CD Equisearch
Vinati Organics (Reduce)
Target: ₹1,072
CMP: ₹1,348.55
The critical demand-side drivers for Vinati Organics’ ATBS (Acrylamide tertiary butyl sulfonic acid) market include its increasing use as water treatment chemicals, textile auxiliaries, paints & coatings and oilfield chemicals. Stress in the overall economic environment seemingly had little impact on VOL’s expansion plans, as it continues to invest in expanding capacities and adding new products.
For FY21, it has set aside ₹150 crore for capacity expansion of PTBBA plant and setting up facilities for four new specialty chemicals having diversified applications ranging from agrochemicals, dyes to plastic additives etc – these will be completed by the end of this fiscal having revenue potential of ₹200-240 cr at current prices. Zero debt-equity ratio, highly elevated interest coverage ratio and robust current investments are strong indicators from VOL’s perspective. However, lower asset turnovers – fixed asset turnover is expected to slip to a dismal 1.2 in FY21 before recovering to some 1.4 next fiscal would harm ROE which will see a sharp decline to 20.7 per cent in FY21 from 29.3 per cent just last year. On balance, we advice reduce rating on the stock with a target of ₹1,072 (previous target: ₹832) based on 32x FY22 earnings over a period of 9-12 months.