CD Equisearch

 

CMP: ₹801.45

Target: ₹832

Accentuated by the increasing demand for ATBS (antimicrobial drugs), Vinati Organics’ market share increased to 65 per cent - in anticipation of strong demand, for some time now, Vinati has been working on capacity addition for ATBS, increasing it from 26000 tonnes to 40000 tonnes; the plant was expected to be completed by November 2019, but owing to subdued demand in the global market not least due to strained crude oil prices it is expected to start commercial production in March 2020. The total capital expenditure incurred on the project is ₹110 crore and ramp-up in capacity utilisation would be gradual.

Pending ramp up in capacity utilisation of new plants of ATBS and butyl phenol, ROE is expected to fall sharply to 28.4 per cent and 23.5 per cent in FY20 and FY21 respectively from 31.8 per cent in FY19. Despite strain on liquidity and unforeseen pandemic, inventory and debtor days will remain subdued not least due to sharp fall in crude oil prices.

Despite the government’s identification of specialty chemicals as a key priority segment, unseen fall in crude oil prices has made VOL’s objective of achieving 15-20 per cent annual growth over the next 4 years looks difficult. Revenue as a consequence would grow by sub-5 per cent next fiscal stoking earnings growth to just 2 per cent. Wherefore, return on capital would barely remain elevated. On balance, we advice ‘hold’ rating on the stock with a target of ₹832 based on 26x FY21e earnings over a period of 9-12 months.

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