HDFC Securities has a buy call on Vinati Organics Ltd. with a target price of Rs 1185. The current market price of Vinati Organics Ltd. is Rs 953. Time period given by the brokerage is a year when Vinati Organics Ltd. price can reach defined target. Vinati Organics Ltd., incorporated in 1989, is a midcap company with a market cap of Rs 5011.65 crore.
Investment rationale by HDFC Securities
Vinati Organics (VO IN) is a diversified chemicals manufacturer with an impeccable product selection history, superior return ratios (FY18 RoE/RoIC: 19.5/25.6%), strong environmental practices and a robust earnings trajectory. VO is a leader in its key products like 2-Acrylamido-2-Methylpropane Sulfonic Acid (ATBS-45% global share), Iso Butyl Benzene (IBB-65% global share) & Iso Butylene(IB-70% domestic share) with technology tie-ups with leading national institutes. An immense option value from Para Amino Phenol (PAP) of Rs 7.0bn (~95% of its FY18 top-line) makes Vinati Organics a business to own. Despite strong capex visibility (of ~Rs 7.5bn), Vinati Organics executed a buy-back of Rs 240mn in Oct-17, this exudes managements confidence in generating strong cash flows.
Exit of Lubrizol in 4QFY18 (a global ATBS supplier) and likely addition of BASFs Ibuprofen plant in USA (link) aiding IBB sales add to near term triggers. Though valuations looked stretched, 28.9/23.5x FY19/FY20 EPS; we believe VO is likely to trade at a premium to peers due to a large option value (from PAP) and strong cash generation (annual OCF ~Rs 1.2-1.6 bn from FY19-21). We value VO at 25x Jun-20 EPS and resume coverage with a TP of Rs 1,185.
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