A few days ago, we saw the illuminating report by Dia Mirza on how specialty chemical stocks are the new favourites amongst savvy investors owing to the slowdown in China and the shift of contract manufacturing to India from European countries. Dia interviewed several luminaries, all of whom are unanimous in their opinion that the future is very bright for specialty chemical stocks.
We also saw how all of our favourite stock wizards such as Dolly Khanna, Vijay Kedia, Ashish Kacholia and Anil Kumar Goel have commandeered large volumes of specialty chemical stocks like Dai-Ichi Karkaria, Meghmani Organics, Sudarshan Chemicals, Navin Fluorine, Thirumalai Chemicals etc, etc and are making merry at the huge gains that are effortlessly flowing into their coffers.
One stock that appears to have escaped the attention of the wizards is Vinati Organics.
Vinati Organics, a small-cap with a market capitalisation of only Rs. 2,370 crore, has all the characteristics that discerning investors look for in a stock. It has high promoter holding (72.31%), management with integrity, high RoE (31%), strong product line up, market leadership, low debt, reasonable valuations etc.
In fact, the figures of the past three and five years are very impressive with a healthy growth in revenue and EPS and high operating margins, RoNW and RoEs.
|Vinati Organics Annual Ratios (%)|
|Return on Networth||31.12||31.48||34.08|
|Return on Investment||37.75||31.96||32.70|
So, when Jwalamukhi a.k.a. Westbridge Capital dumped its entire holding of 10,42,900 shares in an abrupt move on 13th August 2014, a lot of eyebrows were raised.
However, today, with the benefit of hindsight, we can compliment the wizards of Jwalamukhi. They rightly figured out that as one of Vinati Organics’ major products is an “Enhanced Oil Recovery” (EOR) chemical, the slump in crude oil prices would reduce the demand for the EOR and result in a decrease in volume for the Company. They also realized that because crude oil constitutes a raw material for other products, the selling price of the other products would be reduced, resulting in a further decline in revenue.
Now that there has been a steep correction in the stock price, analysts are once again warming up to Vinati Organics.
Motilal Oswal has issued an initiating coverage report recommending a buy on the basis that:
“As a diversified specialty chemicals company, VOL is a play on three key emerging trends: (1) Rising demand for specialty chemicals in India (15% CAGR FY15-FY20E), (2) Migration of global chemical manufacturing from China to India (Asia to have 70% production share by 2030), (3) established product positioning & lowest cost producer. We value VOL at 18x FY 18E EPS of INR 33.1 with a target price of INR 595, which is an upside of 32% from CMP.”
It is notable that Motilal Oswal issued the report in December 2015 when the stock was quoting at Rs. 450. Today, the stock is at about the same price.
Philip Capital has expressed the same view in its initiating coverage report of March 2016:
“Stronger and wider moat in ATBS
Vinati Organics is a global leader of 2‐acrylamido 2‐methylpropanesulfonic acid (ATBS, 46% of total sales) in the world with a capacity of 26,000TPA and ~45% market share. Global scale and backward integration in ATBS (it is the only integrated player in the world) has earned it cost/price leadership. Price leadership is evident – despite being a crude derivative, VO’s ATBS prices remained stable over the 70% correction in crude prices in the last two years. VO’s cost/price leadership puts up an entry barrier for others. It reported sales/volumes CAGR of 28%/23% in ATBS over FY10‐15 and we estimate 15% sales CAGR over FY16‐18 to Rs 3.35bn, led by steady progress in construction chemicals, paints, and water‐treatment chemicals.”
Nirmal Bang has echoed similar sentiments in its research report of April 2016:
“Unique Story In Indian Specialty Chemical Space
Vinati Organics (VOL) is present in niche specialty chemicals business with global leadership status, strong client base, high technology barriers, excellent management with a distinguished track record, making it a compelling growth story in Indian specialty chemicals industry. VOL is a global leader in isobutyl benzene (IBB) and acrylamido tertiary-butyl sulfonic (ATBS) with a market share of 65% and 45%, respectively, and a domestic leader in isobutylene (IB) with a 70% market share. After posting robust growth in the past, VOL is set to move into its next growth orbit. We believe the growth levers will come from: 1) Capacity expansion with launch of new products, and 2) Demand pick up for ATBS. We expect VOL’s margins to stay at an elevated level on account of: 1) Increased sales contribution from new products having a margin profile better than IBB and IB, 2) Continuous synergestic integration of new products keeping VOL a cost leader 3) Cost savings from co-generation plant, and 4) Low raw material prices on account of the decline in global crude oil prices.”
Karvy has expressed a similar view about the prospects of Vinati Organics.
We must also note that Ayaz Motiwala Of Nivalis Partners had recommended Vinati Organics on the basis that it has a “unique competitive advantage, high quality & consistent, numbers, high ROC, reasonable valuations”.
It is also significant to note that the Company intends to buyback stock with a view to increasing the promoters’ stake from 72% to 75%. A buy-back of stock is usually a positive factor because it enhances the EPS and indicates that the stock is undervalued in the management’s opinion.
It is also worth noting that Vinati Organics is quoting at a valuation that is lower than some of its peers. While Navin Fluorine and Hikal are commanding valuations of 31x and 23x respectively, Vinati is available at a valuation of only 18x even though its net margin is higher at 20% and RoE is higher at 31%.
|Net Margin (%)||RoE (%)||Price to Book||Price to Earnings|
|Navin Fluorine International||1,961.37||636.24||86.47||13.08||10.19||3.04||23.49|
So, if you are scouting for a specialty chemicals stock to adorn your portfolio, you have to give Vinati Organics serious consideration!