Vinati Organics

(Vivek Mashrani, CFA) #61

Anyone attending the AGM scheduled on 8-August-2015?

(Vivek Mashrani, CFA) #62

The main trigger of growth for Vinati Organics is expected to come from below:

  1. The ATBS product is key growth driver for the company. Initially IBB was the largest contributor of revenue (Vinati is global leader in IBB), but in order to diversify, company started focusing on ATBS as well. As a result from 2nd largest producer of ATBS, now Vinati has become global leader in ATBS as well

Few key points to ponder from annual report:

  • The global market share of IBB has gone up from 60% to 65% this year due to its cost leadership thanks to economies of scale and high quality
  • The global market share of ATBS has gone up from 40% last year to 45% (there are only 2 major players which make this globally i.e. Lubrizol and Toagosei
  • Vinati is benefiting from 4 triggers for ATBS
    a) ATBS is relatively high margin product than IBB (hence improving overall margins of company)
    b) ATBS is gaining market share from global players
    c) Overall demand for ATBS itself is growing at c.20% CAGR
    d) Company has completed backward integration and started producing IB (Isobutylene) which is input for ATBS, this further improves margins

To know more about ATBS applications:

  1. Another trigger is capacity expansion of INR 200 Cr which company announced on 27-May-2015 which will be completed in next 18 months consisting of:
  • New plant for producing IBAP which is intermediary between IBB and Ibuprofen
  • Further capacity expansion of IB (note that it is the only player in India to supply IB and has eliminated need of Chinese import)
  • Launch of new products to diversify the product mix; the products will be used in personal care, perfumery, rubber and pharma industry (all of them relatively recession proof)
  • Setting up of co-gen power plant to drive self sufficiency

Few other interesting points:

  • Company is set to be debt-free in next 1 to 1.5 year; currently it has c.65 Cr of debt left
  • The Capex is planned majorly from internal accruals

Disclosure: Invested since 2010 and adding on dips

(Vivek Mashrani, CFA) #63

Also, the company is de-risking its product portfolio from IBB and also shifting to higher margin products (like ATBS) without diluting its leadership position.

Below is the % breakdown for revenue:

(Vivek Mashrani, CFA) #64

Excellent report to understand Indian Specialty chemical sector (though bit old)…covers many important aspects around competition, future growth prospects, industry dynamics etc.

Also covers details on Vinati and other specialty chemical companies like Aarti Industries and Atul Ltd…

(soumenghosh83) #65

How will VOL be impacted with yuan devaluation ?

(Vivek Mashrani, CFA) #66

Vinati sells ~70% of its products on the contract basis (which comprises most of its exports). They keep realizations per litre constant and pass on the exchange rate risk and raw material price risk on consumers.

The remaining ~30% is on spot basis which is primarily to domestic market, hence there is very little impact due to forex fluctuation.

Only thing that will hit the P&L is market to market forex loss/gain on their loan, which you will be able to see in their finance cost.

To put things in perspective, in June-2015 1Q results, the revenue fell but the EBIDTA increased by 22% (due to fix realizations and passing on fall in crude price, also you can see forex losses in finance cost in 1Q result in notes.)

On competitiveness front, China’s export competitiveness will increase which is bit of negative for chemical industry but since VOL has economies of scale and has very low cost base, it is difficult for any Chinese player to compete with Vinati IMHO.

You can verify the details regarding passing on of forex losses and raw material prices in the Pg. 7 of the below report:

Disclosure: Invested and my views may be biased, please do your own due diligence before any investment decision

(Vivek Mashrani, CFA) #67

This article speaks tonnes about the innovation and hard work that went into for production of ATBS:

(soumenghosh83) #68

That was really excellent insight. Thanks indeed.

(huriasahil) #69

anyone invested/tracking vinati organics? Does anyone has any update on capacity expansion or new products?

(Ravi Kiran) #70

accumulating in SIP mode due to confidence on the management… no idea about expansion…

(Vivek Mashrani, CFA) #71


I am actively tracking Vinati Organics. They have recently announced capex plan of 200 Cr in May-2015. You can find the details below:

They are making new plant for IBP which is intermediary for IBB and Ibuprofen. Also, they are expanding capacity of IB for which they have monopoly in India.

I got in touch with Mr. Vinod Saraf (management) to inquire about the progress. They informed that the work is progressing as desired and they are still having some statutory approvals pending for the same. The revenue from this is expected to flow by end of FY16.

Happy to discuss any other queries. Thanks.

Disclosure: Invested

(NMB) #72

Superb company but too rich at 18x PE.

I would be very happy to pay something around 12-13x PE for such a business. Dont get me wrong, its a superb operation but too rich for me.


(Brijesh Mahawar) #73

Hello Vivek,

Its a good business and good management. As you have done such a detailed work on Vinati Organics can you please throw some light on:

  1. How to judge (roughly) the predictability of earnings. If their are some disruptions / discontinuity in the end products to whom Vinati supplies how to predict that ?
  2. An extension of above -> One of the application of ATBS is in oil industry. Is it in the exploration of oil, shale gas ? Do you see some shakeups in this area ?

Disc: Not Invested

(Vivek Mashrani, CFA) #74

I think valuation is very subjective matter. But to add some points for you to take better decision:

  • Currently Vinati is trading at 16x 17E fwd PE multiple. If you read the reports which forms this consensus, you will find that they do not account for 200 Cr capex revenue which will start flowing from a year now.

  • The company has excellent return ratios around 30% RoE and 23% RoCE, just look around in the market and see how are businesses with similar return ratios trading >>> look at La Opala, Mayur Uniquoters, Kajaria, Wim Plast etc.

  • You find all the points which Graham or Fisher mentiones in their books >>> Dull B2B businessess >> Niche in their business >> Economies of scale >> Well-known among customers >> Expanding market share >> Oligopoly market >> Market leader with competitive advantage >> Good management etc.

  • You can even compare the return ratios and multiples of its peers who are fairly discovered and having decent coverage like Atul limited and Aarti industries >> they trade at same multiples despite slightly moderate return ratios

  • The only negative currenly I see is the stock is less discovered, less tracked by brokers and there is lack of communication from management in terms of disclosure, concalls etc

Happy to have your views on above points.

Disclosure: Invested and my views may be biased

(Vivek Mashrani, CFA) #75

Hi Brijesh,

Please see below my thoughts on your queries:

1>> The key products of Vinati are IB, IBB and ATBS. You are correct there could be disruption in terms of discontinuity of use of some products in some applications or fear of substitute. The application of these chemicals are very broad ranging from water treatment, adhesives, personal care, gelatin substitutes, epoxy resin, coatings, construction chemicals, mining chemicals etc. Hence, I believe the threat of disruption is also diversified and suddenly there will be no big impact on usage.

Read: Pg. 16 and 17 of annual report for applications >>

2>> The application of ATBS in oil industry is to act as sealant to prevent leakage during high pressure oil while drilling and doing maintenance. As per my understanding this forms only part of ATBS application and guess if there would have been impact of falling oil prices this would have been evident till now but on contarary the market share has increased to 45%+ during last year. Also, Vinati Saraf has spoke about ATBS application and impact in one of the videos you can find it below:


([email protected]) #76

Vinati Organics forms more than 10% of my portfolio. In my opinion, this stock may not be a multi-bagger within a year but once the capex which the company initiated in last 1-2 years starts kicking, it should improve its earnings on a consistent basis for next 3-4 years.

(amolk) #77

Is Vinati Saraf Mutreja wife of Mohit Mutreja?
The both are board of directors. Mohit is founder and MD of another company Alphagrep securities (trading).

(Vivek Mashrani, CFA) #78

Yes, Vinati Saraf is daughter of Vinod Saraf (CEO); She is married to Mohit Mutreja sometime back.

(Samir P H) #79

Thanks Vivek for providing the updates.

I missed earlier on picking up this great company earlier. I believe here lies an opportunity to pick this for long term now that there is some selling pressure. The 200Cr expansion could be a good risk reward once and if it materializes. Considering the previous experience of the management in reducing the debt they should be able to work this out well.
Disc - Not invested and tracking closely.

(Vivek Mashrani, CFA) #80

Thanks. Absolutely, by current pace of repayment, they should be debt free by FY2016 or latest by 1H 2017.

Also, given the track record of succefully completing capex, I believe they should be able to do this one in timebound and efficient manner.