Increase/decrease in finished stocks

-3.12

1.24

-0.45

-4.11

-1.09

-4.42

-0.14

-1.30

-1.25

-2.42

-5.11

Raw Material

58.06

42.63

39.31

53.36

52.82

188.12

30.25

34.23

35.73

37.73

137.94

Employee cost

4.41

3.39

3.59

4.18

3.71

14.87

2.71

2.89

3.14

2.75

11.49

Depreciation

8.37

1.67

1.35

1.75

1.85

1.46

6.43

1.13

1.41

1.12

1.27

4.93

Other expenditure

14.82

10.86

15.79

14.26

14.36

55.26

7.63

9.49

8.52

10.16

35.80

Other Income

0.00

0.00

1.20

0.00

0.00

1.20

0.00

0.00

0.00

0.00

0.00

Interest & Finance charges

4

1.09

0.74

0.67

1.33

1.11

3.86

0.96

0.94

0.78

0.68

3.36

PBT (Post Extra-ord Items)

67.63

14.51

10.78

14.95

17.17

19.61

62.50

11.01

14.88

11.86

14.05

51.80

PAT

45.31

9.85

8.51

12.05

14.33

16.72

51.61

7.58

11.58

9.25

11.63

40.05

Forex gain loss

0.00

1.76

0.00

0.06

1.82

0.00

0.00

0.00

0.00

Earnings per share

9.18

2.00

1.72

2.44

2.90

3.39

10.45

7.68

11.73

1.87

2.36

23.64

Taxes

22.32

4.66

2.27

2.90

2.84

2.88

10.89

3.43

3.30

2.61

2.42

11.75

Tax rate

33%

32.13%

21.05%

19.40%

16.54%

14.71%

17.43%

31.12%

22.19%

21.98%

17.20%

22.69%

PBIDT

80

17.28

12.87

17.38

20.35

22.18

72.78

13.10

17.23

13.76

16.00

60.09

Operating Profit (PBIDT -other Income)

17.28

12.87

16.17

20.35

22.18

71.58

13.10

17.23

13.76

16.00

60.09

Profit before Interest & Taxes (PBIT)

15.61

11.51

15.62

18.50

20.72

66.36

11.97

15.82

12.64

14.73

55.15

Net Operating Profit after Taxes (NOPAT)

10.94

9.25

12.72

15.66

17.84

55.47

8.54

12.51

10.03

12.31

43.40

Vinati Organics

1QFY11

2QFY11

3QFY11

4QFY11

FY11

1QFY10

2QFY10

3QFY10

4QFY10

FY10

PBIDT margin

20%

19.37%

18.40%

23.85%

23.60%

24.21%

22.70%

25.78%

28.18%

23.79%

25.81%

25.93%

Operating Margin

19.37%

18.40%

22.19%

23.60%

24.21%

22.32%

25.78%

28.18%

23.79%

25.81%

25.93%

Raw Material/Sales

62.64%

62.18%

53.51%

58.54%

56.82%

57.70%

59.34%

54.51%

60.28%

58.13%

57.98%

Employee Cost/Sales

4.94%

4.85%

4.93%

4.85%

4.04%

4.64%

5.33%

4.73%

5.43%

4.43%

4.96%

Other Exp/Sales

16.62%

15.52%

21.66%

16.54%

15.67%

17.23%

15.02%

15.53%

14.73%

16.38%

15.45%

Net Margin

11%

11.04%

12.16%

16.54%

16.62%

18.25%

16.09%

14.93%

18.94%

16.00%

18.77%

17.28%

Deprec/Sales

1.87%

1.94%

2.41%

2.15%

1.60%

2.00%

2.23%

2.31%

1.94%

2.05%

2.13%

Fin costs/Sales

1.23%

1.06%

0.92%

1.54%

1.22%

1.20%

1.89%

1.53%

1.35%

1.10%

1.45%


(Subbu) #33

Donald,

I agree with you. The increased tax outflow means that FY 12 EPS should almost equal FY 11 EPS. So the stock will not go up anytime soon.

However, I think the company has a good market share. Margins from Q1 - Q4 FY 11 have been increasing from 18 - 24%.I do not think it is fair to compare margins on a Q-o-Q basis as any input price increases will only be realised in the subsequent quarter. That is the reason for low margins in Q1 FY 11 which were made up in subsequent quarters.

You should bear in mind that there are few business out there with a >20% EBITDA margin. Even a 15% EBITDA margin is very healthy in the chemicals sector.

Im fairly confident of management and their dividend payout is good. They also hold a substantial stake >70% and do not have any competing business interests. The MD (Vinati) I think has done her masters from the US and recently negotiated long-term contracts with chemical companies in the US.

They have also taken out a loan from the World Bank to increase capacity significantly.

Overall I would recommend keeping this on the radar and getting into it if prices go below rs 40 which Im sure it will over the next 2 years.

My only concern is with so much capacity coming onstream and oil prices below $85, demand for their products mights drop just when supply is high. This will affect realisations.

Disc. I would not recommend getting into this stock at current levels.

cheers,

Subbu


(Donald Francis) #34

Subbu,

Its a good company with a good Management, no doubt about it.

But the business dynamics are complex and not entirely manageable/under their control. I would rather be in a business with far better business quality, and visibility. So in our Conviction Rating scorecard, it fares poorly on 2 out of 5 parameters - Business Quality and Growth Prospects.

Currently I don’t see the stock going anywhere in the next one year. There are much better opportunities. ButI agree with you should valuation equations (VR) change, we can look at re-entry.


(Subbu) #35

Donald,

I do agree with your analysis. Can you direct me to the section where you list better opportunities? Im a newbie and there is probably an area for such things.

My view on PI, Solar etc is that there is no margin of safety for entering now. I think the superior growth prospects are already captured in the price. PI is trading at 20x LTM earnings, solar is trading at 15.6x. I dont see a margin of safety if things go wrong.


(Donald Francis) #36

We haven’t matured to create clear demarcation lines yet. We are slowly trying to move there. The Capital allocation discussion is a move in that direction.

Now conviction in opportunity/margin of safety is not transferred easily - unless one goes deep into the business. PI Industries story is compelling…just reading the ARs of last 3 years, compiling the quarterly results for last 2 years, and the two concall transcripts gave me the feel that Hitesh talks about - its unique and its heady:)

Personally I think PI has a long long way to go. On the face of it, PI fares very well on BQ, MQ, FM, GP and IPTR…not much to fault. I have been accummulating more at current levels taking advantage of the recent drops.

But am trying to understand the sources and quality of its success - and therefore its sustainability. so that I can develop the conviction to really load up on it…its looking that good. Please give more time to understand PI…and follow discussions on PI thread, maybe some conviction will start developing.


(Raj Panda) #37

“Grab a copy of the PAT Dorsey Book TODAY”

Hi Donald,

Can you please name the book ? i found 2 books written by him. Which one of these 2 ?

1). The little book that builds wealth: The knockout formula for finding great investments.

2.The five rules for successful stock investing: Morningstars guide to building wealth and winning in the market


(Donald Francis) #38

http://www.flipkart.com/books/0471686174 Link: http://www.flipkart.com/books/0471686174

The Five Rules For Successful Stock Investing: Morningstar’s Guide To Building Wealth And Winning In The Market


(Jarvis) #39

Dreaded fall in PAT YTD!


(Hitesh Patel) #40

But there seems to be a lot of improvement in the q3 fy 12 results both in terms of sales and net profits inspite of higher tax rates. At EBIT level vinati seems to have done great.

I think vinati seems to be getting on track.