>VINATI ORGANICS LIMITED (HDFC SECURITIES)

COMPANY UPDATE
We had initiated coverage on Vinati Organics Ltd (VOL) in August 2007 (at a price of Rs. 76.5 – Cum Bonus) with a price target of Rs. 112 (CB). Thereafter, the stock made a high of Rs. 183.0 (CB) on November 20, 2007, thereby surpassing our target price. Ex-bonus, the stock is currently trading at the Rs. 169.4 level. We present an update on the company following a discussion with the management.

Company Background
Vinati Organics Ltd (VOL) has been operating in the chemical manufacturing industry since 1992 and has successfully implemented technology available to only few in the world. VOL primarily produces IBB (Iso Butyl Benzene) and ATBS (2-Acrylamido 2 Methylpropanesulfonic Acid). Its manufacturing facilities are located at Mahad and Lote Parshuram, Maharashtra. VOL currently has
over 300 employees. VOL also has export house status for its ATBS manufacturing facility.

Iso Butyl Benzene (IBB)
IBB is the prime raw material for the manufacture of Ibuprofen, a vital bulk drug. Ibuprofen is an anti-inflammatory and analgesic drug. It also has an application in the perfumery industry in small quantities. India is a net exporter of both IBB and Ibuprofen. Besides exporting IBB, VOL supplies IBB to domestic companies such as Shasun Drugs who in turn uses it to manufacture Ibuprofen and then exports the drug.

VOL has the largest IBB manufacturing capacity in the world with a current capacity of 14,000 MT at Mahad, Maharashtra. VOL acquired the technology to produce IBB from Institut Francais du Petrole (IFP), France. The worldwide demand for IBB is about 20,000 MT and the market is growing between 3-5% p.a. The current realizations of IBB vary between Rs. 80 – Rs. 90 a kg at the current crude oil price levels. One of VOL’s main customers for IBB is BASF with whom it has signed a 5-year contract (upto 2011). BASF’s offtake each quarter is in the 1,000 MT range.

2-Acrylamido 2 Methylpropanesulfonic Acid (ATBS)
VOL started the commercial production of ATBS in October 2002. VOL manufactures ATBS of Acrylic Fiber grade and exports more than 90% of its ATBS production. VOL also manufactures the sodium salt of ATBS and n-tertiary Butylacrylamide (TBA). The uses of ATBS and its variants include acrylic fiber, water treatment chemicals, emulsions for paints and paper coatings, adhesives, hydro gels and super absorbents, textile auxiliaries, detergents and chemicals, oilfield and mining chemicals and construction chemicals / super plasticizers. At the end of FY08, VOL had a capacity of 3,000 MT for ATBS production at Lote Parshuram, Ratnagiri, Maharashtra.
During FY09, the company carried out a debottlenecking activity and expanded the capacity to 5,000 MT. In addition, the company set up another 5,000 MT plant for the production of ATBS, which was commissioned in May 2009. Thus, the total capacity of ATBS stands at 10,000 MTPA.

The manufacturing of the ATBS monomer is very limited worldwide and restricted to 3-4 players due to the difficulty in development of manufacturing technology. VOL sourced the technology from National Chemical Laboratories, Pune and further enhanced the technology. Other than VOL, the current manufacturers include Lubrizol (~14,000 MTPA capacity), Toagosei Co Ltd (Japan) (~8,000 MTPA capacity most of which is used for captive consumption) and China (~2,000 MTPA). The worldwide demand for ATBS is about 30,000 MTPA and is growing at about 8% p.a. Moreover, it is expected that the demand of ATBS could double over the next 2-3 years due to its application in enhanced recovery oil polymers. The use of this polymer is viable when the price of crude is above $40 a barrel. ATBS is currently sold at about Rs. 140 – Rs. 150 per kg.

Investment Rationale
VOL continues to look like an attractive investment opportunity due to the following reasons:

· Oligopolistic market structure – VOL is the market leader in IBB and 2nd largest producer in case of ATBS

· Revenue Visibility - Assured offtake of IBB due to long-term contracts aid revenue visibility. VOL has entered into similar contracts for the offtake of ATBS (5,000 – 6,000 MTPA). The tenure of the contracts ranges from 1-5 years. VOL has annual contracts with companies like BASF, Rohm & Haas, Akzo Noble, SNF and Nalco Chemicals.

· Operating margins in the 15% range for IBB and 20% range for ATBS. Long-term contracts contain clauses for the pass on of raw material costs and to a certain extent foreign exchange fluctuation, which helps protect margins

· High entry barriers due to economies of scale, cost efficiency, technology and high quality standards.

· The demand for ATBS and IBB is to a certain extent recession proof. VOL’s performance in FY09 underscores this fact. While most companies faced slowdown in topline growth and margin pressure, VOL put up a good show in FY09. VOL reported sales of Rs. 190.5 cr up 30.2% y-o-y, operating margins of 17.4% (flat y-o-y) and PAT of Rs. 25.1 cr (up 65.4% y-o-y). The jump in bottomline is due to a fall in the effective tax rate from 34% in FY08 to 21% in FY09. VOL has converted its plant in Lote Parshuram (ATBS production facility) into an EOU (Export Oriented Unit) from a DTA (Domestic Tariff Area), effective July 28, 2008 and hence paid a lower tax rate. This benefit is available until March 2011.

To see full report: VOL