Vinati Organics Limited — Q1 FY24 earnings call

Call held 16 Aug 2023

Management summary

Vinati Organics faced a challenging Q1 FY24 characterized by significant inventory destocking in its flagship ATBS product, particularly within the Oil & Gas segment. Despite a 14% revenue contraction, the company maintained healthy EBITDA margins of 28%. Management remains focused on long-term growth through aggressive capacity expansions in ATBS and diversification into Antioxidants and niche specialty chemicals via VAPL and VOPL, targeting a 20-25% revenue growth in FY25.

Highlights

  • Revenue from operations stood at ₹430 crores, a 14% decline from ₹500 crores in Q1 FY23.

  • EBITDA declined 16% YoY to ₹109 crores, while PAT fell 18% YoY to ₹83 crores.

  • EBITDA margins remained resilient at 28% despite volume headwinds.

  • Revenue decline was driven 90% by lower volumes and only 10% by pricing corrections.

  • ATBS segment faced significant destocking, particularly from the Oil & Gas sector, expected to normalize by H2 FY24.

  • Veeral Additives (VAPL) is currently operating at 25% capacity due to transient demand pressure in the Antioxidant industry.

  • Total Capex of ₹260 crores for Veeral Organics (VOPL) is on track for commissioning by March 2024.

Key financials

  1. Revenue ₹430 Cr -14%YoY
  2. EBITDA ₹109 Cr -16.1%YoY
  3. PAT ₹83 Cr -17.8%YoY
  4. EBITDA Margin 28%

What they filed

Q1 FY27: revenue up 28.4%, net profit up 4.8% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue553 522 648 542 550 −1%531 +2%604 −7%696 +28%
EBITDA134 142 180 160 167 +25%157 +11%170 −6%170 +6%
Net profit104 94 123 104 115 +11%101 +7%124 +1%109 +5%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • Product Revenue Mix (Q1 FY24)
    40% ATBS Revenue Share20% IBB Revenue Share17% Butyl Phenols Revenue Share

Guidance & targets

Revenue

  • Niche product portfolio revenue Revenue · FY24 · High confidence ₹150-175 crores
    During FY2024 we expect these products to provide revenue in the range of 150 to 175 Crores.

    — Vinati Saraf Mutreja, MD & CEO

  • Veeral Additives (VAPL) Revenue Revenue · FY24 · Medium confidence ₹150 crores
    VAPL has started commercial production and sales and we expect the revenues in this year to be around 150 Crores.

    — Vinati Saraf Mutreja, MD & CEO

  • Total Revenue Potential (Butyl Phenols + Antioxidants) Revenue · at peak · Medium confidence ₹900-1000 crores
    Total revenue potential of butyl phenols plus antioxidants combined is about 900 Crores to 1000 Crores.

    — Vinati Saraf Mutreja, MD & CEO

  • Annual Sales Growth Revenue · FY25 · Medium confidence 20-25%
    Next year I would expect a sales growth of around 20% to 25% given the ATBS recovery as well as AO and butyl phenol.

    — Vinati Saraf Mutreja, MD & CEO

Capacity

  • ATBS Capacity Expansion Capacity · early next fiscal or end of FY2024 · High confidence 60,000 metric tons

    From 40,000 metric tons today

    ATBS expansion the new line which will take our capacity from 40000 to 60000 metric tons per annum... scheduled to become completed somewhere in early next fiscal or end of FY2024.

    — Vinati Saraf Mutreja, MD & CEO

Profitability

  • ROCE for new projects Profitability · ongoing · High confidence 20%
    when we are making a new investment was return on capital we expect and frankly we look at, we do projects at about 20% ROCE margins.

    — Vinati Saraf Mutreja, MD & CEO

Risks & concerns

  • Inventory Destocking

    medium

    ATBS destocking in the Oil & Gas sector is expected to continue until October 2023.

    Management acknowledged

  • Low Capacity Utilization in Antioxidants

    medium

    The AO plant is currently operating at only 25% capacity due to industry-wide demand pressure.

    Management acknowledged

  • Margin Dilution from New Products

    medium

    Butyl phenols and Antioxidants have lower EBITDA margins (15-20%) compared to the core business (28%+).

    Management acknowledged

  • NCLT Approval Delay

    low

    The amalgamation of Veeral Additives is pending NCLT approval, which has been repeatedly delayed.

    Analyst acknowledged

Areas of evasion (1)

  • Specific details on NCLT merger timeline (admitted lack of visibility).

Q&A highlights

3 direct
ATBS Slowdown and Destocking Direct
ATBS actually mostly the decline is from the oil and gas sector... they just built up too much inventory... starting April the next six months is just gone in destocking.

Explains that the revenue drop is a transient inventory issue rather than a structural demand loss, with recovery expected from October.

Asked by Surya Narayan Patra

VOPL Technology and Competitiveness Direct
One by phenol and when I had methanol and from phenol you make Anisole and from Anisole you make MEHQ and Guaiacol. This is the route that we will be following because this is the most cost-effective route.

Confirms the company's cost leadership strategy through backward integration and choosing the most efficient chemical pathway.

Asked by Abhijit Akella

Margin Guidance vs. ROCE Direct
margin as a percentage of sales is very irrelevant because prices also fluctuate... we look at it more from an ROE or ROCE perspective... we do projects at about 20% ROCE margins.

Management signals they prioritize capital efficiency (ROCE) over maintaining a fixed percentage margin, which is critical in a volatile raw material environment.

Asked by Lakshminarayanan

2 min read 5 chapters

Detailed narrative

ATBS Destocking and Recovery Timeline

The primary driver for the Q1 revenue decline was a significant destocking phase in the ATBS segment, particularly from Oil & Gas customers who overstocked in FY23 due to COVID-related freight concerns. Management noted that 90% of the revenue drop was volume-led. They expect this destocking to conclude by October 2023, with demand normalizing in the second half of FY24.

Strategic Expansion in Antioxidants (VAPL)

Veeral Additives (VAPL) has commenced commercial production but is currently operating at a low 25% utilization rate due to transient global demand pressure. Despite this, management remains bullish on the segment, citing double backward integration into butyl phenols and isobutylene as a key competitive advantage. They expect VAPL to contribute ₹150 crores in revenue in FY24, doubling in FY25.

Veeral Organics (VOPL) Capex and Niche Diversification

The company is investing ₹260 crores in VOPL to manufacture MEHQ, Guaiacol, and Iso Amylene derivatives. These plants are expected to be commissioned by March 2024. Vinati aims for a 25-30% initial market share in these products, leveraging a cost-effective phenol-based manufacturing route to compete with more expensive hydroquinone-based processes.

Sustainability and Energy Self-Sufficiency

Sustainability remains a core focus, with 55% of the company's electrical consumption last year met through renewable sources. Vinati recently commissioned 15 MW of solar power and is adding another 11 MW by September 2023. This initiative is designed to reduce energy dependence on conventional sources and lower the company's carbon footprint.

Financial Outlook and Capital Allocation

While new product lines like Butyl Phenols and Antioxidants carry lower EBITDA margins (15-20%) than the core business, management emphasizes a 20% ROCE target for all new investments. For FY24, they expect revenue to remain around ₹2000 crores, with a significant 20-25% growth leap projected for FY25 as new capacities and the ATBS segment recover.

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