HDFC Securities Maintains ‘Sell’ Rating on Vinati Organics, Predicts 23% Drop

Baishakhi Mondal

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HDFC Securities Maintains 'Sell' Rating on Vinati Organics, Predicts 23% Drop

Vinati Organics: Potential and Outlook

Vinati Organics, a prominent player in the chemicals sector, is currently under scrutiny from HDFC Securities, which has maintained a ‘sell’ recommendation for the stock, citing its high valuation concerns. The brokerage has set a target price of 1,491, highlighting a prospect of a 23% downside from the stock’s current levels. Despite this cautious stance, HDFC Securities acknowledges the company’s robust long-term growth trajectory.

Current Valuation Analysis

In its analysis, HDFC Securities points out that Vinati Organics is trading at P/E multiples of 50 for FY25 and 40.2 for FY26, which are considered elevated. This valuation reflects high market expectations, thus prompting the brokerage to advocate for a cautious investment approach while remaining optimistic about the company’s long-term outlook and growth potential.

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Projected Growth Engines

Vinati Organics is poised for impressive expansion over the upcoming years, driven by significant investments aimed at enhancing product offerings and infrastructure. The brokerage forecasts the commercial launch of projects valued at approximately 800 crore within the next two quarters, which are expected to boost revenue and EBITDA growth rates of 19% and 20%, respectively, from FY24 to FY27.

Strategic Investments in Product Development

One of the key components of Vinati’s growth strategy is the expansion of its product range. The company is investing 5 billion in its subsidiary, Veeral Organic Private Limited (VOPL), to establish production facilities for new products such as MEHQ, Guaiacol, Anisole, and Isoamylene derivatives. These products cater to various industries including polymers, pharmaceuticals, agrochemicals, and personal care. The company aims to achieve capacities of 5,000 MTPA for Anisole, 3,000 MTPA for MEHQ, and 2,000 MTPA for Guaiacol, with operations expected to be fully online by Q3 FY25. Notably, the production of MEHQ and Guaiacol will utilize a cost-effective vapor phase technology, which is predicted to enhance profit margins.

Strengthening Operational Synergy

Vinati Organics is also focusing on the integration of its subsidiaries to streamline operations and bolster its butyl phenol value chain. The construction of a 10,000 MTPA Isoamylene plant is set to reinforce margins, while the merging of operations with Veeral Additives is anticipated to protect profit margins in the antioxidants segment. Veeral Additives produces phenolic antioxidants utilized in numerous polymers and materials and is aiming to capture a 60-70% share of the domestic market while exploring export opportunities. At peak utilization, revenue from this segment could potentially reach 700 crore.

Boosting Capacity for ATBS

As a market leader in ATBS and IBB, with a commanding 65% market share, Vinati Organics is expanding its capacity from 40,000 MT to 60,000 MT to meet escalating demand. Investment of 300 crore is allocated for this expansion, with the new plant set to commence operations in the second half of FY25. The recent surge in sales of high-grade ATBS molecules further illustrates the company’s strong position for future revenue growth, supported by long-term contracts in place.

Financial Performance and Projections

In terms of financial health, Vinati Organics reported a 6.5% year-on-year decline in revenue for FY24, amounting to 1,938.8 crore, alongside an 11% decrease in EBITDA, bringing it down to 508.6 crore. The EBITDA margin contracted by 132 basis points to 26.2%. Nonetheless, the company invested 360 crore in capital expenditures during FY24, emphasizing its focus on niche products and facility enhancements.

Future Earnings Expectations

Looking ahead, Vinati Organics is projected to enjoy revenue growth of 21% for FY25 and FY26, largely driven by improved utilization of the antioxidants business and the launch of new product facilities. The company’s return on equity (ROE) is anticipated to rise from 15.5% to 17% by FY26, and it is expected to generate free cash flow of 330 crore within the next two years.

Conclusion

In summary, while HDFC Securities maintains a cautious stance on Vinati Organics due to high current valuations, the company stands at a pivotal point of growth fueled by its strategic investments and enhanced capacity planning. With a solid fiscal foundation and a diversified portfolio of products, Vinati Organics is well-positioned to navigate the evolving market landscape effectively and leverage emerging opportunities in the coming years.

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