Valiant Organics is part of the Aarti Group of companies. This includes specialty chemicals player Aarti Industries and active pharmaceutical ingredient or API maker Aarti Drugs. The group companies have synergies for sourcing raw materials as well as forward integration of products that are used for processing by another group company. Valiant Organics sources one of its key raw materials, PNCB (para nitro chlorobenzene) from Aarti Industries. Around 35% of its total raw material need is sourced from Aarti Industries, and around 20% of its final products are sold to group companies.

Valiant Organics is present in the chemistry verticals of chlorination, ammonolysis, acetylation, hydrogenation, and methoxylation-based specialty chemical products in India. It manufactures a wide intermediates portfolio. The company derives 88% of its revenue from the domestic market and 12% from exports. 

On an analyst call with the management last week, it was clear that there were many questions about the future of the company and its stock market performance. Management was represented by Chief Financial Officer Mahek Chheda and Senior Manager Finance Mihir Shah. 

A major concern for investors was that Valiant Organics gave negative returns over the last one year. The stock fell 25% over the past year, while the Nifty 50 rose 22%. Investors are left wondering whether there is any chance of further declines, or if the stock is a buying opportunity at this valuation. The management outlined the current issues faced by them and presented future plans. 

Quick Takes

• Revenues rose for the fourth consecutive quarter in Q3FY22 at Rs 290.9 crore, a YoY increase of 40%, while profits saw a 5.7% decline in Q3FY22 to Rs 29.9 crore.
• Three of the four verticals surpassed their respective FY21 revenues in 9MFY22
• OAP (ortho Amino phenol) plant will be commissioned in Q4FY22 will have a capacity of 100 MT per month
• Plant for pharmaceutical intermediates to be commissioned in Q4FY22 for forward integration with group company
• The EBITDA margins for 9MFY22 stood at 18.3%, which was lower than the preceding three financial years

Rising revenues, but inconsistent profitability

The Q3FY22 results saw the company’s revenues rise for the fourth consecutive quarter to Rs 290.9 crore, up 39% YoY. In comparison, net profit fell for three straight quarters from Q3FY21 till Q2FY22. This trend reversed in Q3FY22, with net profits at Rs Rs 29.9 crore, which was still lower by 5.3% on a YoY basis.

Valiant Organics has a diversified portfolio across chemistries as well as end-user industries. Products derived from chlorination find application in agrochemicals, cosmetics, veterinary, and pharmaceuticals. Hydrogenation and ammonolysis find application in dyes, pigments, pharmaceuticals, and agrochemicals. Other processes like acetylation, sulphonation, and methylation supply the dyes and pigments industry.

Valiant Organics is the only Indian manufacturer of chlorophenol products and is a global leader with about 25% global market share. Exports form more than 50% of this vertical’s revenues. Valiant Organics entered the ammonolysis vertical as a result of two acquisitions i.e. Abhilasha Tex Chem in 2017 and Amarjyot Chemicals in 2019. It supplies its products to almost all the leading dye manufacturers and has a leadership position in manufacturing PNA (para nitro aniline) due to its raw material security of PNCB (para nitro chlorobenzene) from its group company Aarti Industries.

In the hydrogenation vertical, it began manufacturing two new products in FY21 of ortho anisidine (OA) and para anisidine (PA). It is also focusing on PAP (para amino phenol), which is a difficult product to make and is an import substitute product in India.

Mihir Shah said that Valiant Organics became one of the first companies in India to manufacture PAP in FY21, as well as a steady supply of PNCB (para nitro chlorobenzene) from its group company Aarti Industries. The majority of its PAP production will be sold to Valiant Laboratories, which is its subsidiary.

The majority of the revenues are driven by three verticals: chlorination, ammonolysis, and hydrogenation. During the 9MFY22 period, except for chlorination, all other verticals surpassed their respective FY21 revenues. Hydrogenation and ammonolysis surpassed the FY21 revenues by around 21%. Presenting the 9MFY22 numbers, CFO Chheda said, “During 9MFY22, we have seen topline growth as well as volume growth, but margins were compressed.”

The data for 9MFY22 also shows that the hydrogenation vertical consistently produces the highest volumes, followed by chlorination. This vertical, despite its high volumes, comes in third as far as revenue contribution is concerned. The other processes vertical delivered better margins. In response to an investor query, the management said the company isn’t seeing any fall in demand from the dyes industry.

The biggest challenge for Valiant Organics is its falling EBITDA margins. The EBITDA margins from FY19 to FY21 were above 26%. However, for 9MFY22 the EBITDA margins fell drastically to 18.4%. This is attributed to rising raw material and logistic costs.

Explaining the reasons for falling margins, CFO Chheda said that the company passes on the increase in raw material costs to the end-user, but with a lag. The contracts are typically short-term contracts for three months to long term contracts for 12 months of supply. The incremental cost is passed on only after the completion of the previous contracts, which results in the delay. This compresses the margins at the company's end for a particular quarter.

The management expects raw material prices to stabilise over the next two quarters. On this part, CFO Chheda said, “If prices stabilise over the next two quarters, we can expect to deliver normalised EBITDA margins in the range of 22-25%.”

New products lines will add to the topline from Q1FY23

Valiant Organics is expanding its product lines with its upcoming units due for commissioning in Q4FY22. The PAP (para amino phenol) unit with 1000 MT (metric tonnes) per month was commissioned in Q4FY21, but full production was delayed due to technical difficulties in achieving the desired specification. The management expects to ramp up production from Q1FY23 onwards. PAP will be an import substitute and an essential element for the manufacture of paracetamol.

Speaking on new projects on the conference call, Mihir Shah presented data on new projects including the unit for OAP (ortho amino phenol) and another for pharma intermediates. The OAP unit has a capacity of 100 MT (metric tonnes) per month and the company will be the first Indian firm to manufacture it. The pharma intermediates unit with a capacity of 20 MT per month will manufacture products for group companies and raw materials for APIs (active pharmaceutical ingredients). Mihir Shah informed investors that incremental annual revenues from the new lines are projected to be Rs 450-500 crore from PAP, Rs 35 crore from OAP, and around Rs 45 crore from pharma intermediates.

With the expectation of raw material prices stabilising over the next two quarters, and new units commencing production from Q1FY23 onwards, there is a possibility of improving margins along with incremental revenues from new product lines.