hdfc isobutylene report

VISIT NOTE 27 AUG 2014

Vinati Organics NOT RATED

Well placed We met with the management of Vinati Organics Ltd to get insights on the business and outlook. Vinati organics (VOL) is a mid-size specialty focused company having a concentrated portfolio (3 products contributing ~90% to revenues). Vinati has delivered a strong 30% CAGR in revenues/PAT over FY09-14 driven by strong demand for its products, capacity expansions and few product additions.

Focused approach : VOL’s product selection approach is driven by three key philosophies, (1) niche product with a high technological barriers. (2) ability to be globally competitive on both quality and cost. (3) Production based on clean and green technology with nil environmental hazards. VOL follows stringent due diligence to narrow down on product section based on the given three parameters and hence has a very concentrated product basket, total 14 products with top 3 contributing ~90% of revenues.

Global leadership : Post product launch VOL aims to be the global leader through quality and cost efficiencies, it is this vision which has led to VOL’s global leadership in three products. VOL is globally the largest producer of two products (Isobutyl Benzene - IBB and 2-acrylamido 2-methylapropane sulphonic acid - ATBS) and the largest Indian manufacturer for one product (Isobutylene - IB). Through enhancing the quality and cost efficiency VOL aims to provide the product at competitive prices.

Growth drivers : ATBS and IB (~54% of revenues) will be the main drivers going ahead for VOL. The ATBS market is witnessing a growth of ~10-15% globally. Moreover, with increase in customer base as well as higher demand from existing customers will lead to ~20% CAGR in ATBS revenues for VOL over the next three years. VOL entered into IB as a backward integration for ATBS. IB is a gas based product and VOL is the only Indian manufacturer currently. VOL is witnessing huge surge in demand for IB , the overall market in India which hovered around 4,000 metric tons in 2012-13 stands a ~7,000 metric tons as of date.

Outlook and valuation : VOL commands premium over peers due to its best in class return ratios and strong growth visibility. VOL currently trades at ~14x FY16E (Bloomberg est.) EPS of Rs 29. The stock is currently NOT RATED by us.

FINANCIAL SUMMARY YE Mar (Rs mn) FY11 FY12 FY13 FY14 Net Revenues 3,226 4,475 5,529 6,961 Growth (%) 39.2 38.7 23.6 25.9 EBIDTA 761 978 1241 1621 EBIDTA margin (%) 23.6 21.9 22.4 23.3 APAT 520 548 687 862 EPS (Rs.) 10.5 11.1 13.9 17.5 P/E (x) 38.3 36.3 29.0 23.1 EV/EBITDA 27.2 21.8 17.7 13.0 RoE (%) 36.2 29.3 28.5 27.8 Source: Company, HDFC sec Inst Research

INDUSTRY SPECIALITY CHEM CMP (as on 26 Aug 2014) Rs 403 Target Price NA Nifty 7,905

Sensex 26,443

KEY STOCK DATA

Bloomberg VO IN

No. of Shares (mn) 49

MCap (Rs bn) / ($ mn) 20/328

6m avg traded value (Rs mn) 17

STOCK PERFORMANCE (%)

52 Week high / low Rs 416/74

3M 6M 12M

Absolute (%) 54.5 52.9 331.3

Relative (%) 47.5 26.9 288.8

SHAREHOLDING PATTERN (%)

Promoters 75.00

FIs & Local MFs 1.15

FIIs 2.75

Public & Others 21.10

Source : BSE

Meeta Shetty, CFA [email protected] +91-22-6171-7338

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

VINATI ORGANICS : VISIT NOTE

REVENUE BREAK UP - PRODUCTWISE

Source : Company, HDFC sec Inst Research TOP 3 PRODUCTS

Product Application Competition VOL's installed capacity (tpa)

Isobutyl Benzene (IBB) Pharmaceutical. A key raw material used in Ibuprofen

VOL is the largest manufacturer globally and commands ~60% market share. IOL Chemicals & Pharmaceuticals and SI Group, both Indian companies, are the competitors.

16,000

2-acrylamido 2-methylapropane sulphonic acid (ATBS)

Various applications ranging from water treatment, paints, textiles, fibre, detergents, oil field, mining chemicals and construction chemicals

VOL commands ~40% market share globally. Lubrizol (~15000 tpa) and Toagosei (~8000 tpa) are the only two competitors

26,000

Isobutylene (IB) An intermediate used in chemicals, food additives and antioxidants

VOL is the largest Indian manufacturer and commands ~70% market share in Indian market. VOL markets IB only in domestic market. Savita Chemicals Ltd is the only other India manufacturer with a small capacity.

12,000

Source : Company, HDFC sec Inst Research

VOL exports majority of IBB and ATBS to US and EU (~40% each) and rest goes to Asian markets IB is marketed only in domestic market, VOL is the only large player with 70% market share

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Dominant market share in key products VOL product basket has evolved from mere 2

products in FY01 to 14 as of FY14. Company’s stringent product selection has restricted the product basket compared to peers (Atul Ltd – 1,400 products). VOL’s top three products contribute ~90% of revenues. IBB and ATBS are the highest contributor for VOL with 41/35% contribution.

IBB – Isobutyl Benzene (35% of FY14 revenues)

Vinati is world’s largest producer of IBB and its Mahad raigad plant is biggest IBB manufacturing facility in the world. IBB is the basic raw material in manufacture of Ibuprofen. VOL began commercial production of IBB at its factory in Mahad, Maharashtra in 1992, based on technology from the renowned Institute Francais du Petrole (IFP) in France. It has since expanded its capacity in phases to 16,000 tpa and supplies to all major Ibuprofen manufacturers globally.

IBB’s contribution has been coming down from ~57% in FY09 to 35% in FY14 and is expected to slide further driven by higher growth in ATBS and new product launches. IBB market is growing at 5-7% CAGR, we expect the Ibuprofen market to remain subdued as new generation NSAIDS replace older drugs. VOL expects growth in IBB to remain <10% over FY14-16E.

2-acrylamido 2-methylapropane sulphonic acid (41% of revenues FY14)

Vinati Organics is also the largest manufacturer of 2-Acrylamido 2-Methylpropane Sulfonic Acid (ATBS) in the world. ATBS is a specialty monomer with several applications including the manufacture of acrylic fibers, personal care products, water treatment chemical, enhanced oil recovery chemical. VOL began

commercial production of ATBS at its plant in Lote Parashuram, Maharashtra in 2002, based on technology sourced from the National Chemical Laboratories, Pune. VOL has been consistently expanding the capacity for ATBS from ~1000 tpa in 2002 to 26,000 tpa in 2014.

Mgt expects VOL to be the key driver over the next two years driven by capacity expansion and robust demand from enhanced oil recovery (EOR). ATBS is used an important ingredient to manufacture polymers for enhanced oil recovery (EOR). VOL has expanded ATBS capacity from 12,000 in FY12 to 26,000 FY13-14. VOL expects this incremental addition in capacities will add ~Rs 2.0bn revenues over the next two years. Moreover, ATBS market is expanding at ~15% CAGR globally which adds to revenue visibility for VOL.

Isobutylene (IB) (13% of revenues FY14)

VOL entered into IB as a backward integration for ATBS. Vinati Organics commissioned its Isobutylene (IB) plant, the largest in India, in June 2010 with a capacity of 12,000 MT. IB is a hydrocarbon of significant industrial importance. It is used as an intermediate in the production of variety of products. VOL not only uses IB for captive consumption, as raw material for ATBS, but has also derived a revenue stream from selling it in domestic market. IB market in India was restricted at ~4000mtpa due to higher import prices. Post VOL’s commercialization, VOL sells ~7000mtpa apart from captive consumption of ~5000mtpa.

VOL has planned to debottleneck its IB facility and also expects to incur capex ~Rs1.0bn (including debottlenecking exercise for other products). VOL expects IB to grow >30% over the FY14-16E.

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PRODUCTWISE REVENUES In Rs mn FY09 FY10 FY11 FY12 FY13 FY14 IBB 1116 1227 1078 1801 2394 2436 YoY % 9.9% 9.9% -12.2% 67.1% 32.9% 1.8% ATBS 744 1034 1861 2161 2282 2854 YoY % 39.0% 39.0% 79.9% 16.1% 5.6% 25.0% IB 0 0 131 360 557 905 YoY % 0.0% 0.0% 0.0% 175.8% 54.5% 62.6% Others 98 144 196 180 334 766 YoY % 47.4% 47.4% 35.8% -8.1% 85.4% 129.2% Sources : Company, HDFC sec Inst Research VOL to focus on de-concentrating revenues Though VOL expects ATBS to remain a key growth

driver over the next two years and expects ATBS to remain a large contributor to revenues, mgt is also simultaneously looking to de-concentrate its product basket. Mgt expects its non-core products (curr ~10% of revenues) to con tribute ~20% by FY16E. Moreover, VOL is also focusing on introducing new products by FY16-17E which will further de-concentrate revenues.

Resilient EBIDTA margins VOL enjoys highest profitability compared to peers

led by stringent focus on cost efficiency. Though VOL exports ~80% of revenues and is also prone to crude fluctuations (ATBS cost are linked to crude), company contracts with customers safeguards from these fluctuations. VOL’s pass through arrangement with customers also restricts benefits from favorable crude prices and currencies.

ATBS has the highest profitability (~30%) followed by IBB (~25%) and IB (~15%). As ATBS’s contribution to revenues increases, we expect EBIDTAM to witness expansion over FY14-16E.

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Revenues have grown at 20% CAGR over FY09-14 EBIDTAM margins have remained steady ~22%

Sources : Company, Industry, HDFC sec Inst Research Sources : Company, Industry, HDFC sec Inst Research VOL has maintained its cash conversion cycle ~80 days Lower asset turns led to dip in return ratios

Sources : Company, HDFC sec Inst Research Sources : Company, HDFC sec Inst Research

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QUARTERLY FINANCIALS - SNAPSHOT (Rs mn) 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 YoY (%) QoQ (%) Net Revenues 1,479 1,749 1,702 1,943 1,961 32.6 0.9 Material Expenses 901 978 1,065 1,245 1,281 42.1 2.9 Other Operating Expenses 299 301 227 189 218 (27.3) 14.9 Employee expenses 67 70 70 67 80 18.7 19.7 Operating income 211 400 339 443 383 81.3 (13.6) Other operating income 45 22 59 9 22 (51.3) 134.7 EBIDTA 256 422 398 452 405 58.0 (10.5) Other Income 17 18 22 35 22 30.2 (38.7) Depreciation 36 37 40 40 43 18.4 9.2 Interest expense 48 49 43 42 25 (46.9) (39.5) Exceptional items - - - - - PBT 189 354 337 406 358 89.8 (11.9) Tax 62 127 105 130 117 88.2 (10.2) RPAT 127 227 232 276 241 90.5 (12.7) Sources : Company, HDFC sec Inst Research MARGIN ANALYSIS

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 YoY (bps) QoQ (bps)

Material Exp as % of Net Sales 60.9 55.9 62.6 64.0 65.3 437 127 Employee Exp as % of Net Sales 4.5 4.0 4.1 3.4 4.1 (48) 64 Other Operating Exp as % of Net Sales 20.2 17.2 13.3 9.7 11.1 (914) 135 Operating Margin (%) 14.3 22.9 19.9 22.8 19.5 524 (327) EBITDA Margin (%) 16.8 23.8 22.6 23.2 20.4 360 (275) RPAT Margin (%) 8.6 13.0 13.6 14.2 12.3 374 (191) Tax Rate (%) 32.9 36.0 31.2 32.0 32.6 (27) 62 Sources : Company, HDFC sec Inst Research

VOL repaid debt (~Rs 750mn) in FY14 which led to lower interest outgo EBIDTA margins remain lumpy between quarters due to product mix change

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Outlook and Valuation VOL has grown at a healthy CAGR of ~35% over FY06-

14 largely driven by exports which posted a CAGR of ~55%, whereas domestic revenues have grown at ~25%. EBIDTA margins have shown a steady expansion from ~11% in FY06 to ~23% in FY14 led by both gross margin expansions as well better operating leverage.

Going ahead management expects ~20% CAGR in revenues over the next 2-3 years driven by ATBS and IB. Growth post FY17 will be driven by addition of new products. VOL’s contracts with the customer’s safeguards against exchange fluctuations and crude price impact, hence VOL has guided for steady EBIDTA margins at ~23% levels over the next 2-3 years. We expect slight improvement in EBIDTA margins in FY15E/16E driven by higher revenue contribution from ATBS (ATBS is a higher margin product compared to IBB).

VOL has a strong balance sheet with Net D/E OF 0.4x and a restricted cash conversion cycle of ~77 days. VOL has also started generating free cash flows from FY14 (Rs 995mn) and is expected to generate positive free cash flows (given the capex guidance of Rs 1.5bn) and steady working capital requirements.

VOL commands premium over peers due to its best in class return ratios (ROE of ~28%, ROCE of ~21%) and strong growth visibility. VOL currently trades at ~14x FY16E (Bloomberg est.) EPS of Rs 29. The stock is currently NOT RATED by us.

Risks and concerns Highly concentrated product basket : VOL’s high

dependence in two products (IBB and ATBS - `76% of revenues) may cause a threat to revenues and profitability. However, VOL has started focusing on increasing product basket and also expects IBB contribution to slide in the overall pie. ATBS, though, is expected to remain a significant contributor.

Client concentration : VOL is highly dependent on its top 5 customers for IBB as well as ATBS as they account ~50% of revenues. For IBB major customers include Shasun, Perrigo and BASF – Germany. For ATBS, BASF, NALCO, Clariant are amongst the large buyers. Any adverse event at customers end or lower demand from these large customers can have a significant impact on revenues.

Anti dumping or any other regulatory concern : VOL derives ~75% of its revenues from export. The key markets include US, EU, China and SEA . Imposing of anti-dumping duties from any of the concerned markets can impact VOL’s financials.

Huge capex : VOL incurred a huge capex in FY12-13, to double its ATBS capacity from 12,000 tpa to 26,000 tpa (funded by debt) which led to a sharp increase in D/E ratio from 0.5x in FY11 to 1.0x in FY13. Though VOL has guided for a capex of Rs 1.5bn over the next 18 months, any incrementally huge capex could lead to increase in debt which may impact the valuations.

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PEER VALUATION

CMP (Rs)

Mcap (Rs bn)

EPS P/E EV/EBIDTA RoE (%) FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E

Vinati 403 20.0 13.9 17.5 23.1 29.3 29.0 23.1 17.4 13.7 17.7 13.0 11.3 9.0 32.1 31.3 31.8 30.5 Omkar spe 145 2.8 10.5 6.9 8.3 10.0 13.9 21.0 17.6 14.5 11.4 10.7 8.4 6.3 17.7 10.3 11.3 12.4 Atul Ltd 1285 38.0 40.4 73.9 84.9 103.0 31.8 17.4 15.1 12.5 16.9 11.4 9.6 8.1 17.1 25.7 24.1 24.4 Aarti Ind 294 26.0 15.2 18.3 22.9 30.8 19.4 16.0 12.8 9.6 9.7 8.8 7.2 5.9 20.0 20.0 20.7 24.3 Sources : Company, HDFC sec Inst Research, Bloomberg estimates

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Sources : Company, HDFC sec Inst Research

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Company Background VOL was promoted by Maharashtra Petrochemical

Corporation (MPCL) and Vinati Enterprises- a partnership firm of Vinod Saraf in Jun-89 as a specialty organic chemicals focused company. It started with the manufacturing of isobutyl benzene (IBB) - the prime raw material for ibuprofen - a NSAID drug. VOL came out with a public issue in Nov-91 for the manufacture of 1,200tpa of IBB at Mahad, Raigad. Commercial production commenced in Jul-92. The company has gradually increased the capacity of IBB to 16,000tpa. VOL has technical collaboration with Institute Francais Petrole (IFP) for petrochemical processes and catalyst. In 2000, VOL acquired 22 acre land at Lote Parsuram for Rs15mn. It is then when VOL started focusing on 2-acrylamido -2-methylpropane sulphonic acid (ATBS) with an installed capacity of <2000tpa, as of date VOL has installed capacity of 26,000tpa for ATBS. ATBS is used in industrial water treatment, oil recovery and construction chemicals. VOL is the world’s largest manufacturer of IBB and ATBS. The company manufactures isobutylene (IB) – a key intermediate in the manufacture of ATBS. IB is used in the manufacture of agrochemicals and anti-oxidants. VOL total product basket includes 14 products (inclusive of top 3 products). VOL exports its products to 22 countries.

Key management team Mr Vinod Saraf, Managing director : The founder of

VOL, is an MBA from BITS Pilani and has thorough knowledge of specialty chemicals. Prior to starting his own venture, Mr. Saraf worked for about 25 years in the textile and petrochemical industry.

Ms Vinati Saraf Mutreja, Executive director : An experienced financial consultant, having worked for leading companies in New York, USA, before she joined VOL in 2006. She has completed a dual degree in Bachelors of Science in Economics (Finance) from The Wharton School and Bachelors in Applied Science, Biotech and Pharmaceutical Development from the School of Engineering and Applied Sciences from University of Pennsylvania.

Ms. Viral Saraf Mittal, Director – corporate strategy : She has rich experience of working with organizations like Citi Bank and Ernst and Young. She became a part of VOL in 2009. She holds a Bachelors of Science degree in Economics (Finance and Management) from The Wharton School, University of Pennsylvania.

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INCOME STATEMENT Year ending March (Rs mn) FY10 FY11 FY12 FY13 FY14 Net Sales 2,318 3,226 4,475 5,529 6,961 Growth (%) 21.7 39.2 38.7 23.6 25.9 Material Expenses 1,328 1,834 2,677 3,351 4,188 Employee Expenses 115 149 183 226 274 Other Operating Expenses 347 546 665 748 970 Operating Profits 527 697 950 1,203 1,529 Operating Profit Margin (%) 22.7 21.6 21.2 21.8 22.0 Other Operating Income 84 64 28 38 92 EBIDTA 612 761 978 1,241 1,621 EBIDTA (%) 26.4 23.6 21.9 22.4 23.3 EBIDTA Growth (%) 55.6 24.4 28.6 26.9 30.6 Other Income - - - - - Depreciation 50 64 70 99 153 EBIT 562 696 908 1,141 1,467 Interest 44 71 92 115 181 PBT 518 625 816 1,026 1,286 Tax 118 105 268 339 424 PAT 400 520 548 687 862 PAT Growth (%) 59.3 29.8 5.5 25.3 25.5 EPS 8.1 10.5 11.1 13.9 17.5 EPS Growth (%) 59.3 29.8 5.5 25.3 25.5

Source: Company, HDFC sec Inst Research

BALANCE SHEET Year ending March (Rs mn) FY10 FY11 FY12 FY13 FY14 SOURCES OF FUNDS Share Capital 99 99 99 99 99 Reserves 893 1,338 1,772 2,314 3,002 Total Shareholders’ Funds 992 1,437 1,870 2,412 3,101 Minority Interest - - - - - Long Term Debt 570 417 1,108 1,720 1,493 Short Term Debt 61 353 619 653 123 Total Debt 631 770 1,727 2,373 1,616 Deferred Taxes 87 117 149 261 331 Long Term Provisions & Others - - - - - TOTAL SOURCES OF FUNDS 1,710 2,324 3,746 5,046 5,048 APPLICATION OF FUNDS Net Block 796 1,112 1,443 2,901 3,042 CWIP 384 360 567 140 101 Investments, LT Loans & Advances - 32 79 128 27 Inventories 189 350 430 546 466 Debtors 359 519 857 1,132 1,151 Cash & Equivalents 18 20 320 338 453 ST Loans & Advances, Others 106 185 350 271 281 Total Current Assets 671 1,075 1,956 2,287 2,351 Creditors 57 119 89 156 142 Other Current Liabilities & Provns 84 135 211 254 331 Total Current Liabilities 141 254 299 410 473 Net Current Assets 530 820 1,657 1,877 1,878 Misc Expenses & Others - - - - - TOTAL APPLICATION OF FUNDS 1,710 2,324 3,746 5,046 5,048


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CASH FLOW Year ending March (Rs mn) FY10 FY11 FY12 FY13 FY14 Reported PAT 400 520 548 687 862 Non-operating & EO items 65 53 19 25 61 PAT from Operations 335 467 529 661 800 Interest expenses 44 71 92 115 181 Depreciation 50 64 70 99 153 Working Capital Change (195) (288) (537) (202) 114 OPERATING CASH FLOW ( a ) 234 314 155 675 1,249 Capex (348) (357) (609) (1,131) (254) Free cash flow (FCF) (115) (42) (454) (456) 995 Investments - (32) (47) (49) 100 INVESTING CASH FLOW ( b ) (348) (388) (656) (1,179) (154) Share capital Issuance - - - - - Debt Issuance 122 138 957 646 (757) Other long term liabilities (44) (71) (92) (115) (181) Interest expenses 29 30 32 112 70 Dividend (58) (75) (115) (144) (173) FINANCING CASH FLOW ( c ) 48 23 782 498 (1,041) NET CASH FLOW (a+b+c) (66) (51) 281 (7) 54 Non-operating and EO items 65 53 19 25 61 Closing Cash & Equivalents 18 20 320 338 453


KEY RATIOS FY10 FY11 FY12 FY13 FY14 PROFITABILITY (%) GPM 57.3 56.8 59.8 60.6 60.2 EBITDA Margin 26.4 23.6 21.9 22.4 23.3 APAT Margin 17.3 16.1 12.2 12.4 12.4 RoE 40.4 36.2 29.3 28.5 27.8 ROIC 25.4 24.9 16.3 15.1 19.5 RoCE 25.7 25.1 17.8 16.2 21.4 EFFICIENCY Tax Rate (%) 22.7 16.9 32.8 33.1 33.0 Asset Turnover (x) 1.4 1.4 1.2 1.1 1.4 Inventory (days) 29.8 39.6 35.1 36.1 24.5 Debtors (days) 56.5 58.7 69.9 74.7 60.3 Payables (days) 9.0 13.5 7.2 10.3 7.4 Cash Conversion Cycle (days) 77.3 84.9 97.7 100.5 77.3 Debt/EBITDA (x) 1.0 1.0 1.8 1.9 1.0 Net D/E 0.6 0.5 0.8 0.8 0.4 Interest Coverage 12.7 9.8 9.9 9.9 8.1 PER SHARE DATA EPS (Rs/sh) 8.1 10.5 11.1 13.9 17.5 CEPS (Rs/sh) 9.1 11.8 12.5 15.9 20.6 DPS (Rs/sh) 1.0 1.3 2.0 2.5 3.0 BV (Rs/sh) 20.1 29.1 37.9 48.9 62.8 VALUATION P/E 49.7 38.3 36.3 29.0 23.1 P/BV 20.1 13.9 10.6 8.3 6.4 EV/EBITDA 33.6 27.2 21.8 17.7 13.0 OCF/EV (%) 1.1 1.5 0.7 3.1 5.9 FCF/EV (%) (0.6) (0.2) (2.1) (2.1) 4.7 FCFE/EV(%) (0.8) (0.6) (2.7) (2.9) 4.1 Dividend Yield (%) 0.2 0.3 0.5 0.6 0.7


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Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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hdfc isobutylene report

Documents

vinati organics vol

post product launch

niche product

product isobutylene

product section

product additions

cost efficiency vol

atbs revenues