Vinati Organics

Background

Vinati Organics Limited was promoted by first generation entrepreneur Vinod Saraf in 1989 to manufacture specialty organic chemicals. Vinati is a niche player but has already achieved global recognition and size.

With ATBS, Vinati has broken into the exclusive club of ATBS manufacturers. There are only three other manufacturers of ATBS globally viz. Lubrizol (USA) ~14000 TPA, Toagosei (Japan) ~8000 TPA and a Chinese company with small capacity of ~2000 TPA.


Main Products/Segments

  • Iso Butyl Benzene (IBB) – largest manufacturer – 14,000 TPA – 60% global market share
  • 2-Acrylamido 2-methylpropanesulfonic Acid (ATBS) – 2nd largest manufacturer – 12,000 TPA -25% global market share.

In FY 2010 IBB contributed 54% , ATBS contributed 44% while Others contribute 2% of the Sales mix. Contribution from ATBS has been steadily growing over the years and in 1Q FY 2011, ATBS has already overtaken IBB contributing ~57% to the Sales mix.


Main Markets/Customers

Domestic market for its products is small, the Company exports bulk of its products to USA, Europe, Australia, Middle East and China. Export contribution in FY 2010 is ~75%

  • IBB – is the primary raw material for the popular painkiller Ibuprofen – supplied directly to Ibuprofen manufacturers like BASF (largest Ibuprofen manufacturer), Shashun Chemicals, Biocause (China) the other large scale Ibuprofen Manufacturers.
  • ATBS, Na-ATBS and other derivatives that the Company makes are specialty monomers having wide applications mainly in acrylic fibre manufacturing, adhesives, and personal care products. These are supplied to polymer manufacturers who then sell the polymers to users through their distribution channels. Direct sales of ATBS are only to acrylic fiber industry.
  • New Applications like Enhanced Oil Recovery & Water Treatment hold substantial potential for growth of ATBS and global demand is expected to go up 2-3 fold (Source: company)
  • Some of the key clients are BASF, AkzoNobel, Ciba, Perrigo, Rohm & Haas, Clariant, NALCO, Shasun Chemicals

Bullish Viewpoints

  • Competitive edge in niche specialty chemicals – Cost leadership & scale economies in IBB and technological entry barrier in ATBS are strategic advantages. VOL is making its presence felt in specialty chemicals where there is less competition globally, technology is not easily available and large players are probably not interested due to relatively smaller global market size of the products.
  • Most impressive track record in last 5 years – The growth snapshot shows while Sales have grown at a compound annual growth rate (CAGR) of 41.78%, EBITDA has grown at an accelerated pace of 73% CAGR over the last 5 years. EPS (adjusted for stock splits) has galloped away at over 112% CAGR on expanding margins. The profitability analysis shows Operating Margins have gone up from 10% in FY 2006 to over 22% in FY 2010. Net Margins have done better going up from 3.4% in Fy 2006 to over 17% in FY 2010. RoEis over 40% and RoCE at ~34% in FY 2010 from single digit figures in FY 2006.
  • Ranked #14 among India’s top 100 fastest growing companies -Economic Times, Oct 2009
  • Focus on high-margin ATBS – The worldwide demand for ATBS is about 30,000 TPA and is growing at about 10-15% annually.  Vinati has seen its ATBS business growing at 40%  in FY10 and sees this trend continuing in FY11. Moreover, it is expected that the demand of ATBS could double over the next 2-3 years due to its application in enhanced recovery oil polymers. Plans are on to expand ATBS capacity to 18000 TPA from current 10000 TPA by December 2011. Margins from ATBS are around 25-30% while those for IBB are around 15-20%.
  • Backward Integration into Isobutylene – The company has completed a backward integration project of ATBS by manufacturing Isobutylene (IB) a key ingredient. The IB plant with a capacity of 12000 TPA has commenced production in June 2010. Hitherto IB was imported from Europe & Taiwan in pressurized tanks. The freight cost per kg of IB is about Rs. 20. One kg of ATBS requires about 0.35 kg of IB. In FY11, VOL’s demand for IB could be atleast 3,000-4000 MTPA. Thus, the cost savings based on freight and captive consumption of IB alone could be to the tune of Rs. 6-8 cr.
  • Replace Import demand of IB in domestic market – ~4000 TPA of IB would be used for captive consumption while the remaining would be sold off in the market. Currently, the only domestic manufacturer of IB is Savla Cemicals who has a capacity of 5,000 MTPA. The demand for IB in the domestic market (not including VOL’s demand) is about 10,000 MTPA. The demand supply mismatch is currently being met by imports.
  • New products to add to revenue stream –  Several new products in pipeline are also coming onstream in 2HFY11 which include ATBS capacity expansion, Tertiary Butyl Acrylamide (TBA), Tertiary Octyl Acrylamide (TOA), Di-Acetone Acrylamide (DAAM). The new capacities of TBA, TOA and DAAM could help the company to improve turnover significantly by FY12.
  • Proximity to Mumbai and JNPT port – greater ease of logistics and access to advanced infrastructure facilities.
  • Environment-friendly operations include waste product recycling. With the aim to be a zero-effluent company, VOL has focused on recycling and monetising waste byproducts of ATBS like TOA, TBA, and DAAM as mentioned above.

Bearish Viewpoints

  • Highly dependent on two products – Currently VOL derives its revenue from two products – namely IBB and ATBS. Thus the company is highly sensitive to any additional capacities, market changes etc. affecting either of these two products.
  • Muted growth for IBB – IBB is the primary raw material for Ibuprofen a mature product with expected growth of ~3-5% CAGR. Capacity expansion and newer capacities from players like IOL Chemicals & Pharmaceuticals limited (6000 TPA) has started impacting margins.
  • Lower than expected offtake of IB – VOL has a 12,000 TPA facility of IB. Requirement for captive use of IB in ATBS is 3000-4000 MT. This is expected to go upto 6000 MT when ATBS capacity reaches 18000 MT by FY11 end. The company has been unable to sell the balance in the domestic market. Savla Chemicals the other domestic manufacturer of IB is a competitor.
  • Aggressive Capex plans – As per FY 2010 Annual Report, VOL is carrying out capex of about Rs. 77 Cr in FY 2011. Also there is a 5MW co-generation plant (coal based) expected to be operational by end of FY11 involving a capex of around Rs. 33 Cr. While operational leverage takes time to kick in, there is a possibility of increased interest and depreciation costs, and lower capacity utilisations having a negative impact on bottomline. Execution risks remain significant as more aggressive plans have been announced and re-iterated in this August 2010 Analyst Meet.
  • Higher Tax payout from FY 2012 – ATBS manufacturing facility at Lote, Maharashtra enjoys 100% EOU tax exemption. Such tax breaks are available till March 2011. From FY12 onwards tax payout will see a big jump which will impact net margins significantly.
  • Volatility in crude oil prices – The main raw materials required for the manufacture of IBB and ATBS are crude oil derivatives such as toluene and propylene. Any major fluctuations in the prices of crude oil could adversely affect VOL’s performance (due to the 3 months time lag in passing on the increase in cost to its customers) especially for fixed price orders.
  • Foreign currency fluctuations – VOL exports ~75% of Sales. Thus, it is a net receiver of foreign exchange. It procures raw materials through imports and local purachases, where local purchases track import parity price.Thus raw materials and the FCNR loan it has taken provides a partial natural hedge. Unforeseen sharp fluctuation in the value of the Rupee could affect its realization and margins at least temporarily. Long Term contracts have provisions for shared currency risks.

Barriers to entry

  • ATBS technology is exclusively licensed from National Chemical Laboratories (NCL) Pune. The process developed by NCL is protected by two US patents (6,504,050 and 6,660,882). A third PCT application has been filed. Development of Process Technology for SMAS & ATBS
  • IBB technology is licensed from Institut Francais du Petrole (IFP) France. With 60% market share VOL enjoys cost leadership & scale economies in IBB
  • Its not easy to manufacture these products to exacting requirements of quality. It took Vinati 4 years to get the quality right on ATBS.
  • Since these are niche products with only a few large scale suppliers, major customers usually enter into long term contracts. BASF had entered into a 5yr contract for IBB (till FY 2011). ATBS contracts are of 1-3 years durations.

Interesting Viewpoints

  • The worldwide demand for ATBS is about 30,000 MTPA and is growing at about 10-15% p.a. Moreover, it is expected that the demand of ATBS could double over the next 2-3 years due to its application in enhanced recovery oil polymers. (Source: company, HDFC Securities)
  • Backward integration into IB may assist in VOL’s quest for leadership position in ATBS
  • The company is further de-risking its product profile by investing in a new product Para Amine Phenol (PAP). A key ingredient in manufacture of paracetamol, PAP is being produced in a pilot plant using a new NCL Pune developed technology, (single step catalytic hydrogenation of nitrobenzene) since there are issues of large amount of effluent generated and technological gaps in the existing conventional technology. The technology is meant to be environment friendly and competitive internationally with other technology
  • The company has already invested around Rs 4 crore on R&D and hopes to complete the pilot trials on PAP by October 2011 when more clarity would emerge. Once the pilot runs are successful, VOL could set up the plant which would take another 18 months to go onstream. If successful the prospects of VOL could further improve from here on.

Disclosure(s)

Donald Francis: No Holdings in the Company;


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