Warming Up to Vinati Organics - Planning to increase allocation to 4% from 2% at present
After Suprajit and Ajanta Pharma, first time I have a feeling that - I have got a candidate to concentrate albeit it’s too early. My typical allocation life cycle is 5-6 years for concentrated positions. Suprajit : 2014 - 2020, Ajanta 2016 - 2023. Vinati, I have started journey in Jan 24
Rationale behind increasing the allocation
1. Clarity emerged as one time gains withered away
From 2017 - 18, there were series of one time windfall gains clouding the true margin profile of the franchise. Lubrizol exit, change of business matrix in covid, chinese supply disruption, aggressive customer stocking - all these events boosted margin profiles in short term but it was not the true reflection of the long term strength of the franchise. In my view - FY 24 margins of 24-25% ( which are decadal low ) is a good starting point to model future trends. Margins can still go down further but I believe we are somewhere at the bottom
2. Journey towards diversification while maintaining the speciality franchise?
From 100% ATBS, IBB portfolio in 2008 - 09, company now has more diversified profile with ATBS/IBB contribution reduced to 55-60%. Company plans to introduce 2-3 new products every year. I do not have strong reasoning yet to decide - “are the new products diluting the speciality franchise or really making it granular?” Example - even after Anti Oxidant being doubly backward integrated to butyl phenol and IB, it is still not matching Chinese prices which can be confirmed from the management response in Q4 FY 24 confall that AO is the only product in the portfolio which is facing pricing pressure
3. Understanding the durability of ATBS/IBB product franchise
This point is also work in progress. Company has shown proven capabilities of scouting, absorbing and re-engineering the third party technologies. For me, proof of pudding still lies in ‘’time’’. If Vinati can defend its ATBS franchise over next 1-2 years when there is more competition is propping up, that itself will act as a good data point to ramp up allocation further
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