Vinati Organics 27Sep Final

7/30/2019 Vinati Organics 27Sep Final

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C O M P A N Y R E P O R T

India

27 Sep 2011Vinati Organics Rs 67.5

S e c t o r : C h e m i c a l C a r v i n g N i c h e s o f G l o b a l - sc a l e

o...

BSE Sensex 16,524

Nifty 4,971

52 week high (Rs) 97.4

52 week low (Rs) 61.1

Bloomberg VO:IN

NSE VINATIORGA

BSE 524200

Equity Shares (m) 49.37

Face Value (Rs) 2

Market Cap (Rs mn) 3335

Share Price Performance(%) Vinati Sensex

1 week -2.53 -3.36

1 month 6.38 4.26

3 month -6.31 -10.26

6 month -3.22 -12.18

1 year -14.28 -17.86

Shareholding Pattern (Jun11)

Promoters 74.99

FIIs -

DII 0.05

Bodies Corporates 1.73

Others 24.96

Vinati Organics (Vinati) is a specialty chemical company with a truly differentiated

business, specializing in growing niche products into global scale. Having already

attained global leadership in its two key products IBB, and ATBS, Vinati is now

rapidly diversifying its product mix, while keeping its business model intact. While

this transition is on, the company has also delivered standout numbers in terms of

sales growth, profitability and capital efficiency.

Diversifying sales mix: While IBB contributed as much as 70% of sales in FY07, by

FY13, its share will be down to 18-20%. The single largest contributor to sales would

be ATBS, which has the potential to grow for several years at double digit rates,

driven by new applications and growth in existing applications.

Growing strongly: Its performance of FY07-11 has been standout. Sales have grown

at over 40% CAGR. EBITDA margin has expanded to over 20%. ROE and ROCEare at 43% and 34% respectively. The current product mix has enough ammunition to

drive revenue growth at more than 30% over FY11-13. Vinati also has a robust

product pipeline, which could drive sales beyond FY13.

Differentiated business model: Vinatis global leadership in its key products and

high margins are not by accident. The company has a clear focus on entering only

niche chemical products, where technology is not easily available. The company has

the ability to source the right lab-scale technology and then scale it up to commercial

levels. It appears this is a skill set its peers cannot easily replicate.

Reducing risk: The risk profile of the company reduces with each year. The

dependence on IBB is less. Cash profits crossed Rs 520mn in FY11, giving Vinatigreater internal resources with which to plan expansion.

Vinati is a good stock for investors with a medium to long term holding horizon.

The stock can outperform due to both its superior growth rates, and likely re-

rating, as investors give weight to the company differentiated business model.

Our price target for March13 is Rs 120, based on PE of 8x.

FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E

Revenue 1463 1905 2318 3167 4226 5867

Revenue growth (%) 78.3 30.2 21.7 36.7 33.4 38.9

EBITDA 253 340 527 640 823 1207

EBITDA margin (%) 17.3 17.8 22.7 20.2 19.5 20.6

PAT 152 251 400 520 530 757

ROE(%) 41.9 46.7 48.8 42.8 31.2 32.3

ROCE(%) 33.8 31.9 34.3 30.0 25.6 27.6

P/E (x) 4.7 2.8 8.8 6.6 6.3 4.4

EV/EBITDA (x) 4.1 3.5 7.9 6.4 5.0 3.1

(Rs mn unless stated)


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Company Report: Vinati Organics 27 Sep11

Four-S Research 2

Investment Rationale

Business with a moat

In business, I look for economic castles protected by unbreachable moats.

-Warren Buffett

Vinati is amongst

top global

producers in its

product lines,

helped by

technology

leadership

You dont normally associate an SME business with ability to break into

exiting global business bastions and achieve with global leadership. SMEs are

generally me-too players. There are dozens of such listed me-too companies in

practically all sectors - IT, pharma, textiles, construction, real estate, chemicals

etc.

Specialty chemicals industry is also not without its fair share of me-toos. There

are several producers of textiles chemicals, leather chemicals, construction

chemicals, plastic additives all of which you may classify under speciality

chemicals.

Vinati is different. This is not by accident; this is by careful thought, planning

and rigorous management discipline. Very early on, the Vinati management

decided the criteria on which it would grow: look for products where it could

achieve global leadership, where margins were good, and technology hard to

come by. As you can guess, some of these factors are inter-related. Margins

wouldnt have stay good for too long, if technology was easily copyable. With

this background, now look at Vinatis product folio.

IBB: purer than thou

Leading global

producer of IBB,

technology scaled

up in-house

Vinatis first product was Isobutylbenzene (IBB), where it is today the globalleader. It has about 60-65% of the global market. Vinati has maintained its

leadership in this market for quite some time now. Check some features of this

business. Vinati got the basic technology done from a French lab, and figured

out on its own how to scale it up to commercial levels. And now, Vinati can

make this product with a purity level better than anyone else in the world. The

result: a secure market, most leading global buyers are its customers. There

you have it: a business with a moat.

ATBS: history repeats itself

Second largest

global producer ofATBS

The success with 2-Acrylamido 2-methylpropanesulfonic Acid (ATBS) proved

Isobutylbenzene (IBB) was not an accident.. Here again, Vinati is now thelargest producer in the world. There is no competition in India, or anywhere

else in the developing world, and no new capacities are coming up in the

developed world.

We think Vinati has provided ample proof that it can build globally relevant

businesses, with a technology edge, thereby deriving and maintaining strong

margins.


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Four-S Research 3

Aggressive growth performance

The numbers Vinati has delivered in the last few years are what any listed

company would be proud of. Revenues have grown at over 40%, EBITA hasgrown at 78% and PAT at 89%.

On a strong growth

path in recent years

Impressive margin performance

Vinatis strong growth in top line has come with strong profitability

performance. The latter is a clear reflection of the success of its management

philosophy of building businesses with superior economic characteristics

Margins haveimproved, a

testimony to its

technological

leadership

Enough drivers for future growth

ATBS market stillgrowing, new

products lined up to

There are more than enough drivers to push the future growth for Vinati

Organics. Carefully calibrated capex strategy to expand the production

capabilities will drive the top line for coming years. Installed capacity is

expected to reach from current levels of 38,500TPA to 46,000TPA by this year

2007 2008 2009 2010 2011

PAT 41 152 251 400 520

EBITDA 86 253 340 527 640

Revenue 820 1,463 1,905 2,318 3,167

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Rsmn

Growth in Revenue, EBITDA and PAT historically

0%

5%

10%

15%

20%

25%

FY'07 FY'08 FY'09 FY'10 FY'11

Consistently bettering margins

EBITDA margin

PAT margin


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Four-S Research 4

drive continuing

growth

end and 60,000TPA by FY13. Being world leaders in the major segments it

operates in and by being preferred vendor of its major customers, Vinati will

continue to enjoy high demand from its customers. The company is also

looking to venture into some high technology, high return special chemical

products; its R&D team expects breakthrough in a few areas it is working on.

The company is banking on similar strategy to build capacities, like it did withIBB or ATBS, once these technologies become commercially feasible.

Strong balance sheet

Conservative financials

Vinati has always

maintained a strong

balance sheet

The prudence on the P&L side what to produce and how much also extends

to the balance sheet side. Vinati has always had conservative financials, and it

continues to do so even now. Its balance sheet ratios are much better than peer

group.

For example, Vinati ended FY11 with a debt equity ratio is 0.5, presenting

eminent possibility to management for financial leverage. Strong managementof balance sheet numbers has ensured good capital efficiency. Vinatis ROE

and ROCE ratios at 43% and 34% respectively are also substantially better

than most competition.

ECB, FCCB combo at good terms

Obtained loan from

IFC at favourable

terms

An interesting point is the funding route it took in FY11, as part of its last

round of expansion. The company raised US$ 16mn from IFC through FCCB

and ECB route. Out of this only US$5mn FCCBs are issued by company as of

now to IFC with conversion price of Rs 100 per equity share. This funding is

available to Vinati Organics at generous rate of around 3-4%. Although Vinati

Organics has not used or taken disbursement of this fund, this shows VinatiOrganics strong financial condition.

Business is derisking

The companys

expanding size will

reduce many of the

traditional SME

risks

One reason why SMEs get low discounting from the market is the higher

business risk. You can break down this risk into many parts:

Financial: ability to service debt, ability to withstand sudden changesin cash flows, ability to finance growth etc

Operational: ability to sustain margins, ability to negotiate withsuppliers.

HR: ability to attract and retain talentAnd so on. You could add a few more bullets here. As companies grow, this

risk reduces.

Vinati, we believe, is rapidly crossing important milestones in this derisking

process. In its current lines of business, Vinati has very little demand side risk.

It has several key global chemical majors as its customers, many of whom are

relationships of several years.

Financial risk for the current round of expansion is well covered. This round of


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Four-S Research 5

capacity expansion will take Vinati to a revenue size of Rs 5.51bn, and a net

profit size of Rs 757mn. This makes it financially highly secure.

Business Portfolio Risk

Sales mix has

diversified

considerably,

reducing

dependence on IBB,

a mature product

Lets take an easy one first. In the last few years, the sales mix has changed

sharply. Whereas a few years ago, Vinati was heavily dependent on IBB, now

there are more products in its product line. So while you could say earlier:

What if the IBB market collapses? What if a new producer enters the market?

(while none of this happened) The risk from such events is much less now.

The product mix is diversifying; the company is less dependent on any one

molecule.

Whats more, ATBS, the biggest revenue earner now, is still in early stage of

its product life cycle. New applications are emerging, and the management

believes there are more as yet undiscovered applications. In other words,

ATBS market can be much bigger.

This is not all. The management is working on several new products. Thebusiness mix could look very different 3-5 years down the line. Management

already has announced introduction of 4 new products in portfolio by the mid-

end of FY13 with overall capacity of 15050TPA. These could yield a sales of

around Rs 125 crore.

New Products Capacity (TPA)

DAAM 1000HP-MTBE 6000DIB 5000DEA 3050

Growth risk

Strong cash flows

give Vinati an

enhanced ability to

finance growth

Will the company be able to finance growth? This is a critical question you

can ask about many SMEs. With Vinati, given its superior margins and strong

cash flow, this issue is rapidly becoming less important.

For FY11, its operating cash flow was Rs 313mn. At this number it becomes

far easier for Vinati to expand, compared to say in FY07, when the operating

cash flow was Rs 15.6mn.

In other words, Vinati is reaching a sort of critical mass. From here on, the

growth risk ability to finance growth reduces significantly.

Attractive Valuations

There is little

downside risk at

current valuations.

We expect 15%

returns based on

FY12 numbers

Vinati, we believe, is a good bargain at current levels. The forward PE has

drifted downward over the last few months, indicating the market is not quite

factoring in the growth likely to happen at Vinati.

Our price target of Rs 120 for March13 is based at a PE of 8x. We believe

given superior business model of the company, its valuations would trend up

over a period of time.


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Four-S Research 7

Peer Benchmarking

The peer set: midcap speciality Chemical companies

Vinati is a speciality

chemical company

With a market capitalisation of around Rs 3.35bn, Vinati is a midcap speciality

chemical company. The table below gives key headline data for the midcap

chemical space. As can be seen, while Vinati is smaller than the median

comparable in this list on the basis of sales figures, however, in terms of

profitability of the business, whether via EBITDA or PAT, Vinati scores way

better compared to almost all peers.

The wide dichotomy in business parameters like operating margins is

explained by the fact that several of the peers in chemical space are more into

commodity chemicals, rather than truly speciality chemicals. Himadri and

Clariant, and Balaji to some extent, are the companies which come closest toVinati in terms of profitability of the business.

Himadri Chemicals is a leading manufacturer in its major products: coal tar by

products and derivatives. Clariant is a global chemical giant with strong

technological competency. Balaji Amines manufactures a class of chemicals

called Aliphatic Amines. Its story is similar: amine technology is a closely

guarded process with only a few handful companies having access to such

technology. Balaji developed its technology indigenously and has improved it

further over a period of time.

CompanyMarket

Cap EV Sales

Sales 3 yr

CAGR% EBITDA

EBITAMargin (%) PAT

PAT 3 yr

CAGR%

Aarti Industries 3,602 8,759 14,839 1.1 1,979 (10.7) 815 (3.2)

Balaji Amines 1,110 2,674 3,571 19.1 629 31.5 266 32.7

Chembond 1,208 1,332 2,068 20.6 254 50.5 135 29.7

Clariant 19,422 19,224 9,747 2.7 1,585 21.8 1,124 29.5

Deepak Nitrite 1,777 2,334 6,722 8.4 570 2.7 258 (8.6)

Himadri Chemicals 18,824 26,237 7,001 36.0 1926 49.5 1,144 56.0

Shasun Chemicals 3,274 6,447 8,397 6.0 762 NA 266 NA

Thirumalai Chemicals 742 3,131 7,685 27.8 461 NA 184 NA

Average 6,245 8,767 7,504 15.2 1,021 24.22 524 22.7

Vinati 3,335 4,085 3,167 28.9 640 37.2 520 43.8

(Rs mn, unless specified)

Comparing key P&L items

Note the CAGRs

The key factor to note in the above table is the 3 year CAGR ratios for sales,

EBITDA and net profit. On each of those counts, Vinati fares on par or better

than peer averages. If compared with better valued peers like Himadri


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Four-S Research 8

Sales and net

profits have grown

at 30-40%.

Chemicals and Clariant, Vinati Organics performs exceedingly better than

Clariant and comes close to performance of Himadri Chemicals on all the

fronts.

Vinati has maintained these outstanding CAGRs for last three years resulting

from strategy of building up the scale for its niche products once commercial

technology is developed which is not easy to imitate. Vinati has expanded its

ATBS plant from 5000TPA in 2009 to 12000TPA in 2011 resulting in better

growth in sales and also in EBITDA and PAT.

While the growth rate will slow down somewhat over the next 1-2 years, we

still expect growth of more than 15% in revenues and earnings. Similar growth

rate is expected in further future with new products coming into picture in full

force.

Profitability: Impressive past margins with confident outlook

Vinatis operating

margin is much

better than peers

Vinati Organics has achieved impressive margins historically, achieved

consistently year by year. Vinati achieved 22% EBITDA margin and 16% PATmargin for FY11 which is well above their industry peers posting 13%

EBITDA margin and 9% PAT margin.

Vinati has improved its margin level steadily from EBITDA 10.5% in FY07

and 4.9% of PAT margin to margins of current levels signifying improving

business mix and operational excellence. This consistent improvement in

margins for Vinati is result of companys strategy to develop high margin

product and build capacity for the same. This is evident from current product

portfolio with ATBS contributing to 55% of its top line.

While compared to Himadri Chemicals and Clariant, Vinati scores better than

Clariant on PAT and EBITDA margins and is at par with Himadri Chemicals

on PAT margin showcasing that Vinati Organics profitability performance is

at par with the best in its peers.

FY11 Margin (%)

Company EBIDTA PAT

Aarti Industries 13.3 5.5

Balaji Amines 17.6 7.5

Chembond 12.3 6.5

Clariant 16.3 11.5

Deepak Nitrite 8.5 3.8

Himadri Chemicals 27.5 16.3Shasun Chemicals 9.1 3.2

Thirumalai Chemicals 6.0 2.4

Average 13.8 7.1%

Vinati 20.2 16.4


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Four-S Research 9

Balance sheet ratios

Much better on leverage compared to peers

Debt Equity Interest CoverageCompany FY10 FY11 FY10 FY11

Aarti Industries 1.0 1.0 2.4 2.6

Balaji Amines 1.1 1.5 3.8 4.0

Chembond 0.4 0.7 7.2 9.9

Clariant 0.0 0.0 141.0 610.4

Deepak Nitrite 0.4 0.3 3.8 7.1

Himadri Chemicals 0.6 1.0 3.7 5.4

Shasun Chemicals 2.8 3.9 -0.8 1.2

Thirumalai Chemicals 2.3 2.0 2.1 1.8

Average 1.1 1.3 3.2* 4.6*

Vinati0.6 0.5 10.5 12.3

*excluding Clariant ratios

Only Clariant,

which is an MNC,

has better balance

sheet ratios than

Vinati

Chemical industry is more capex driven with organizations trying to gain scale

to improve operating margin putting strain on their balance sheet. But

compared to industry peers and industry averages, Vinati Organics has much

better debt-equity ratio and interest coverage ratio signifying solid financial

position. D/E and interest coverage ratio better than even Himadri Chemicals

denotes Vinati Organics prudent conduct while considering debt option for

capex.

Vinati has also displayed remarkable sagacity in choosing which debt to take

and from where. In January11, Vinati got approval for a funding of $16mnfrom IFC in ECB and FCCB at approximately 3% interest rate. The exchange

rate risk is naturally hedged, given exports that Vinati does. Also, the IFC loan

is certainly good for its profile value.

Better liquidity ratios

Vinati has better liquidity ratio as compared to almost all of its peers for both

current ratio and also cash ratio. This denotes Vinati has much better ability to

meet both its short term and long term obligations compared to most of its

peers, putting company at in better position to leverage its financials.

Vinati Organics demeanour to keep its liabilities in check while keeping eye

on its assets is visible from its consistent better current ratio for last few years.Among its peers only Himadri Chemicals has scored better than Vinati

Organics here. Whereas Vinati Organics has ratios much higher than peer

average.


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Four-S Research 10

Current Ratio Cash RatioCompany FY10 FY11 FY10 FY11

Aarti Industries 2.8 3.0 0.0 0.0Balaji Amines 3.2 3.5 0.1 0.1

Chembond 2.2 2.5 0.1 0.3Clariant 1.3 1.0 0.0 0.1Deepak Nitrite 2.5 2.4 0.1 0.1Himadri Chemicals 6.0 6.7 0.2 0.4Shasun Chemicals 1.9 1.7 0.0 0.1


Average 2.7 2.8 0.1 0.1

Vinati 4.8 4.2 0.1 0.1

Better capital efficiency

Exceptional ROE

and ROCE

Higher profitability due to efficient management and impressive product

portfolio is evident from much higher ROE and ROCE ratio than almost all ofits peers. Only Clariant, which has global leadership in several areas, has

comparable or better numbers. This signifies Vinati Organics management has

managed to take correct decisions to invest money in right technology and

products.

ROE (%) ROCE (%)

Company FY10 FY11 FY10 FY11

Aarti Industries 19.9 16.9 14.5 15.3

Balaji Amines 25.9 26.5 20.3 23.4

Chembond 27.2 24.1 32.2 29.5

Clariant 32.5 31.5 42.1 39.5Deepak Nitrite 9.2 11.3 10.7 12.8

Himadri Chemicals 19.2 14.5 11.1 11.2

Shasun Chemicals -20 26.5 -5.7 9.0


Average 20.0 21.1 17.5 18.8

Vinati 48.8 42.8 34.3 30.0


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Four-S Research 11

Comparing Peer Valuation

Company

CMP(`Rs) Market Cap EV P/E (x) EV/EBIDTA (x) D/E (x)

Aarti Industries 47.0 3,602 8,759 4.4 4.4 1.0

Balaji Amines 34.3 1,110 2,674 4.2 4.3 1.5

Chembond 190.0 1,208 1,332 8.9 5.2 0.7

Clariant 728.5 19,422 19,224 17.3 12.1 0.0

Deepak Nitrite 170.0 1,777 2,334 6.9 4.1 0.3

Himadri Chemicals 48.8 18,824 26,237 16.5 13.6 1.0

Shasun Chemicals 67.5 3,274 6,447 12.3 8.5 3.9

Thirumalai Chemicals 72.5 742 3,131 4.0 6.8 2.0

Average 6,245 8,767 9.3 7.4 1.3

Vinati 67.6 3,335 4,085 6.4 6.4 0.5

(Rs mn unless otherwise specified)

Vinati deserves a

premium over peer

group in valuations

Vinati Organics is currently quoting at a discount to peer group averages on

both P/E and EV/EBITDA ratios. We believe Vinati Organics should quote at a

premium to peer averages given its superior management quality, strong

leadership in its product lines, technological edge, better capital efficiency and

better balance sheet quality.

The valuation numbers reflected in the above table which place Vinati

valuations in line with, or marginally lower than its peers, do not quite reflect

the business fundamentals.


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Four-S Research 12

Likely growth not captured

Given expanding

size, strong

profitable growth

rate, Vinatis

valuation is set to

expand

We believe Vinati

valuations will

expand if it shows

P&L growth in

FY12

Vinati has consistently traded above 5x forward PE barring a brief period in

2008 when the global financial crisis pulled every stock down. The stock also

enjoyed a valuation of above 7x in FY10 and FY11.

Valuations have drifted downward in recent months, an indication that the

market perhaps doubts the companys ability to maintain strong growth. There

is certainly a flat profit outlook for FY12, but Vinati should return to growth in

FY13 as new products enter production. There has also been a marginal delay

in capacity build up at the ATBS unit, by 4Q FY12, ATBS will be at full

capacity as well.

We believe the market will bid up the valuations once its sees continued

growth coming in from ATBS and the couple of niche compounds the

company has recently introduced.

While we think Vinati deserves a premium valuation as stated above, we are

basic our price target on Vinati matching peer averages by FY13.

At a PE of 8x, we expect a price of Rs 120 by March 2013. This corresponds to

an EV/EBITDA of just over 5x, which is still less than peer averages.

Key Valuation Ratios

FY'09 FY'10 FY'11 FY'12 FY'13E

P/E Ratio (x) 2.8 8.9 6. 6.3 4.

EV/EBITDA (x) 3.5 7.9 6. 5.0 3.1

EV/Sales 0.6 1.8 1.3 1.0 0.6

Dividend Yield (%) 3.5 1.4 1.9 2.0 2.8

0

20

40

60

80

100

120

16 Sep-07 16-Sep-08 16-Sep-09 16-Sep-10 16-Sep-

Rs

1yr Fwd pe band chart

9x

7x

5x

3x

Valuation: Price Target


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Four-S Research 13

Vinati - Business model

Vinati is highly

focussed on

profitable niches

Vinati Organics Limited was established in 1989. It is focused on

manufacturing speciality chemicals with the help of best in class technology

and efficient manufacturing process.

Within the field of speciality chemicals also, Vinati has been very choosy in

what to do. It has consistently worked to find niches where it can build viable

technologies and build global leadership. This has worked very well till date

for Vinati Organics. It has managed to maintain strong focus on R&D, has

found and captures niches, and overall has managed to grow revenues while

maintaining good profitability.

Focus on Higher Margin Products

Has consciously

chosen high margin

chemicals

Vinati has always concentrated on higher margin products and historically has

managed to maintain better margins than other peers. Vinati started with IBB

in 1992, then developed capability to manufacture higher margin ATBS which

pushed its overall margins to the current level. With an aim to expand margins

further, Vinati is expanding current ATBS capacity and also has plans to

manufacture other higher margins products like Diacetone Acrylamide

(DAAM), High Purity Methyl Tert Butyl Ether (HP MTBE) and Di-Ethyl

Aniline (DEA) in near future.

Vertical

integration

Vinati has also integrated backward for further improving margins by setting

up an IB plant. IB is major component in ATBS production and a major cost

factor too. With in-house IB capacity Vinati looks to better margins for ATBS

by at least 2-3%. Also new DIB plant will work as further forward integration

for IB plant utilising surplus IB plant capacity than current ATBS

requirement.

Positioned for continuing growth

ATBS volumes will

expand into FY13

New products such

as HP-MTBE,

DEA, DIB to be

added

The company is undertaking major capacity expansion projects currently

where it would be expanding ATBS product line from current 12000TPA to18000TPA by Dec 2011. ATBS is one of the companys higher margin

product. Vinati has already done backward integration for ATBS by setting up

an IB plant which is major component in ATBS.

Vinati Organics is also setting up a facility to start production for new high

margin products: High Purity Methyl Tert Butyl Ether (HP-MTBE) 6000TPA,

Di-Ethyl Aniline (DEA) 3050TPA, and Di-IsoButylene (DIB) 5000TPA along

with capacity expansion for: N-Tertiary Butyl Acrylamide (TBA) and

Vinatis Business


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Four-S Research 14

Diacetone Acrylamide (DAAM). The company will have a capacity of

1000TPA for DAAM and 1000TPA for TBA by this Dec 2011.

This expansion plans show the companys craving for growth and confidence

in their capability to venture into newer products.

Aggressive Growth in Production Capacities

All fig in TPA

Products ATBS: Key to growth

ATBS is the new

flagship product

2-Acrylamido 2-methylpropanesulfonic Acid (ATBS) has become the flagship

product from Vinati Organics. Vinati Organics is second largest producer of

ATBS in the world after Lubrizol of USA. Vinati started production of ATBS

in 2002 with a plant at Lote, in Maharashtra, with capacity of 1000TPA. The

company was attracted into ATBS production not only to diversify its product

line, but also by the high margin from the segment. With growing demand for

ATBS across globe from customers of various industries like oil industry to

water treatment to acrylic fiber and technology barrier for new entrants to enter

in this market Vinati Organics has strike the right note here. These factors will

help Vinati Organics to maintain higher margins for ATBS. Vinati since then

has progressively built-up the capacity for ATBS, making it the biggest

contributor to top line by 2011. The company currently has a capacity

12000TPA for ATBS, with plans to expand it to 18000TPA by Dec 2011.


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Four-S Research 15

0

5000

10000

15000

20000

2002 2006 2009 2011 2012E

ATBS Capacity

All Figures in TPA

ATBS capacity set

to expand to 18,000

tons by Dec11

ATBS: Limited supply, increasing market demand

Entry in ATBS market has done wonders for Vinati Organics. ATBS market is

not only growing rapidly, driven by its use in various new and emergingapplications, but supply of ATBS is stagnant. Most competitors have stagnant

capacity and no known plans for expansion. This gives Vinati Organics ample

opportunity to capture the growing ATBS market.

ATBS growth is

getting driven by its

use in new

applications.

High oil prices will

benefit ATBS

demand

ATBS : Wide applications with many unexploited opportunities

Acrylic fibre: ATBS is widely used in acrylic fibre industry where it is applied

on the fibre before fibre dying process.

Oil Fields: ATBS is used in oil fields in deep-drilling situations, where

ATBSs characteristics of high stability at higher temperature and higher

salinity help. With global oil prices consistently going up oil companies are

getting more convinced to go deeper to dig out oil to improve recovery factor

of their oil wells. This has opened up a large market for ATBS applications as

ATBSs higher cost will be rationalised by ever increasing oil prices.

Water Treatment: ATBS is used effectively in Boiler plants and Cooling

Tower as corrosion inhibitor for silt control. Due to its special characteristics

ATBS is used to improve corrosion resistance and as a de-scaling agent in

-

500

1,000

1,500

2,000

2,500

3,000

3,500

0%

10%

20%

30%

40%

50%

60%

FY'07 FY'08 FY'09 FY'10 FY'11

ATBS % contribution to topline

ATBS

Total

All Figures in Rs mn


16/30


Four-S Research 16

boilers. In cooling towers again, ATBS is used as descaling agent.

Other: ATBS is also used as by many industries like paper industry, mining

industry as a flocculent agent. ATBS is also used in personal care products like

shampoos etc as surfactant. It is also used in high rising tower/building

construction sites for other uses.

Unexploited opportunities: Vinati maintains the view that many unexploited

application exists for ATBS which will increase ATBS market exponentially

in near future.

Products Isobutyl benzene (IBB): Market Leaders with stable market

Almost 2/3rds

share of the global

market in IBB

Vinati Organics is the largest manufacturers of Isobutyl benzene (IBB) in the

world with 14000TPA capacity and annual production of 12000 tonnes. Vinati

holds almost 60-65% of total IBB market worldwide, in a worldwide market of

20,000TPA.

IBB is the first specialty chemical product from Vinati Organics, which they

started producing in year 1992 with capacity of 1200TPA. Periodic capacityexpansions driven by strong export growth has led the company to become the

worlds largest manufacturer of IBB with a strong customer base across the

world.

IBB tech not freely

available

Vinati has sourced the technology to manufacture IBB is from Institut Francais

du Petrole (IFP) in France on which it did internal research to make it

commercially viable, becoming the first company to manufacture IBB based

on this technology. With this technology Vinati Organics has managed to

manufacture IBB with record purity level 99.8% against prevailing

international standards of 95.5% purity. This showcases companys capacity to

adopt latest sophisticated lab based technology and to convert it into very

successful commercial technology with the help of in-house research center.

But it is a mature

product now

Starting with modest capacity of 1200TPA in Mahad, Maharashtra, Vinati

steadily grew its production capacity to present capacity as shown in the graph

below. With higher operating efficiency and by wining trust from their client

Vinati Organics has managed to win all the major clients from its competitors

pushing them out of competition.

0

5000

10000

15000

1992 1996 1997 2006 2008

IBB Capacity (TPA)


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Four-S Research 17

IBB was the key product for Vinati Organics since its inception for almost 2

decades, before ATBS overtook it in FY11. IBB reached revenue of Rs 1.02bn

in FY11.

With the recent stagnant nature of the IBB market and comparative lower

margins Vinati has no plans to increase capacity here, with more focus on de-bottling and improving efficiencies on operational side to improve bottom line

for IBB segment.

Application Pharma: Major Pharma customers with some use in perfume industry

IBB is used as basic raw material for manufacturing the bulk drug Ibuprofen

which is used as an anti-inflammatory analgesic. IBB is the major raw material

for Ibuprofen bulk drug which is produced in mass volume all over the world.

It is also used in perfume industry in Europe.

IB: Backward Integration with focus on ATBS margins

Set up an IB unit asa backward

integration to

ATBS

Vinati has ventured into backward integration for ATBS line by setting up a12,000 TPA Isobutylene (IB) production facility in its Lote premises. Of the

total IB capacity, up to 60% production will be used captive for the ATBS

plant where Isobutylene (IB) is major constituent.

When the company reaches its full capacity of 18000TPA for ATBS, it will use

around 6500Tonnes of IB for captive use, with the rest of IB production to be

sold in open market.

The company plans to sell rest of IB production in domestic market which has

approximate market of 3-4000TPA as also looks to sell in Asia region as Asia

is shortage of IB in market recently.

With largest manufacturing capacity for IB in India with only other closecompetitor Salva Chemical with much lower capacity (4000TPA), Vinati

Organics is set to gain leading position in this market segment too.

Applications

Whereas IB will be used in Vinati Organics to manufacture in ATBS, IB is also

used to produce Isooctane which is used as fuel additive. Isobutylene is also

used in the production of methacrolein. Polymerization of isobutylene produces

butyl rubber (polyisobutylene). IB is also in Agro-chemical industry as an

active ingredient for pesticides. Many pharmaceutical companies are also doing

research to come up techniques to efficiently use IB for their process.

Venturing into new products

DAAM is a low

volume, but high

margin product

DAAM

The first new product coming is DAAM, with a 1000TPA plant setup, at the

Lote site by Dec 2011. This is a high margin product with much higher

realisation value than other products in Vinatis portfolio. With expectation to

contribute more than Rs 300mn at full capacity DAAM will push Vinatis top

line and margins further.


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Four-S Research 18

August11 announcement

3 new products

announced in

Aug11

Vinati Organics announced three new products in August 2011. These are:

High Purity Methyl Tert Butyl Ether (HP-MTBE), Di-Ethyl Aniline (DEA) and

Di-IsoButylene (DIB). All these are linked to the production chains involved in

existing product lines of Vinati. Hence the capacities will come up at theirexisting plant locations Mahad and Lote. These products will entail a capex of

Rs 500mn with company aiming to complete capex by second quarter of FY13.

These follow the usual Vinati new product route: identify molecules with

limited competition and develop technology through research tie-ups and in-

house resources.

HP-MTBE: Ingredient for Pharma company

Main raw material

same as IB

With domestic market size expected to be larger than 3000TPA and lone Indian

supplier Savla Chemical meeting only half of this demand, Vinati Organics is

aiming to capture and grow the market with a new 6000 TPA setup. The

company holds the advantage of experience of main raw material MTBE,

which is also the raw material for its other product IB. Vinati Organics has

developed technology for HP-MTBE in-house with some external aid. HP-

MTBE is expected to contribute around Rs 320mn to companys top line at full

capacity.

Di-Ethyl Aniline (DEA) Ingredient for agro- industry, perfume and

healthcare industry

Will be sole

manufacturer of

DEA in India

Introduction of DEA presents Vinati Organics with a domestic market of

1700TPA which is expected to reach 2500TPA soon. There is no domestic

manufacturer, providing ideal opportunity to capture entire import market with

right pricing strategy. With a setup of 3000MT, easy availability of its raw

material locally and in-house developed technology with some external aid,

Vinati will be well positioned to become lone and largest manufacturer of DEA

in India.

Di-IsoButylene (DIB): Intermediate for chemical industry

DIB as forward

integration to IB

plant

Similar to other products, Vinati Organics has again chosen to enter this

product as there is no domestic competitor in India. Local consumption is

currently around 1500TPA, met through imports, and with potential to reach

3000TPA in next two years. DIB also has a potent export market in China as

major players in DIB are present only in US and Europe. DIB will also act as

forward integration for its existing IB plant with DIB utilising surplus capacityof IB plant as its ingredient.

Pipeline

Para amino phenol

PAP currently at

pilot plant stage.

While the company now has several molecules in the pipeline, the big one,

which it has publicly mentioned so far, is para amino phenol or PAP for short.


19/30


Four-S Research 19

Company could

decide by Dec11

The company is working on pilot plant, and if that is successful, they will go

for commercial manufacture. The decision on this could be taken by

December11.

PAP is potentially a big product, which can make a significant contribution to

the top line.

Revenue Mix: Focus on Diversification

Share of IBB now

down to 32%

Vinatis revenue is driven by two major products, IBB which was their prime

product for almost 2 decades, and ATBS which is Vinati Organics current

focus. Vinati is progressively diversifying its product portfolio moving from

single product era a decade back to more than 4-5 products under its current

portfolio. With existing plan to introduce few more products in its pool,

revenue mix will further diversify. Vinati by choice has maintained limited

product portfolio as company believes in entering into niche speciality

chemical segment only, with the goal to hold leading position in each of the

segments market.Starting with single product portfolio with IBB in 1992 Vinati now has

multiple products under its kitty other than IBB like ATBS, Na-ATBS, IB,

TBA, DAAM and many more in the pipe line. This has helped Vinati to come

out of situation of over dependence on single product while still maintain

leading position in their product segments.

Global scale of operations

Vinati exports 75%

of its turnover

Vinati Organics exports nearly 75% of its production to USA, Europe, Asia,

Middle East and China, and has some of the largest chemical companies in theworld as its clients. Its top five customers constitutes about 40-50% of top line

0%

20%

40%

60%

80%

100%

FY'07 FY'08 FY'09 FY'10 FY'11

Increasing diversified Revenue Mix

Other-products

NA-ATBS

ATBS

IBB


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Four-S Research 20

Financial Analysis and Growth Outlook

Revenue grew at 41% CAGR for last 5 years

Despite having seemingly few products in its portfolio, Vinati Organics has

maintained a scorching pace of growth in recent years.

New products have

driven revenue

growth

The Companys net revenues grew at a CAGR of 41% over FY07-11 to Rs

3.25 bn from Rs 820mn in FY07. The growth has been driven by major

capacity expansions in last few years along with entering into new product

segments.

Strong revenue growth trend to continue

We expect sales to

grow at over 30%

CAGR over FY11-

13

The top line however is expected to grow at CAGR of 36% over FY11-13 on

the support of more expansion expected in ATBS line from current 12000TPA

to 18000 TPA with the plant expected to run at full capacity by FY13.

IB plant in Lote will start utilising its full capacity by next year and Vinatis

other products like DAAM will also start contributing to top line by next with

full capacity. Also new products like HP-MTBE, DEA and DIB also

contributing in FY13 substantially although major effect of this expansion will

be more visible in the years ahead. With all these future plans Vinati organics

is expected to cross sales of Rs 5.5bn by FY13 posting CAGR of 30% over

period of FY11-FY13.


Product Performance

IB and DAAM will

also contribute to

revenues in FY12

and FY13

ATBS and IBB are the major products offerings from Vinati Organics which

constitute 54% and 33% of revenue to Vinati Organics respectively. IB and

DAAM product is also starting to make headway in Vinati with management

expecting to Rs 274mn contribution in FY12 from IB and Rs 160mn is

expected from DAAM in FY13. Whereas three new products are expected to

contribute around Rs 750mn in FY13 pushing revenues higher.

-

1,000

2,000

3,000

4,000

5,000

6,000

FY'09 FY'10 FY'11 FY'12E FY'13E

FY11-FY13 revenue growth


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Four-S Research 21

ATBS

ATBS segment grew at a 4-year CAGR of 79% to revenue of Rs 1.79bn in

FY11, from Rs 174mn in FY07. ATBS is also the most profitable segment

for Vinati Organics, so strong growth in this segment has helped Vinati to

improve its profitability.

Strong growth seen

in ATBS segment

A major 6000TPA capacity expansion for ATBS is expected to be completed

this year, taking the total capacity to 18000TPA. Vinati is expected to increase

ATBS production to full 18000 TPA capacities by FY13 to push up total

revenue from ATBS to around Rs 3.3bn in FY13.

-

200

400

600

800

1,000

1,200

1,400

FY'07 FY'08 FY'09 FY'10 FY'11

Revenue mix changing to higher margin products

IBB

ATBS

NA-ATBS

Other-products


-

500

1,000

1,500

2,000

FY'07 FY'08 FY'09 FY'10 FY'11

ATBS revenue growth



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Four-S Research 22

ATBS revenue

could cross Rs

3.3bn in FY13 from

Rs 2.1bn in FY11

IBB, a mature

product now, will

have a sedate

growth

IBB

IBB product line has shown the result of market stagnation with sedate growth

of 14% CAGR in last 4 years. IBB contributed Rs 1.07bn of revenue in FY11

to Vinatis top line, from Rs 630mn in FY07. Due to stagnant nature of themarket, steady revenues are expected from IBB product line in the future. The

positive part is, Vinati is expected to maintain top position in the market.

Solid performance on margins with better future expected

EBITDA margin

hit 22% in FY11

Vinati has increased its EBITDA at an impressive CAGR of 70% from FY07

to FY11. This growth was achieved with focus on higher margins; EBITDA

margins touched 20% in FY11 from 10.5% in FY07. In absolute terms,

EBITDA crossed Rs 640mn figure in FY11 from Rs 86mn in FY07.

This growth in EBITDA margin is mainly due to increasing revenue

contribution from higher margin product line. Vinati has impressively pushedup revenue contribution from ATBS product, a high margin product, from

mere 19% in FY07 to significant 55% in FY11. Post capacity expansion ATBS

contribution to revenue is expected to reach 58% by next year. Higher margins

are also attributed to improved operational efficiencies.

-

1,000

2,000

3,000

4,000

FY'09 FY'10 FY'11 FY'12E FY'13E

Boost in ATBS Revenue Expected


-

500

1,000

1,500

FY'07 FY'08 FY'09 FY'10 FY'11

IBB Revenue



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Four-S Research 23

Substantial

EBITDA growth

expected in near

future, while

maintaining solid

margins

Higher net profit with steady margin improvement

Vinati Organics net profit has grown at CAGR of 89% in last 4 years. Net

profit expanded from Rs 40.5mn in FY07 to Rs 520mn in FY11. Net margin

was around 16% in FY11 and has been above 10% for fourth consecutive years

now.

8.0%

13.0%

18.0%

23.0%

28.0%

0

100

200

300

400

500

600

700

FY'07 FY'08 FY'09 FY'10 FY'11

EBITDA

EBITDA

EBITDA margin


15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

0

200

400

600

800

1,000

1,200

1,400

FY'11 FY'12E FY'13E

Strong EBITDA Growth Expected

EBITDA

EBITDA margin



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Four-S Research 24

FY11 net profit at

over Rs 50 croregives Vinati a

strong base to

expand on

FY11-13 net profit growth

Company is expecting to expand its current net profit of Rs 520mn to Rs

757mn by FY13. With current outlook Vinati Organics is expecting to

maintain margins in double digits also with support coming from ATBS and

other existing and new products with higher margins.

Net profit will growstrongly in FY13,

lifting FY11-13 netprofit growth to

about 20% CAGR

Capex and Funding

Rs 1.3bn of capex

in FY12 will finishcurrent round of

expansion.

Vinati has done capital expenditure of around Rs 200mn this year for de-

bottling of their existing Lote plant. Now Vinati will be looking for capital

expenditure of around Rs 800mn in FY12 which will be done for ATBS plant

capacity expansion as mentioned earlier along with TBA and DAAM capacity

expansion. In addition Vinati will be doing another Rs. 500mn capital

expenditure in FY12-13 for capacity setup for new products viz. DIB, DEA

and HP-MTBE.

3.0%

8.0%

13.0%

18.0%

23.0%

0

100

200

300

400

500

600

FY'07 FY'08 FY'09 FY'10 FY'11

PAT & Net Margin Growth

PAT

PAT margin


0

100

200

300

400

500

600

700

800

FY'09 FY'10 FY'11 FY'12E FY'13E

Expected PAT growth



25/30


Four-S Research 25

Funded through

IFC loanVinati does have the luxury of approved IFC loan of US$16mn in terms of

US$11mn ECB and US$5mn of FCCBs which are convertible into Company

Equity Shares at Rs. 100 per share. Vinati is looking to fund existing capex

plan with the mixture of its own reserves and debt funding.


26/30


Four-S Research 26

Financial Annexure

Income Statement

Income Statement FY'07 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13

Gross Sales 905 1614 2035 2384 3293 4394 6101

Less : Excise Duty 84 150 130 67 126 168 234

Revenue from Operations 820 1463 1905 2318 3167 4226 5867

Decrease/(Increase) in Stock 8 -18 29 -59 -12 -35 -46

Raw Materials Consumed 543 962 1190 1387 1844 2613 3561

Manufacturing/Other expenses 66 91 125 210 345 320 445Payments to and provision for

employees 53 66 88 115 149 206 287Administrative & Other expenses 64 110 132 137 202 298 414

Total Expenses 734 1210 1565 1790 2527 3402 4660

EBITDA 86 253 340 527 640 823 1207

Depreciation 27 30 33 50 64 101 114

EBIT 59 224 307 478 575 723 1093

Other Income 22 40 53 84 97 133 185

Financial Expenses 20 33 41 44 47 107 128Profit before tax and Exceptional

Items 61 231 319 518 625 749 1151

Exceptional Items 0 0 0 0 0 0 0

Profit before tax 61 231 319 518 625 749 1151

Tax 20 79 68 118 105 219 394Profit after tax before minority

interest 41 152 251 400 520 530 757

Reported net profit 41 152 251 400 520 530 757

(All values in Rs mn)


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Four-S Research 27

Balance Sheet

Balance Sheet FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13EShareholder's Equity

Share Capital 66 99 99 99 99 99 99

Reserves and Surplus 233 328 550 893 1338 1868 2626

ESOPs 0 0 0 0 0 0 0

Total equity capital 299 427 649 992 1437 1967 2724

Liabilities

Secured Loans 210 282 448 570 708 1408 1708

Unsecured Loans 47 61 61 61 61 61 61

Deferred Tax Liability 48 53 59 87 117 165 212

Total Liabilities and Owner's

Equity 604 822 1217 1710 2324 3602 4706

0 0 0 0

Assets 0 0 0 0 0 0 0

Goodwill on consolidation 0 0 0 0 0 0 0

Gross Block 563 640 711 1109 1487 2487 2787

Less: Depreciation 203 232 264 313 375 472 586

Net Fixed Assets 360 408 447 796 1112 2014 2201

Work-in-progress 16 109 434 384 360 0 0

Investments 0 0 0 0 32 32 32

Inventory 82 121 121 189 350 297 413Debtors 197 221 279 359 519 581 806

Cash and Bank Balance 9 14 19 18 19 726 1335

Other Current Assets 0 0 0 0 0 0 0

Loans and Advances 57 107 75 106 186 300 392

Total Current Assets 345 462 493 671 1075 1903 2946

Current Liabilities 104 129 117 98 173 232 322

Provision 13 29 40 43 81 115 151

Total Current Liabilities 117 158 157 141 254 347 472

Net Current Assets 228 305 336 530 820 1556 2474

Total Assets 604 822 1217 1710 2324 3602 4706



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Four-S Research 28

Cash Flow Statement FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E

Net Profit/(Loss) before Tax 55 231 319 518 625 749 1,151

Depreciation 27 29 33 49 64 101 114

Interest paid 20 33 33 34 39 81 97Unrealised Foreign Exchange (Gain)/Loss(net) 0 0 5 -17 -14 - -

Provisions for expenses and liabilities 0 0 15 20 31 - -

Excess Liability written back 0 0 0 0 -1 - -

Other Provisions and write offs (net) 0 0 -9 -9 -1 - -

Others charges and liability 2 -10 -1 -1 -27 - -

Operating Cash flow before Wcap 102 293 394 594 717 931 1,362

(Increase)/Decrease in Trade/OtherReceivables -91 -73 -16 -102 -167 -61 -226

(Increase)/Decrease in Inventories -3 -39 1 -68 -161 53 -115

Increase(Decrease) in Trade/Other Payables 35 41 -26 -39 45 93 125

Cash Generated from Operations 43 221 352 385 434 1,016 1,146

Direct Taxes Paid -28 -98 -55 -97 -120 -225 -345

Operating Cash flow- A 16 123 297 288 313 791 801

0 1 - 0 0 0 0

Cash from Investing activities- B -68 -33 -396 -348 -385 -640 -300

Change in Borrowings 64 32 167 122 138 700 300Adjustment for foreign exchange year endrevaluation 0 0 -6 17 13 - -

Interest paid -12 -20 -33 -34 -39 -81 -97

Dividend paid 0 0 -25 -35 -34 -48 -70

Tax on dividend 0 0 -3 -7 -6 -16 -23

0 0 - 1 2 3 4

Cash from Financing activities- C 52 12 99 64 74 555 109

Change in Cash= A+B+C 9 -5 0 3 2 706 610

Opening Balance 5 14 -6 -6 18 19 726

Closing Balance 14 9 -6 18 19 726 1,335


Cash Flow Statement


29/30


Four-S Research 29

Ratios FY'07 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13

Per share numbers (Rs)

EPS 0.7 3.1 5.1 8.1 10.5 10.7 15.3

DPS 1.2 2.0 2.5 1.0 1.3 1.3 1.9

Book Value 6.1 8.6 13.2 20.1 29.1 39.8 55.2

Profitability (%)

EBITDA margin 0.1 0.2 17.8 22.7 20.2 19.5 20.6

Pretax margin 0.1 0.2 16.7 22.3 19.7 17.7 19.6

Net margin 0.0 0.1 13.2 17.3 16.4 12.5 12.9

Return on avg. Equity 0.1 0.4 46.7 48.8 42.8 31.2 32.3

Return on avg. Capital employed 0.1 0.3 31.9 34.3 30 25.6 27.6

Growth Ratios (%)

Revenue growth 0.4 0.8 30.2 21.7 36.7 33.4 38.9

EBITDA growth 0.5 1.9 34.2 55.1 21.3 28.7 46.6

Net profit growth 1.0 2.8 37.8 62.4 29.8 2 42.8

Activity/Turnover Ratios

Asset turnover 1.7 2.5 2.2 1.8 1.7 1.6 1.6

Working Cap turnover 4.1 5.5 5.9 5.4 4.7 3.6 2.9

Debtor Days 73.3 52.1 47.9 50.2 50.6 47.5 43.1

Inventory Days 35.8 25.4 23.2 24.4 31.1 28 22.1

Payables Days 39.4 29.0 23.6 17 15.6 17.5 17.2

Liquidity Ratios

Current Ratio 3.0 2.9 3.1 4.8 4.2 5.5 6.2

Cash Ratio 0.2 0.1 0.1 0.1 0.1 0.1 2.1

Solvency

Debt Equity 0.9 0.8 0.8 0.6 0.5 0.7 0.6

Leverage Ratio 2.0 1.9 1.9 1.7 1.6 1.8 1.7

Net Debt / EBITDA 2.9 1.3 1.4 1.2 1.2 0.9 0.4

Interest Coverage 3.0 6.9 7.4 10.8 12.3 6.7 8.5

Valuation Ratios

P/E Ratio 5.7 4.7 2.8 8.8 6.4 6.3 4.4

EV/EBITDA 5.6 4.1 3.5 7.9 6.4 5.0 3.1

Dividend Yield (%) 3.4 2.8 3.5 1.4 1.9 1.9 2.7

Ratio Analysis


30/30


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Documents

Vinati Organics 27Sep Final