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Vinati Organics: Margin expansion makes up for revenue decline - Views on News from Equitymaster
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  • Aug 10, 2015 - Vinati Organics: Margin expansion makes up for revenue decline

Vinati Organics: Margin expansion makes up for revenue decline
Aug 10, 2015

Vinati Organics announced its results for the quarter ended June 2015. During the quarter, the company's revenues declined by and profits grew by 11% YoY and 34% YoY respectively.

Performance summary
  • Net sales down by 22% YoY during the quarter. Decline is seemingly due to lower realisations in a deflationary environment.
  • Operating profits grow by 10% YoY as margins expand to 28.7% from 20.4% in same quarter last year.
  • Net profits rise by 29% YoY on the back of higher operating profits coupled with lower interest costs and an exceptional income of Rs 88 m pertaining to export duties of earlier years. Adjusting for same, profit before tax would have been higher by 8% YoY.

Financial snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 1,983 1,546 -22.0%
Expenditure 1,578 1,102 -30.2%
Operating profit (EBDITA) 405 444 9.6%
Operating profit margin (%) 20.4% 28.7%  
Other income 22 11 -47.6%
Interest 25 25 -2.7%
Depreciation 43 46 5.7%
Exceptional items - 88  
Profit before tax 358 473 32.1%
Tax 117 162 39.0%
Effective tax rate 32.6% 34.3%  
Profit after tax/(loss) 241 310 28.7%
Net profit margin (%) 12.2% 20.1%  
No. of shares (m) 49.4 51.6  
Fully diluted EPS (Rs)*   22.1  
P/E (x)*   23.2  
*Based on trailing 12-months earnings

What has driven performance quarter ended June 2015?
  • Similar the preceding quarter, Vinati Organics' (VOL) revenues declined during the quarter largely due to the base effect of high crude prices - given the company passes on lower price to its customers. While details regarding the sales volume have not been provided by the company, it would be safe to assume the margin expansion would have been a result of the same.

  • Operating profits (not adjusted for forex related adjustments) were up by 10% YoY during the quarter, while profits came in higher by profit before tax came in higher by 8% YoY (not including extraordinary income of Rs 88 m on account of export benefit related to earlier years). Margin expansion due to lower input costs.
What to expect?
At the current price of Rs 507, the stock of VOL is trading at a multiple of about 23.2 times its trailing twelve month earnings and about 16.3 times our FY17 estimates.

At the end of FY15, VOL's total debt stood reduced by 60% YoY to Rs 653 m, translating to a debt-equity ratio of 0.15 x as of FY15.

The company continues to be in an expansion phase, and has envisaged a capex of Rs 2 bn which will be spent by the end of 2016. As of FY15, the gross block stood at Rs 4.1 bn.

As reported by the management in its latest annual report, this amount will largely be spent towards:

  • New plant for producing Isobutyl AcetoPhenone (IBAP); This product is an intermediary between IBB and Ibuprofen

  • Capacity expansion of IB

  • New plant for producing para Tertiary Butyl Toluene / para Tertiary Butyl Benzoic Acid (PTBT/PTBBA); these products are IB based derivatives and find their application in perfumery, personal care and as polymer additives

  • New plant for producing Tertiary Butyl Amine (TB Amine), which is used in the rubber and pharmaceutical industry.

  • Couple of export oriented custom synthesis products

  • Setting up of 5 MW Co-generation plant at the Company's Lote facility
The company is largely looking to fund this expansion through its internal accruals as can be gauged by the fact that debt has been coming down. Funding the same may not really be a problem considering cash flow from operations averaged to Rs 1.2 bn per annum over the past two years.

We maintain our view of investors putting in 50% of the intended amount in the stock at current prices. Investors who have not bought until now can put 50% of the money they intend to put into the stock at current levels, while those that have already invested 50% of the money should not buy more of the same at the current juncture. It would be advisable to wait to buy more of it as and when the stock moves closer to the best buy price.

Please note that for the purpose of risk mitigation, investors are requested not to have more than 5% to 7% exposure to a particular stock in their portfolio.

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