BP Equities_Vinati Organics Ltd_Initiating Coverage_Buy_ Tgt 531_9th Dec 2015

Chemistry of Profitable Formulation

Vinati Organics Ltd. Initiating Coverage

institutional Research BP Equities Pvt. Limited (www.bpwealth.com) 09/12/2015

B P W E A L T H

Table of Content

Summary on Business Profile & Explanation on why we like this company………….…………..3&4

Investment Rationale……………………………………...…………………...……………………………...5-8

Revenue growth expected to remain strong from FY17 onwards on new product launches,

enhancing the existing product capacity to meet rising demand and new product launches…..5-6

Sustained capex to drives revenue growth

Self-sufficiency in sourcing the raw material for new products

Renowned customer base ensures the consistency in demand of the company’s products

Blended margin to remain healthy on the back of change in existing product mix, introduction

of high margin products and lower input costs………………..………………………...……………......7

RM prices are expected to remain at lower level

Introduction of high margin products to maintain healthy margin

Comfortable Working Capital cycle, Healthy Return ratio and nearing Debt-Free status...…..……8

Industry Overview ….……………………………………………………..…………………………..…….9-11

Global Chemical Industry

Asia emerging as a hub for global chemical manufacturing

Huge growth opportunity in domestic Chemical market

India gaining strategic advantages over China, which can aid in faster growth

Unique Positioning in the Industry………………………………………………………………………. 12

3 Main Products and their raw material compositions……………………………………………......12

Competitive Scenario ………………………………………………………………………………..……...13

Key Milestone & Management Team …….……………………..….……………………...……….….....14

Peer Comparison, Key Concerns & PE Band…………………………………………………………...15

Valuation & Outlook ……………………………………………………………………………….…….…..16

Financial Statements…...………………………………………………………………………..............17-20

Disclaimer………………………………………………………………………………………………………21

nd Feb , CY

Vinati Organics Ltd

Share Holding Pattern (%)

Sector Outlook Positive

Stock

CMP (Rs) 387

Target Price (Rs) 531

BSE code 524200

NSE Symbol VINATIORGA

Bloomberg VO IN

Reuters VNTI.BO

Key Data

Nifty 7,702

52 Week H/L (Rs) 665 / 370

O/s Shares (mn) 52

Market Cap (Bn) 21

Face Value (Rs) 2

Average volume

3 months 33,223

6 months 28,276

1 year 33,406

Relative Price Chart

Company Overview

Vinati Organics Ltd (VOL), established in 1989, is a specialty chemical company producing aromatics, monomers, polymers and other specialty products. The company manufactures Isobutyl Benzene (IBB) and -acrylamido-2-methylpropane Sulphonic acid (ATBS) and Isobutylene (IB). VOL started op-erations in its first plant in Mahad-Raigad in 1992, with its focus on IBB. In 2002, the company started commercial production in its second plant in Lote Ratnagiri for manufacturing ATBS. Superior technol-ogy and strategic capacity expansion plans have made VOL the world’s largest manufacturer of both IBB and ATBS (with 65% & 45% market share globally respectively). IBB, a specialty organic interme-diary, is used as a raw material for the manufacturing of Ibuprofen, an anti-inflammatory analgesic bulk drug. VOL has achieved a record purity level of 99.8% for IBB as against the prevailing international standards of 99.5%. Thus, it has become a reliable supplier for leading producers of Ibuprofen across the world. ATBS is a specialty monomer with multiple applications such as industrial water treatment, oil field applications, construction chemicals, hydro gels for medical applications, personal care prod-ucts, emulsion polymers, detergents, textile print pastes, adhesives & sealants, thickeners & paper coatings. IB (70% market share in domestic market) is used as intermediate chemicals, food addictives and antioxidants.VOL has 14 products in its basket and serves more than 60 customers across 25 countries. The company exports its products to the US (~40%), Europe (~40%) and Middle East & Asia(~20%).

Investment Rationale

Revenue growth expected to remain strong from FY17 onwards on enhancing the existing product’s capacity to meet rising demand and new product launches

VOL generates its ~88% revenue from its top 3 products i.e. IBB, ATBS and IB (Isobutylene). The company has a backward integrated business for the manufacturing IB which is the raw material for ATBS. The company generates 68% of its revenues from exports. Globally, VOL commands ~65% market share in IBB and ~45% market share in ATBS, and exports majority of it to the US (~40%), Europe (~40%) and other Asian markets (~20). In the IB business, VOL is the largest player with a 70% market share and deals only in the domestic market. The company plans to spend Rs 2 Bn on capacity expansion and new product launches between FY16-17E. Currently, production of both IB and IBB are at 100% capacity utilization and the company is increasing IB capacity from 12,000tpa to 15,000tpa by 2HFY17 through debottlenecking processes. Though the company focuses on maintain-ing the leadership positions in each of its products, new product launches are expected to contribute in total revenue from 2HFY17. With an increase in customer base and geographical expansion, we ex-pect VOL to maintain a healthy performance in terms of revenue growth. We expect overall volume to decrease 7% YoY in FY16 due to lower crude oil prices and therefore almost no demand of Enhanced Oil Recovery (EOR) chemicals (~15% of ATBS revenue). However, we also believe demand scenario to turn favorable from FY17E onwards on the back of new product launches and expectation of higher demand from user industries with favorable business dynamics. Therefore, we expect volume to grow at a CAGR of 12% between FY16-FY18E.

Blended margin to remain healthy on the back of change in existing product mix, introduction of high margin products and lower input costs

ATBS and ‘Others’ products (excl. top 3 products) have highest profitability followed by IBB and IB. The company’s EBITDA margin has remained in the range of 21-25% during FY10-FY15. The margin stability can be maintained based on customer stickiness which ensures that the company can easily pass on the change in raw material price as per raw material price volatility. Aided by revenue growth, EBITDA has increased at a CAGR of ~30% to Rs.1,918 mn between FY10-FY15. We expect the reve-nue contribution from ’Others’ products is expected to increase from 12% in FY15 to ~30% in FY18E with introduction of new products. New products are likely to contribute ~Rs 700 Mn in FY17E (revenue expected to start from 2HFY17) and ~Rs 1.3 bn in FY18E in total revenue and these prod-ucts expected to deliver more than 25% margin which will help VOL to maintain its blended margin at higher level (above 25%). Therefore, we expect margin to expand from ~25% to nearly 30% going forward.

Comfortable Working Capital cycle, Healthy Return ratios and near Debt-Free status VOL operates at comfortable working capital levels at below 90 days which in line with its peers Aarti Ind (88 days) Atul Ltd (85 days) and Omkar speciality (over 100 days). Over a period of last few years, the working capital cycle has consistently improved with active working capital management. The working capital cycle witnessed an improvement (from 93 days in FY06 to 87 days in FY15). We ex-pect working capital cycle to remain at same level for next 2-3 years on the back of efficient working capital management by the company. VOL has the healthy return ratio compared to its peers. Current-ly, the company is operating at 31% and 23% ROE and ROCE respectively and Going forward, we believe ROE and ROCE to remain at healthy on the back of improvements in demand scenario and significant expansion in margins. We foresee earnings growth of ~10% and 24% for FY17E and 18E respectively.

Specialty Chemicals 09th December, 2015

Buy

BUY HOLD SELL

> 15% -5% to 15% < -5%

Stock Rating

Research Analyst Nikhil Shetty

[email protected]

022-61596409

B P W E A L T H

3

72.3%

1.1%

6.9%19.7%

Promoter FII DII Others

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Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

Vinati Organics Ltd Nifty 500



B P W E A L T H

Why we like this stock & valuation methodology

VOL’s revenues are mainly driven by the exports which grew at a 5 Yr CAGR of ~50% along with do-mestic revenue growth of a 5 Yr CAGR of ~25%. We believe, with improved demand in the company's high margin business, ATBS and other products to maintain healthy margins from FY17 onwards. IB product is expected to grow at higher rate going forward on the back of capacity expansion coupled with better demand from its user industry. The company has strong balance sheet and it plans to become debt free by FY17E.

VOL has consistently maintained strong and best return ratios compared to its peers. The stock current-ly available at ~14x to our FY18E earnings estimates, which we believe is attractive considering A) es-tablished product positioning, B) higher volume growth supported by capacity expansion & new product launches, C) robust balance sheet and D) scope of increasing export volume with entering into new geography going forward. We have valued this stock by assigning 18x to its FY18 earning estimates (implying EV/EBITDA of 10.7x on FY18E). We arrive at a target price of Rs 531 (potential upside of 37% from CMP) for an investment horizon of 12-18 months.

Strong return ratios and near debt-free status are making this company attractive.

4

New products expected to add revenue of ~Rs 700 Mn in FY17E and ~Rs.1.3bn In FY18E

Source: Company, BP Equities Research

Key Financials

YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E Net Sales 6,961 7,717 5,768 6,672 8,807 Sales Growth (Y-oY) 25.9% 10.9% (25.3%) 15.7% 32.0%

EBIDTA 1,529 1,918 1,829 2,089 2,595 EBIDTA Growth (Y-o-Y) 27.1% 25.4% (4.6%) 14.2% 24.2%

Net Profit 862 1,158 1,110 1,224 1,521 Net Profit Growth (Y-o-Y) 25.5% 34.4% (4.2%) 10.3% 24.3%

Diluted EPS 17.4 22.4 21.5 23.7 29.5

Diluted EPS Growth (Y-o-Y) 25.5% 28.6% (4.2%) 10.3% 24.3%

No of Diluted shares (mn) 52 52 52 52 52 Key Ratios

EBIDTA (%) 22.0% 24.8% 31.7% 31.3% 29.5%

NPM (%) 12.4% 15.0% 19.2% 18.4% 17.3%

RoE (%) 31.3% 31.1% 23.1% 21.1% 21.8%

RoCE (%) 20.3% 23.0% 19.1% 18.6% 19.9%

Tax Rate % 33.0% 33.3% 33.0% 33.0% 33.0%

Book Value Per share (Rs.) 62.8 84.1 102.4 122.6 147.7 Valuation Ratios

P/E (x) 22.9x 17.8x 18.6x 16.9x 13.6x

EV/EBITDA 13.4x 10.8x 11.0x 9.6x 7.7x

P/BV (x) 6.4x 4.8x 3.9x 3.3x 2.7x

Market Cap. / Sales (x) 2.8x 2.7x 3.6x 3.1x 2.3x



B P W E A L T H

The Company plan to spend Rs 2bn on capex during FY16-

FY17 on IB capacity addition and new product launches

Investment Rationale

Revenue growth expected to remain strong from FY17 onwards on enhancing the ex-isting product’s capacity to meet rising demand and new product launches

Globally, VOL commands ~65% market share in IBB and ~45% market share in ATBS, and exports it mainly to the US, Europe and other Asian markets. In the IB business, VOL is the largest domestic player with a 70% market share and supplies only in the domestic market. VOL derives ~88% of its revenue from its top 3 products IBB, ATBS and IB (Isobutylene). The company has a backward inte-grated business in the manufacturing of IB which is the raw material for ATBS.

Sustained capex coupled with favorable demand scenario to drive revenue growth

Between FY07 and FY15, VOL has spent overall ~Rs 4bn for capacity expansions and on de-

bottlenecking, which has led to a significant increase in its product capacities. Its ATBS capacity in-creased from 3,000tpa in FY07 to 26,000tpa in FY15, which contributes ~41% to revenues currently. While 80% of ATBS revenue comes from the industries such as water treatment chemicals, construc-tion chemicals, textile auxiliaries and acrylic fibre, detergents and cleaners, remaining ~20% of its rev-enue generated from Oil & Gas industry in FY15. With sharp fall in crude oil prices, demand for ATBS from Oil & Gas industry is expected to remain under severe pressure. However, demand from other user industries (contributed 80% in FY15) is growing at 10-15% CAGR over the last 5 years. Going ahead, constructing chemicals expected to see accelerated growth of ~15% during 2015-20E led by adoption of international construction standards and increase in high-rise building in Tier–I cities. Addi-tionally, Government initiatives such as ’Housing for all by 2022’ and ’100 smart cities’ would drive the domestic construction chemical market. Global giant Nalco chemicals (US) is the main client in water treatment for VOL. The tightening of the environmental norms is focusing municipal corporations and industries to explore water treatment solution which in-turn are boosting the demand for water treat-ment chemicals. Therefore, water treatment chemical industry expected to grow at 10-15% in coming years. We believe VOL is well placed to take benefit from user industry growth with its diversified cus-tomer base.

IBB’s capacity grew from 10,000tpa in FY07 to 16,000tpa in FY15, constituting roughly 35% of FY15 revenues. IBB is the basic raw material in manufacture of Ibuprofen. IBB’s contribution has been com-ing down from ~57% in FY09 to 35% in FY15 and expected to slide further due to higher growth in ATBS and new product launches in 2HFY17. Ibuprofen is matured market and it is expected to grow at ~7% CAGR and therefore we expect being a market leader in IBB production VOL to grow at 7% CAGR over FY16-FY18E. The company has a 12,000tpa capacity for IB (used as in intermediate in the production of ATBS) where the company plans to spend Rs 2bn on capacity expansion of IB (by 3,000tpa to reach 15,000tpa in 2HFY17E through debottlenecking) including new product launches in FY17E. VOL is operating at 100% capacity utilization for IB and IBB products, we believe capacity expansion to drive the volume growth for the company as demand for these products are expected to remain strong as explained above. Therefore, we expect volume to grow at a CAGR of 12% between FY16-FY18E.

5

Capital Expenditure (Rs. Mn) Production Capacities (TPA)


354

608

1,103

254

511

1,100 1,100 1100

0

200

400

600

800

1,000

1,200

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

-

5,000

10,000

15,000

20,000

25,000

30,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

IB IBB ATBS



B P W E A L T H

VOL exports majority of IBB and ATBS to US and EU (~40% each) and remaining goes to Asian markets

Self-sufficiency in sourcing the raw material for new products The company is coming out with 2 new products - para-Tertiary Butyl Toluene and para-Tertiary Butyl Benzoic Acid (PTBT/ PTBBA) with planed capacity of 3,000tpa each. These products are IB based derivatives and find their application in perfumery, personal care and as polymer Additives industries. The Company to produce PTBT / PTBBA to sell only in domestic market. We expect perfumery and personal care industries to grow at 10-15% over next 3-5 years on the back of rising income, in-creased availability and wider product portfolio of companies has led to growth in perfumery & person-al care products and thereby in its ingredients. Currently, PTBT and PTBBA chemicals have 1,000tpa each demand in India. VOL entry with high capacity and low cost structure to help company to become largest producer in domestic market.

Renowned customer base ensures the consistency in demand of the company’s products

Currently, VOL has 60+ customers and exports its products to 25 countries (generates 68% of the total revenue). The company’s client base includes established names across the world, namely BASF-Germany, Perrigo-China, Nalco, Clariant Chemicals, Dow chemicals, Lubrizol, Ciba, Rohm and Hass, Akzo Nobel etc.. It’s domestic customers include, Shashun Chemicals, Pashupati, Thermax, Indian Acylic, UPL, Gharda Chemicals, Meghmani Organics etc. The company is expecting increased de-mand from its top 5 existing customers in IBB & ATBS as together they account for ~50% of the reve-nue. VOL is continuously increasing the client base for its existing products and also introducing new products which will help in adding new customers. Even though the company maintains its focus on achieving a leadership position in each of its products, derivative product launches are likely to in-crease better utilization of main product. With an increase in customer base and geographical expan-sion, we expect VOL to reap fruits in terms of healthy revenue growth.

6


Product Wise Domestic and International Revenue (%) Overall Domestic and Export Revenue (%)

76% 67% 68%

24%33% 32%

0%

20%

40%

60%

80%

100%

120%

FY13 FY14 FY15

Export Domestic

74%

95%

21% 16%

26%

5%

100%

79% 84%

0%

20%

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100%

120%

IBB ATBS IB HPMTBE Others

International Market Domestic Market

IB Capacity (TPA)


5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000

7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000

3,000

-

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8,000

10,000

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FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Captive Consumption Sale In Domestic Market New Product Consumption

Capacity addition will be used for new products



B P W E A L T H

Blended margin to remain healthy on the back of change in existing product mix, in-troduction of high margin products and lower input costs

RM prices are expected to remain at lower level The key raw materials required to manufacture VOL products are crude oil derivatives whose cost is directly proportional to global crude oil prices. The company is expected to get the benefit of lower raw material prices, however as VOL follows cost plus basis pricing method (absolute amount) realization per ton also likely to fall with a drop in raw material prices. The company enters into longterm con-tracts with its suppliers and the agreements are fairly priced whereby company jointly shares the risks and returns with its clients. We expect oil prices to remain at lower levels since OPEC member have decided to maintain its production levels at current levels of 31.5 million barrel per day. Post Iran’s decision not to reduce the production and with higher U.S. crude inventories (to almost 490 million barrels a record high since 2008 crises) supported by strong reserves & lower demand off-take, a de-cision on how to handle new volumes is critical. Therefore, we expect crude oil price to remain in lower range going forward.

Introduction of high margin products to aid healthy EBITDA margin ATBS and ‘Others’ products (excl. top 3 products) have highest profitability followed by IBB and IB. The company’s EBITDA margin has remained in the range of 21-25% during FY10-FY15. The margin stability can be maintained based on customer stickiness which ensures that the company can easily pass on the change in raw material price as per raw material price volatility. Aided by revenue growth, EBITDA has increased at a CAGR of ~30% to Rs.1,918 mn between FY10-FY15. We expect the reve-nue contribution from ’Others’ products is expected to increase from 12% in FY15 to ~30% in FY18E with introduction of new products. New products are likely to contribute ~Rs 700 Mn in FY17E (revenue expected to start from 2HFY17) and ~Rs 1.3 bn in FY18E in total revenue and these prod-ucts expected to deliver more than 25% margin which will help VOL to maintain its blended margin at higher level (above 25%). Therefore, we expect margin to expand from ~25% to nearly 30% going forward.

7

Focus on product diversifi-cation to help improving revenue contribution of ’Others’ products to in-crease from 12% to ~30% in FY18

VOL is expected to maintain >25% EBITDA margin and >15% PAT margin during FY16-FY18E


EBITDA Margin and NPM (FY12-FY18E) (%)

22% 22%

25%

32% 31%29%

12% 12%15%

19%18% 17%

5%

10%

15%

20%

25%

30%

35%

40%

FY13 FY14 FY15 FY16E FY17E FY18E

EBIDTA (%) NPM (%)

Crude Price are expected to remain flattish ($/bl)

Source: Investing.com, BP Equities Research

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Crude oil price dropped more than 50% since June 2014, reaching levels last seen during the depths of the 2009 recession.



B P W E A L T H

Comfortable Working Capital cycle, Healthy Return ratios and near ‘Debt-Free status’ VOL operates at comfortable working capital levels at below 90 days which in line with its peers Aarti Ind (88 days) Atul Ltd (85 days) and Omkar speciality (over 100 days). Over a period of last few years, the working capital cycle has consistently improved with active working capital management. The working capital cycle witnessed an improvement (from 93 days in FY06 to 87 days in FY15). We ex-pect working capital cycle to remain at same level for next 2-3 years on the back of efficient working capital management by the company.

Return ratios are best among its peers

VOL has the healthy return ratio compared to its peers. Currently, the company is operating at 31% and 23% ROE and ROCE respectively and Going forward, we believe ROE and ROCE to remain at healthy on the back of improvements in demand scenario and significant expansion in margins. We foresee earnings growth of ~10% and 24% for FY17E and 18E respectively.

8


VOL has consistently main-tained strong return ratios(RoE & RoCE both more than 20%)

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Debtors (Days) 50 50 56 66 60 58 58 58 58

Creditors (Days) 19 15 11 10 10 11 11 11 11

Inventory (Days) 41 52 52 52 44 40 40 40 40

Working Capital Cycle 73 87 97 108 94 87 87 87 87

0.0

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FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Net Debt Debt/ Equity (x)

Expected to be a ‘Debt-Free’ by 17E


RoCE to show 18-22% range over FY16-FY18 RoE to improve going forward


19%

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23%

19%19%

20%

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ROCE (%)

32%31% 31%

23%

21% 22%

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ROE (%)



B P W E A L T H

Global Chemical Industry

The global chemical industry, estimated at US$ 3.9tn in 2013, is expected to grow to US$ 4.7tn by 2018 and to nearly double by 2030, growing at a CAGR of 3-4%. Bulk chemicals form the largest seg-ment (~40%), followed by specialty chemicals (23%).

Rising population and increasing disposable incomes are creating demand for improved urban infra-structure, personal mobility and consumer products in emerging economies, in turn creating growth opportunities for chemical and petrochemical products. Asia is expected to be the key driver of growth in the next decade, forming 60% of the incremental demand by 2030. China, which accounts for 33% of global chemical manufacturing, is rapidly emerging as a key chemical consumer market.

Asia emerging as a hub for global chemical manufacturing Historically, North American, Western European and Japanese firms have dominated the chemicals business. However, with trade liberalization, the spread of process technology, breakdown of numer-ous economic barriers, rapid growth of newly industrialized Asian economies and rising standards of living in many developing countries, the centre of gravity of the global chemical industry is shifting to-ward the Middle East and Asia, where cheap petrochemical feedstock, low labour costs and higher economic growth is driving the industry. Over the last 10-12 years, the share of Asia (ex-Japan) in global chemical sales has increased from 23% (2003) to 53% (2013) and this is expected to increase further to 67-70% in the next decade.

Asia to contribute 60% of in-cremental demand for chemi-cals by 2030

9

Industry Overview

Spread of Global Chemical Industry

China has the largest share at 33%

Core of chemical industry shifting to Asia

Source: AT Kearneys, BP Equities Research

By 2030, at least 5 of the top 10 chemical companies would be Asian

Source: CEFIC, Company

China , 33%

Rest of Asia , 13%Latin America, 5%

NAFTA, 17%

Rest of Europe, 3%

EU28, 17%

Rest of the World, 1%

India, 2%

South Korea, 4% Japan, 5%

15%

49%

66%45%

25%

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19%12%

10% 7% 7%

0%

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1986 2010 2030E

Asia Europe NAFTA Rest of world



B P W E A L T H

By 2030, it is expected that out of the top 10 chemical companies, at least 5 would be Asian. North American, European and Japanese specialty chemical producers are increasingly looking to develop-ing regions for growth as the key automobile and consumer electronics/instrumentation players shift their manufacturing and R&D base to Asia. Many global chemical companies have already established manufacturing facilities in Asia. This has spurred demand for Chinese and Indian specialty chemical manufacturers as they in turn supply key intermediates to the global chemical giants (such as BASF & DOW).

Huge growth opportunity in domestic Chemical market

The Indian Chemical industry has witnessed robust growth in the past decade and has been ranked 6th largest in the world and 3rd largest in the Asia according to United Nations Industrial Development Organisation (UNIDO). The industry has been forecast to reach USD 200 billion mark by 2020. Indian government is rendering extensive support to give impetus to the Indian chemical industry and has set up the task force to consider suggestions for National Chemical Policy to ensure steady growth of the country’s chemical sector. Indian Speciality chemicals industry is expected to grow at a robust pace driven by consumption boom, infrastructure spending and exports to international markets.

Proxy to play consumption as well as infrastructure theme The key demand drivers for Speciality chemicals are per capita income growth, rising urbanization and infrastructure spending. The per capi-ta chemical consumption for India in most categories of Speciality chemicals (paints, dyes, polymers, home and personal care etc.) is only about 15-20% of the global average, thus, there is a significant opportunity for growth. While around 70% of Speciality chemical demand is linked to consumer spend-ing, the balance is used by construction and infrastructure industry. As domestic consumer as well as infrastructure spending slowed in the past couple of years, Indian Speciality chemical companies were impacted though overall impact was limited due to strong growth in exports. However, both these dy-namics are expected to improve in medium to long term. The robust demand for Speciality chemicals (FICCI est: 13%) would be driven by strong growth in end-user industries itself. While the ones linked to infrastructure (construction chemicals, paints, water chemicals, industrial cleaners) are expected to grow at >15%, the other categories (dyes, personal care, plastic additives, rubber chemicals) are ex-pected to grow at 10%-15% over next 5 year.

10

India’s specialty chemicals (excl. agro chem and dyes) market expected to grow at 13-17% p.a. to US$ 60-70bn by 2020

India’s chemical industry is the 3rd largest in Asia, but relatively small on a global scale

Differentiation Specialty Chemical Base Chemical Market Structure Oligopoly Competitive

Basis of differentiation R&D capability, Quality consistency, Timeliness of delivery

Pricing

Type of product Customized products Standard Products

Customer stickiness High

Customer approval systems and process are highly elongated Tedious approval processes with high quality and consistency re-quirement Switching suppliers is difficult due to long approval processes

Low

Customers look for lower price suppliers as products are standardized

Nature of contract Long-term volume contracts with clauses for pass-through of cost escalation, de-escalation

Short term contracts

Core strategy for success High process R&D capability Cost leadership strategy

Margin profile Stable margins due to escalation and de-escalation clauses in con-tract

Volatile margins depended on chemical cycle

Benefits of scale economies Limited due to large number of low volume-high value products Significant due to standardized products




B P W E A L T H

India gaining strategic advantages over China, which can aid in faster growth

Clearly, China has taken a lead over India as far as the global chemical industry is concerned, primari-ly due to the vast government support and clear cost advantages. However, there have been structural shifts in China, which have forced global players to look at India as an emerging manufacturing desti-nation:

Tightening of pollution control norms in China: Growing levels of pollution in China have forced the government to act strictly against polluting industries. This has led to increased pressure on high-

polluting sectors to implement corrective actions, which have led to an increase in capex, thereby re-ducing their competitiveness.

Weaker IPR protection: India has a much stronger track record in IPR protection compared to China, which makes it a better fit as far as R&D-intensive, early technology lifecycle production is concerned. According to the International Property Rights Index report 2013, India’s standing in terms of both IPR and legal rights is better than that of China. In terms of ranking, India stood at 55 out of 130 countries globally, while China stood at 59 out of 130 with respect to IPR. On legal rankings, too, India fairs bet-ter than China, with a ranking of 71 of 130 compared to 76 for China.

INR depreciation: While Yuan has appreciated steadily in the last 5 years, INR, on the other hand, has depreciated by 47% in the same period against USD, which is beneficial for companies looking to shift manufacturing locations. The inverse movement in the currencies implies that on relative terms, INR has depreciated by 54% vis-à-vis Yuan.

11

China has identified more than 50 chemicals to act upon to reduce pollution, shifting its focus from pollution con-trol to pollution elimination

Source: Mc kinsey, Planning Commission , BP Equity research

Growth of specialty chemicals (incl. dyes and agrochemicals) (US$ bn)

2%3%

4% 5%

7%

13%

5%

1%

0%

2%

4%

6%

8%

10%

12%

14%

0

50

100

150

200

250

Europe North America

Latin America

MENA Greater China

India Southeast Asia

Japan

2010 2020 % Growth



B P W E A L T H

Unique Positioning in the Industry VOL is placed strategically in the specialty chemical industry. It manufactures monomers which act as a base for polymer and other complex chemicals. It has the benefit of working with world’s finest and strongest chemical players. VOL enters into longterm contracts with its suppliers and thereby is able to precisely forecast the demand for its products. The agreements are fairly priced whereby company jointly shares the risks and returns with its clients. VOL has a strong portfolio of 14 products (of which it has a dominant global position in two key products), which constitute roughly 88 % of its revenues. It has gradually scaled up its product portfolio from 2 products in 2001 to 14 products currently.

Why Vinati Organics?

Well Placed Strategically The ATBS product commands for expensive and specialized technology for its production and small players at this stage feel the heat of competitive pricing and economics of scale put upon by VOL. Exclusive tie ups The technology partners of the company will not share the information with other players and thus there persists technical barriers for new players to achieve the same quality and cost effectiveness. Less attractive for the Big players to enter New players defer entering in this segment as they can’t enjoy the large volume game due to limited demand for these niche products.

3 Main Products and their raw material compositions

IB : There are two principle sources of highly purity isobutylene. One is the decomposition of MTBE to isobutylene and methanol, and the other is the dehydrogenation of isobutane.

ATBS: ATBS is made by the Ritter reaction of acrylonitrile and isobutylene in the presence of very strong sulfonic acids and water. IBB: Isobutyl Benzene (IBB) is manufactured out of toluene, propylene, methanol, potassium car-bonate, sodium metal etc.

12

Product focused strategy with top two products (ATBS & IBB) contributing ~66% of total revenues

VOL commands market leadership position in ma-jority of its products

IB, IBB and ATBS--Chemical Compositions

Source: BP Equities Research



B P W E A L T H

Competitive Scenario

IBB (65% market share globally)

IBB is primarily manufactured in India, China and the US with the total market size of 25,000 TPA. It is estimated to grow by ~5% CAGR annually going forward.

Other companies involved in manufacture of IBB include:

Herdilla chemicals (SI Group) – Capacity to manufacture 3,500 TPA

Few Chinese manufacturers – With smaller capacity

Albermarle, U.S.A – Manufacture only for captive consumption

ATBS (45% market share globally)

Currently, there are only three manufacturers of ATBS in the world. VOL is the only Indian company and largest company in world in terms of capacity. Global ATBS market is estimated to grow by 8%10 % CAGR going forward.

Other companies involved in manufacture of ATBS include:

Lubrizol, U.S.A – Capacity to manufacture 14,000 TPA

Toagosei, Japan – Capacity to manufacture more than 6,000 TPA

VOL does not face significant competition in terms of pricing from other two suppliers of ATBS. Majori-ty of Toagosei’s manufactured ATBS is used for its captive consumption and only balance in sold in the market.

IB (Commands 70% market share in domestic market)

VOL is the largest IB manufacturer with the 70% market share domestically. Currently, it has IB capac-ity of 12,000TPA which expected to increase to 15,000TPA by 2HFY17. Savla chemical is the direct competitor in IB business. The company is coming out with para Tertiary Butyl Toluene / para Tertiary Butyl Benzoic Acid (PTBT/ PTBBA); these products are IB based derivatives and find their application in perfumery. These products will start contributing to the revenue after 2HFY17.

13


Product Market Position Application/End usage Relevance

Iso Butyl Benzene (IBB) Largest manufacturer in the world with 65% market share

Pharmaceutical The main raw material for Ibu-profen widely used drug in the US, Europe and Asia

2-acrylamido 2-methylpropane sulphonic acid sulphonic acid (ATBS)

Largest manufacturer in the world with 45% market share and the only manufacturer in the country

Water treatment chemicals, emulsions for paint and paper coatings, adhesives, textiles auxiliaries and acrylic fibre, deter-gents and cleaners, oil field and mining chemicals, construction chemicals

Used in the manufacture of disper-sants in water chemicals; Im-portant ingredient to manufacture polymers for Enhanced Oil Recov-ery (EOR); Important for giving dye receptability for acrylic fibre and other specific qualitie

IB Largest manufacturer in the country

Agro-based chemicals, food additives, antioxidants

Used as an intermediate

HPMTBE Largest manufacturer in the country

Pharmaceuticals, organo-metallic com-pounds

Used as a speciality solvent

TBA Only manufacturer in the country Thickeners, personal care, water treat-ment, metal working fluid

An important ingredient to in-crease viscosity of coatings and solutions

TOA Only manufacturer in the country Personal care, adhesives and enhanced oil recovery

An important ingredient in person-al care products like hair gel and creams



B P W E A L T H

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Key Milestones

1989 Vinati Organics Limited (VOL) established

1992 Isobutylbenzene (IBB) plant comes onstream with 1200 MTA production capacity

1996 IBB capacity expansion to 3000 MTA 1997 IBB capacity expansion to 5000 MTA

2002 ATBS plant onstream with 1000 MTA production capacity

2006 IBB capacity expansion to 10,000 MTA. ATBS capacity expansion to 3600 MTA

2007 Started n-tertiary Butylacrylamide (TBA) production

2008 IBB capacity expansion to 14,000 MTA

2009 ATBS capacity expansion to 12000 MTA. TBA capacity expansion to 500 MTA

2010 VOL listed amongst Forbes Asia's 200 Best Under A Billion companies.VOL ranked amongst the Top 10 Fastest Growing Companies in India for 2009 by The Economic Times.

2011 VOL listed amongst Forbes Asia's 200 Best Under A Billion companies.

2012 IBB capacity expansion to 16,000 MTA. 2013 ATBS capacity expansion to 26,000 2015 VOL reported net profit of Rs.100cr+ for the first time.



Vinati Organics - Management Details

Name Designation Educational Background Professional Details

Mr Vinod Saraf Managing Director MBA Pilani

He has a thorough knowledge of specialty chemicals. Prior to starting his own venture, Mr. Saraf worked for about 25 years in the textile and petrochemical industry.

Ms. Vinati Saraf Mutreja

Executive Director

Bachelors of Science in Economics (Finance) from the Wharton School and Bachelors in Applied Science, Biotech and Pharmaceutical Devel-opment from the School of Engineer-ing and Applied Sciences from Uni-versity of Pennsylvania.

An experienced financial consultant, Ms. Saraf has worked for leading companies in New York, US, before joining VOL in 2006.

Mr. Girish Dave Independent Non-Executive Chairman

M.Com, LLB, & CAIIB graduate de-gree from BITS

He is an eminent advocate and senior partner of well-known law firm, M/s. DAVE & GIRISH & CO., Advocates, with over 46 years of ex-perience in the legal field.

Ms. Viral Saraf Mittal Director-Corporate Strategy

Bachelors of Science degree in Eco-nomics (Finance and Management) from the Wharton School, University of Pennsylvania

She has rich experience of working with or-ganizations like Citi Bank and Ernst & Young. She became part of VOL in 2009. She is re-sponsible for formulating the corporate strate-gies at VOL.

Mr. Sunil Saraf Director Bachelor of Commerce from Mumbai University

He is having 25 years of experience in chemi-cals industry, Sunil Saraf plays a major role in developing our products and processes



B P W E A L T H

Peer group comparison

PE Band

Key Risks and concerns: Significant domestic currency appreciation

Significant appreciation in INR could impact growth as competitive advantages vis-à- vis China could reduce, thereby slowing the pace of shifting of volumes from China to India.

Slowdown in end user industry growth

The slow down in growth of end user industries such as water treatment, specialty polymers, construc-tion chemicals etc could impact the overall growth for the company.

Dependency on few clients

VOL is highly dependent on its top 5 customers for IBB as well as ATBS as they account ~50% of revenues. Any adverse event at customers end or lower demand from these large customers can have a significant impact on revenues.

Changes in regulatory policies

VOL derives ~68% of its revenues from export. The key markets include US, EU, China and SEA. Imposition of anti-dumping duties or any sort of regulation from the concerned markets could impact VOL’s operations.

15

Company Name CMP Mcap EPS P/E EV/EBITDA

(Rs) (Rs bn) FY16E FY17E FY16E FY17E FY16E FY17E

Aarti Industries Ltd. 510 42.5 27.9 34.3 18.3 14.9 10.1 8.8

Atul Ltd. 1,704 50.1 97.3 110.4 16.8 14.8 9.4 8.5

Omkar Speciality Chemicals Ltd. 197 4.0 16.5 20.4 13.3 10.8 9.1 7.3

Vinati Organics Ltd. 387 19.9 21.5 23.7 18.6 16.9 11.1 9.6

Source: BP Equities Research

Source: BP Equities, Ace Equity

VOL– PE Band

0

100

200

300

400

500

600

700

800

Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

Price 10x 15x 20x 25x 30x



B P W E A L T H

Valuation and Outlook

VOL’s revenues are mainly driven by the exports which grew at a 5 Yr CAGR of ~50% along with do-mestic revenue growth of a 5 Yr CAGR of ~25%. We believe, with improved demand in the company's high margin business, ATBS and other products to maintain healthy margins from FY17E onwards. IB product is expected to grow at higher rate going forward on the back of capacity expansion coupled with better demand from its user industry. The company has strong balance sheet and it plans to be-come debt free by FY17E.

VOL has consistently maintained strong and best return ratios compared to its peers. The stock cur-rently available at ~14x to our FY18E earnings estimates, which we believe is attractive considering A) established product positioning, B) higher volume growth supported by capacity expansion & new product launches, C) robust balance sheet and D) scope of increasing export volume with entering into new geography going forward. We have valued this stock by assigning 18x to its FY18E earning esti-mates (implying EV/EBITDA of 10.7x on FY18E). We arrive at a target price of Rs 531 (potential up-side of 37% from CMP) for an investment horizon of 12-18 months.

16

We have valued this stock by assigning 18x to its FY18 earning estimates (10.7x based on FY18E EV/EBITDA considering target price). We arrive at a target price of Rs 531 (potential upside of 37% from CMP) for an investment horizon of 12-18 months.

Source: Company, BP Equities

Valuation Basis FY16 FY17 FY18

Vinati Organics Ltd

EPS 22 22 24 29

Growth in EPS (YoY %) -4% 10% 24%

Implied PE 18 16 13

Assigned PE (18x PE) 18 18 18

Target Price 387 427 531

CMP 387 387 387

Upside Potential (%) 37%



B P W E A L T H

17



Profit & Loss A/c

YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E Net Sales 6,961 7,717 5,768 6,672 8,807 Growth % 25.9% 10.9% (25.3%) 15.7% 32.0%

Total Operating Revenue 6,961 7,717 5,768 6,672 8,807 Growth % 25.9% 10.9% (25.3%) 15.7% 32.0%

Less:

Raw Material Consumed 4,180 4,559 2,813 3,262 4,570 Power & Fuel Cost 361 313 236 254 360 Employee Cost 274 319 358 444 551 Other Manufacturing Expenses 224 271 239 286 344 General and Administration Expenses 92 110 97 111 128 Selling and Distribution Expenses 242 217 196 225 259 Miscellaneous Expenses 50 3 0 0 0 Total Operating Expenditure 5,432 5,800 3,939 4,583 6,211 EBIDTA 1,529 1,918 1,829 2,089 2,595 Growth % 27.1% 25.4% (4.6%) 14.2% 24.2%

Less: Depreciation 153 177 235 272 335 EBIT 1,376 1,741 1,593 1,817 2,261 Growth % 24.6% 26.6% (8.5%) 14.1% 24.4%

Interest Paid 181 98 72 70 70 Non-operating Income 92 91 135 80 80 Profit Before tax 1,286 1,735 1,656 1,827 2,271 Tax 424 577 547 603 749 Net Profit before Minority 862 1,158 1,110 1,224 1,521 Minority Interest 0 0 0 0 0 Net Profit 862 1,158 1,110 1,224 1,521 Adjusted Profit 862 1,158 1,110 1,224 1,521 Reported Diluted EPS Rs 17.4 22.4 21.5 23.7 29.5 Growth % 25.5% 28.6% (4.2%) 10.3% 24.3%

Adjusted Diluted EPS Rs 17.4 22.4 21.5 23.7 29.5 Growth % 25.5% 28.6% (4.2%) 10.3% 24.3%

Common Sized Profit & Loss Account YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0%

Less:

Raw Material Consumed 60.0% 59.1% 48.8% 48.9% 51.9%

Total Operating Expenditure 78.0% 75.2% 68.3% 68.7% 70.5%

EBIDTA 22.0% 24.8% 31.7% 31.3% 29.5%

Depreciation 2.2% 2.3% 4.1% 4.1% 3.8%

Interest Paid 2.6% 1.3% 1.2% 1.0% 0.8%

Non-operating Income 1.3% 1.2% 2.3% 1.2% 0.9%

Extraordinary Items 0.0% 0.0% 0.0% 0.0% 0.0%

Profit Before Tax 18.5% 22.5% 28.7% 27.4% 25.8%

Current tax 6.1% 7.5% 9.5% 9.0% 8.5%

Profit/Loss of Associate Company 0.0% 0.0% 0.0% 0.0% 0.0%

Profit After Tax 12.4% 15.0% 19.2% 18.4% 17.3%

Adjusted Profit 12.4% 15.0% 19.2% 18.4% 17.3%



B P W E A L T H

18


Balance Sheet YE March( Rs. mn) FY14 FY15 FY16E FY17E FY18E Liabilities

Equity Capital 99 103 103 103 103 Reserves & Surplus 3,002 4,237 5,181 6,223 7,517 Net Worth 3,101 4,340 5,285 6,326 7,621 Net Deferred tax liability/(Asset) 685 904 904 904 904 Total Loans 1,222 390 275 0 0 Capital Employed 5,008 5,634 6,464 7,230 8,525 Assets

Gross Block 3,711 4,123 5,223 6,323 7,423 Less: Depreciation 669 850 1,086 1,358 1,692 Net Block 3,042 3,273 4,137 4,965 5,731 Capital WIP 101 200 200 200 200 Investments 426 626 626 626 626 Current Assets

Inventories 466 545 312 362 507 Sundry Debtors 1,151 1,291 912 1,055 1,393 Cash and Bank Balance 427 271 758 522 613 Current Investments 27 27 27 27 27 Loans and Advances 226 243 181 210 277 Other Current Assets 8 30 22 26 34 Total Current Assets 2,306 2,407 2,214 2,202 2,852 Less: Current Liabilities & Provisions

Sundry Creditors 142 215 121 141 191 Provisions 206 256 191 221 292 Other Current Liabilities 519 401 401 401 401 Total Current Liabilities & Provisions 867 872 714 763 884 Capital Applied 5,008 5,634 6,464 7,230 8,525



B P W E A L T H

19


Cash Flows YE March (Rs. Mn) FY14 FY15 FY16E FY17E FY18E

PAT 861.5 1,157.9 1,109.7 1,224.3 1,521.5 Less: Non Operating Income (91.7) (91.4) (134.7) (80.0) (80.0) Add: Depreciation 153.2 176.6 235.5 271.7 334.7 Add: Interest Paid 181.5 97.6 71.6 70.0 70.0 Operating Profit before Working Capital Changes 1,104.5 1,340.6 1,282.1 1,486.0 1,846.1 (Inc)/Dec in Current Assets 120.4 (178.4) 447.5 (174.9) (413.2) Inc/(Dec) in Current Liabilities 89.6 5.6 (158.5) 49.7 120.8 Changes in Inventory 80.1 (78.6) 232.9 (49.8) (145.0) Net Cash Generated From Operations 1,394.5 1,089.2 1,803.9 1,311.1 1,408.7 Cash Flow from Investing Activities

(Inc)/Dec in Fixed Assets (293.2) (412.2) (1,100.0) (1,100.0) (1,100.0) (Inc)/Dec in Capital Work In Progress 39.6 (99.3) 0.0 0.0 0.0 (Inc)/Dec in Investment (Strategic) 0.0 0.0 0.0 0.0 0.0 (Inc)/Dec in Investment (Others) (426.4) (200.0) 0.0 0.0 0.0 Add: Non Operating Income 91.7 91.4 134.7 80.0 80.0 Net Cash Flow from/(used in) Investing Activities (588.3) (620.1) (965.3) (1,020.0) (1,020.0) Cash Flow from Financing Activities 0.0 0.0 0.0 0.0 0.0 Inc/(Dec) in Total Loans (361.6) (613.9) (114.5) (275.1) 0.0 Inc/(Dec) in Reserves & Surplus (25.2) 250.1 0.0 0.0 0.0 Inc/(Dec) in Equity 0.0 4.4 0.0 0.0 0.0 Dividend Paid (148.1) (172.8) (165.6) (182.7) (227.1) Less: Interest Paid (181.5) (97.6) (71.6) (70.0) (70.0) Adjustments (0.5) 5.0 0.0 (0.0) 0.0 Net Cash Flow from Financing Activities (716.9) (624.8) (351.7) (527.8) (297.1) Net Inc/Dec in cash equivalents 89.3 (155.6) 486.9 (236.7) 91.7 Opening Balance 337.7 427.0 271.4 758.3 521.6 Closing Balance Cash and Cash Equivalents 427.0 271.4 758.3 521.6 613.3



B P W E A L T H

20



Key Ratios YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E Key Operating Ratios

EBITDA Margin (%) 22.0% 24.8% 31.7% 31.3% 29.5%

Tax / PBT (%) 33.0% 33.3% 33.0% 33.0% 33.0%

Net Profit Margin (%) 12.4% 15.0% 19.2% 18.4% 17.3%

RoE (%) 31.3% 31.1% 23.1% 21.1% 21.8%

RoCE (%) 20.3% 23.0% 19.1% 18.6% 19.9%

Current Ratio (x) 2.7x 2.8x 3.1x 2.9x 3.2x

Dividend Payout (%) 17.2% 14.9% 14.9% 14.9% 14.9%

Book Value Per Share (Rs.) 62.8 84.1 102.4 122.6 147.7

Financial Leverage Ratios

Net Debt/ Equity (x) 0.3 0.0 (0.1) (0.1) (0.1) Interest Coverage (x) 8.4x 19.7x 25.5x 29.8x NA

Interest / Debt (%) 11.2% 12.1% 21.5% 50.9% NA

Growth Indicators %

Growth in Gross Block (%) 8.6% 11.1% 26.7% 21.1% 17.4%

Sales Growth (%) 25.9% 10.9% (25.3%) 15.7% 32.0%

EBITDA Growth (%) 27.1% 25.4% (4.6%) 14.2% 24.2%

Net Profit Growth (%) 25.5% 34.4% (4.2%) 10.3% 24.3%

Diluted EPS Growth (%) 25.5% 28.6% (4.2%) 10.3% 24.3%

Turnover Ratios

Debtors (Days of net sales) 60 58 58 58 58 Creditors (Days of Raw Materials) 10 11 11 11 11 Inventory (Days of Optg. Costs) 44 40 40 40 40

Valuation Ratios

YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E P/E (x) 22.9x 17.8x 18.6x 16.9x 13.6x

P/BV (x) 6.4x 4.8x 3.9x 3.3x 2.7x

EV/EBIDTA (x) 13.4x 10.8x 11.0x 9.6x 7.7x

EV/Sales 3.0x 2.7x 3.5x 3.0x 2.3x

Market Cap./ Sales (x) 2.8x 2.7x 3.6x 3.1x 2.3x

Dividend Yield (%) 0.8% 0.8% 0.8% 0.9% 1.1%

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