Exclusive report and long term buy call: VINATI ORGANICS

powerfulpicks exclusive report and long term buy call: As I have mentioned earlier, this year I have been extrenely bullish on the chemicals sector and the strong IIP numbers that came out on Monday is in line with my optimism on this sector. Vinati Organics is one of the most respected chemicals companies in India. It is a specialty chemical company producing organic intermediates, monomers and polymers and has over 320 employees working at present. 

VOL is the world's largest manufacturer of Isobutylbenzene (IBB), the basic raw material in manufacture of Ibuprofen, with a capacity of 14,000 TPA. Ibuprofen is a heavily used drug constituent in the pharma industry. Apart from IBB, NBB, Hexens, C10 SolventS are other aromatic chemicals produced by VOL for the manufacture of plastics, dyes and pharmaceutical products.

VOL is also the world's second largest manufacturer of 2-Acrylamido-2-Methyl Propane Sulfonic Acid, popularly known as ATBS, with a capacity of 12,000 TPA. ATBS is used in different industries.

VOL also manufactures industrial polymers, high purity MTBE and methanol. They have a factory at Mahad in Maharashtra and another one at Lote, which primarily manufactures ATBS. The last couple of years have been good to VOL and they are now planning a capacity expansion of Rs 120 crores, funding it through a combination of internal accruals, debt and equity. worldwide ATBS market has been growing at a robust pace and is expected to grow even more significantly in the coming years. The demand for ATBS has been growing at roughly 20% but VOL has been growing at more than 35% in the ATBS segment. VOL plans to increase the capacity from the present 10000 MT to 18000 MT as a part of its expansion plans.

Besides the capacity expansion of ATBS, VOL is also expanding its capacities of TBA and Vintreat Cap Polymers. TBA is going to be expanded from 300 MT to 1000 MT and Vintreat Cap Polymers is going to be expanded from 1000 MT to 3500 MT.

Apart from the above expansions, VOL also plans to launch 2 new products viz., Diacetone Acrylamide (DAAM) and Tertiary Octyl Acrylamide (TOA). Both these acrylamides are high value products and are used as homo polymers and co-polymers for manufacturing adhesives, coatings, resins, cosmetics etc.  The DAAM plant shall be of 1000 MT capacity and TOA shall be a 300 MT capacity plant.

To meet the increase in energy needs due to the expansions, VOL has planned to setup a captive 6MW co-generation (coal based) plant at its Lote facility which is expected to be operational by the end of FY12. The co-generation plant would help VOL to become energy self-sufficient and save nearly Rs 8.5 crores of annual energy cost.

VOL will thus shortly become the world's largest producer of ATBS and also generate  a revenue of Rs 170 crores from the new products.

If we consider FY11 projected sales and margins, VOL is currently sporting a P/E of arounf 8.8, which is quite attractive as per the valuations. The company's debt equity ratio is comfortably below 1. In December 2009, Vinati was ranked as the Top 10 Fastest Growing Companies in India in 2009.

One can buy Vinati Organics on dips around 80 for a 12 month target of 105 (+31%)