Valiant Organics Ltd (VOL) has Buy rating for target price of Rs 1,382 (100% Potential Gain)

Valiant Organics Ltd (VOL) consolidated results fall short of our expectations on the profitability front. The company posted strong revenue growth of 48.5% YoY and 20.5% QoQ at INR 3,476mn (14.6% above est), owing to higher realisation and volume addition on account of PAP ramp up. Inflationary input cost pressures continue to impact EBITDA margin with a 854bps contraction to a 16.4% level, 81bps lower than our estimate. Prices of key raw materials like Phenol and PNCB (collectively account for 40%)remained high during the quarter. However, management expects a sharp recovery in the margin from Q1 onwards as the prices of most raw materials are now stabilizing, and the company is passing on the price increase to the customers. For FY23, management guided a 20% EBITDA margin and targeted 22-23% in the medium term. Reported PAT came at INR 311mn (+12.7% YoY) compared to our expectation of INR.342mn due to muted operational performance. Management said FY23 Capex would be minimal (~INR600m-700m) and the focus on ongoing Capex execution and cash generation would continue. PAP ramp up is on track with a production of 300+ MT/ Month. For FY22, PAP volume was~1900 MT with a EBITDA margin between 10%-12%.

Management believes this margin can improve once the scaling up happens and can achieve 15% at 500 MT/ month; then once they move into continuous process, it can improve further. OAP & Pharma Intermediates projects both are on-track with no significant delays. OAP Phase 1 trial run has been successful, and both OAP and Pharma Intermediates plant expected to commence production from Q2FY23. Together, direct and deemed exports accounted for 14% of revenue in Q4FY22 and 16% in FY22.

Valuation and Outlook

VOL commands a leadership position in the domestic Chloro Phenols market and is the key producer of Para Nitro Aniline (PNA) in India. The company is fully integrated and has an import substitution opportunity persisting for products like Para Anisidine (PA) and Ortho Amino Phenol (OAP), while Para Amino Phenol (PAP), currently has limited availability domestically and is mainly imported. Considering the integrated business model, superior financial performance, healthy balance sheet with improving return ratios, we are optimistic about the company’s long-term growth prospects. We foresee 20.6% revenue CAGR, EBITDA expansion of 29.2% CAGR, and 37.6% growth in earnings over FY22-24E. We believe the stock to witness gradual re-rating on the back of a faster absorption of recently commissioned capacities coupled with a healthy product pipeline. We reiterate our BUY rating with a revised target price of INR 1,382 (earlier INR 1,648), valuing the stock at 18x P/E (in line with 5yr Avg P/E).