Vinati Organics is one of the fastest-growing Indian specialty chemical companies, with a five-year revenue CAGR of 20.7% at the end of FY22. While it had a good run since FY17, it saw declining YoY revenues in FY20 and FY21. It bounced back in FY22 with a 71% YoY increase in revenues.

The company’s Q4FY22 performance played a significant role in the overall numbers for FY22. The company posted its highest quarterly revenues in Q4FY22 at Rs 501.2 crore and its highest quarterly profit in the last eight quarters at Rs 101.1 crore. The market reacted positively and the stock is up more than 20% in two weeks after its results were announced.

The specialty chemicals industry constitutes 22% of the total chemicals and petrochemicals market in India. Due to the recent pandemic, global firms are shifting from China to India. The tightening of environmental norms in China since January 2015 has led to an increase in operating costs, closure, and relocation of manufacturing facilities. These shifts have created a large opportunity for India’s chemical firms.

Success, however, isn’t coming easily. There are several challenges such as the availability of raw materials, and logistics issues post-Covid. The Ukraine-Russia war has further added to the problems. Specialty chemicals are derived from crude oils and escalating crude prices is one of the biggest challenges for the industry. But even in such an adverse environment, most companies from the sector have delivered better than expected returns, Vinati Organics being one among them.

Vinati Organics enjoys global leadership in two specialty chemicals – isobutyl benzene(IBB) and acrylamindo 2-methylpropane sulfonic acid (ATBS)–with a market share of 70% and 80%, respectively. In the specialty chemicals space, it saw unprecedented demand for its products over the past few years due to the China+1 factor.

The company’s Q4FY22 earnings beat the Trendlyne Forecaster estimates by 22.9% on a quarterly basis and 6.4% on an annual basis. It also demonstrated growth across key product segments like IBB and ATBS. The rising revenues are attributed to the increasing volumes of its key products.

Quick Takes

• Revenues grew by 74% YoY in Q4FY22 to Rs 501.2 crore with increased volumes of key products
• Revenues for FY22 grew by 71% YoY to Rs 1,76.5 crore, the highest ever annual revenues for the company
• EBITDA margins declined YoY by 9% at 29.5% in FY22 due to raw material inflation
• Capex plan of Rs 150 crore for the addition of six new products in FY23. Total capex plans of Rs 400 crore are planned over the next two years 
• Expansion of Butyl Phenols plant capacity by 42% to 50,000 MTPA

Rising demand for established products helps the top line grow

During FY22, the demand for Vinati’s key products, IBB and ATBS, of which IBB is the raw material for ibuprofen increased, and these contributed to strong growth in the topline. The company was able to gain market share for some of the products in the butyl-phenol (BP) chemistries. Vinati was able to pass on the incremental cost of raw material to the end customers, which in turn helped it maintain healthy margins per kg across different products.  

The company posted its highest quarterly revenues in Q4FY22 at Rs 501.2 crore and also its highest quarterly profit in the last eight quarters at Rs 101.1 crore. In terms of revenue contribution, ATBS constitutes around 40-50% of overall revenue followed by IBB at 20-30% while the rest is from other segments such as IB derivatives and Butyl Phenols.

The management has guided for revenue growth of 25-30% YoY each in FY23 and FY24, which will be helped by the commissioning of an antioxidant plant and foray into niche chemicals through its subsidiary, Veeral Organics (an agrochemical intermediate). 

Does the specialty chemicals space still offer investors opportunities?

The going has been good for the specialty chemicals sector in the past few years. While Vinati Organics delivered a stellar performance in Q4FY22, many other specialty chemicals players have done even better. 

In Q4FY22, the standout performance was delivered by Fine Organics with YoY revenue growth of 91.1% and net profits growing YoY by 283%. Many others have better YoY net profit growth including Jayant Agro Organics, NOCIL, and Laxmi Organic Industries. 

The specialty chemicals sector offers many opportunities to investors and each player has a strategic advantage with its particular products and their applications across industries. While Vinati Organics holds good future growth prospects, investors would do well to analyse other companies in the sector also for a favourable investment opportunity in this sector.

Cost, delay challenges in exports a worry for this sector

In FY22, exports contributed to 68% of the revenues while 32% came from domestic sales. Currently, Vinati is facing challenges on the export side with rising freight costs. However, these are passed on to the end customers and have no impact on the margins. The other concern is that the lead time for shipping is higher and given current global conditions, this is expected to continue in the next quarter.

The contribution of exports in FY20 was 74%. Over the last two years, export contribution has dropped by 6%, indicating an uptick in domestic demand.

The EBITDA margins for Vinati Organics have been declining over the past two years. It ended in FY22 with margins of 29.5%. Crude oil, the key raw material, has seen a price rise of more than 50% over the last year or so. While the company was able to pass on this increase to end customers, with the rest of the production costs remaining the same, margins weren’t left unscathed. 

EBITDA margins fell to 29.5% in FY22 from 42.7% in FY20. The management view is that these are healthy margins at this level and would be sustainable in the future. In case of a drop in crude oil prices, the company hopes to improve its margins.

Capex plans to add new products underway

The management plans to increase butyl-phenol (BP) capacity and this increased capacity would be captively consumed to manufacture antioxidants at Veeral Additives. The capacity of the BP plant is being increased by 42% to a total capacity of 50,000 MTPA (metric tonnes per annum). 

However, revenues from this expansion are expected only from Q4FY23 onwards.

Veeral Additives will commence production of AOs from Butyl Phenol, thus resulting in forward integration. The board has approved the merger of Veeral Additives into Vinati Organics. 

Post amalgamation, it will be the largest and only manufacturer of AOs in India. These AOs are right now imported into India and the domestic market is seeing significant demand for products like LLDPE (linear low-density polyethylene). The plant is expected to be commissioned over the next 15-18 months and incremental revenues from the AOs are expected from FY24 onwards.

The company also plans to set up new capacities for introducing some new products to the portfolio. A total capex investment of Rs 150 crore is envisaged in this business. The announced capex investment of about Rs 250 crore to produce six specialty chemicals under Veeral Organics is developing well, with anticipation of revenue contribution from FY24. An overall capex of around Rs 400 crore is planned over the next two years.

The management expects to deliver a strong performance in FY23 due to increased penetration of the BP market, and rising volume growth in ATBS and IBB business. This, led by demand revival in key end-user markets such as North America, Europe, and some parts of Asia, could boost volume growth of nearly 25% in FY23. 

However, the growth in FY23 can be expected from existing products only. It would take at least 15-18 months for the capex plans for new products to fructify in meaningful revenues. Investors must keep in mind that there might be challenges in the near term considering the global uncertainties due to the war in Europe and an interest rate reset globally. The company on its part is going ahead with its investment plans to serve demand, which they estimate would lead to rapid revenue growth over the next 2-3 years.