Initiate coverage on Vinati Organics (VOL) with a ‘buy’ rating and target price of R595 per share. We value the stock at 18x FY18e EPS of R33.1. As a diversified specialty chemicals company, VOL is a play on three key emerging trends – i) rising demand for specialty chemicals in India (15% CAGR FY15-FY20e), ii) migration of global chemical manufacturing from China to India (Asia to have 70% production share by 2030), and iii) established product positioning & lowest cost producer.
VOL is a market leader in its segment. The company generates ~88% of revenue from top three products – IBB, ATBS and IB (Isobutylene) with exports contributing 68%. Globally, VOL commands ~65% market share in IBB and ~45% market share in ATBS and exports majority of products to the US (~40%), Europe (~40%) and other Asian markets (~20). It has completed backward integration into manufacturing of IB, which is the raw material for ATBS. VOL is the largest player in IB with a 70% market share and deals only in the domestic market.
While the company focuses on maintaining leadership position in each of its products, new product launches are expected to contribute to total revenue from H2FY17. Reduction in prices of crude oil will lead to almost no demand for EOR (Enhanced Oil Recovery) chemicals. EOR constitutes ~ 15% of ATBS revenue, which will lead to volume decrease in FY16 for VOL. We 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.