Vinati Organics BUY RESULTS REVIEW 2QFY19 29 OCT INDUSTRY CHEMICALS CMP (as on 29 Oct 2018) Rs 1,408 Target Price Rs 1,700

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INDUSTRY CHEMICALS CMP (as on 29 Oct 2018) Rs 1,408 Target Price Rs 1,700 Nifty 10,251 Sensex 34,067 KEY STOCK DATA Bloomberg VO IN No. of Shares (mn) 51 MCap (Rs bn) / ($ mn) 72/986 6m avg traded value (Rs mn) 41 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,519/756 3M 6M 12M Absolute (%) 50.5 58.0 45.4 Relative (%) 59.3 60.5 42.6 SHAREHOLDING PATTERN (%) Promoters 74.01 FIs & Local MFs 6.84 FPIs 3.47 Public & Others 15.68 Source : BSE Archit Joshi archit.joshi@hdfcsec.com +91-22-6171-7316 Nilesh Ghuge nilesh.ghuge@hdfcsec.com +91-22-6171-7342 Divya Singhal divya.singhal@hdfcsec.com +91-22-6639-3038 A spectacular quarter Vinati Organics (VO) reported a strong set of numbers with Sales/EBITDA/PAT coming in at Rs 2.53bn/Rs 9.5bn/Rs 650mn growing at 57.3/107.3/123.1% respectively. VO reported the highest ever quarterly EBITDA margin of 37.7% (expansion of 9.0 percentage points YoY). ATBS, which contributed 50% to the sales mix in FY18 now stands at 60% for 1HFY18. The management is witnessing strong traction for ATBS in enhanced oil recovery applications. We believe the management has taken a significant price hike in ATBS (pricing has outpaced volume growth). We understand that there is no sign of a new entrant in the ATBS market and VO is expected to command superior pricing in ATBS (EBITDA margin assumption for FY19/FY20E is 35.0/34.0%, against a 5 year average EBITDA margin on 27.7%). ATBS as a product, de facto stands as a beneficiary in an inflationary crude oil pricing scenario. Sensing higher demand for ATBS post Lubrizol s exit, VO had revised their expansion plan. VO is now expected to add 14,000 TPA of ATBS (4,000 TPA guided earlier). We expect ATBS Volume CAGR growth of 17% over FY18-21E. RESULTS REVIEW 2QFY19 29 OCT 2018 Vinati Organics BUY Iso Butyl Benzene (IBB) capacity utilization stands at 50% (on 25,000 TPA installed capacity) and may have been impacted by BASF s shutdown in their Iburprofen plant. Butylated phenols is expected to start contributing to revenues from 1HFY20. As per the management, Para Amino Phenol (PAP) project is yet to be finalized and still remains back ended. The company sold double the Iso-Butylene (IB) volumes in 2QFY19 on a YoY basis. We have revised Sales/EBITDA/PAT estimates upwards by 9.2/30.9/37.5% and 14.4/29.8/35.6% for FY19/20E respectively anticipating sustainability of EBITDA Margins led by the new normal of ATBS pricing scenario and revenues worth Rs 4.0 bn Vinati Organics has been commanding a premium in valuations due to an impeccable product selection history, best in class return ratios (ROE/RoIC for FY19 expected at 28.0/25.6%) and a strong technocrat promoter backing. We are valuing Vinati Organics 25xSept 20 EPS with a revised target price of Rs 1,700. We upgrade our rating to Buy. Financial Summary (Rs mn) 2QFY19 2QFY18 YoY (%) 1QFY19 QoQ (%) FY18 FY19E FY20E FY21E Net Sales 2,528 1,607 57.3 2,647 (4.5) 7,434 10,430 13,158 16,675 EBITDA 952 459 107.3 917 3.8 2,109 3,654 4,477 5,595 APAT 650 291 123.1 643 1.2 1,439 2,587 3,117 3,874 Diluted EPS (Rs) 12.7 5.6 124.0 12.5 1.6 28.0 50.3 60.6 75.4 P/E (x) 72.2 51.6 50.3 28.0 EV / EBITDA (x) 41.1 33.1 33.7 19.4 RoE (%) 20.5 22.9 19.5 28.0 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Volume growth for 4QFY18 was We believe between the 10-15%. management has taken a significant price hike in ATBS (pricing has outpaced volume growth) and that explains the margin expansion We expect EBITDA Margins to be at ~19% for FY19E and FY20E. Sales growth was led by ATBS and IB, while IBB sales were impacted in 2QFY19 due to BASFs plant shutdown Butyl Phenols is potentially margin dilutive and is expected to commission in 1HFY20 Quarterly Financials Snapshot (Rs mn) 2QFY19 2QFY18 YoY (%) 1QFY19 QoQ (%) Net Sales 2,528 1,607 57.3 2,647 (4.5) Material Expenses 1,135 762 48.9 1,310 (13.4) Employee Expenses 135 124 8.4 137 (1.5) Other Expenses 307 261 17.5 283 8.2 EBITDA 952 459 107.3 917 3.8 Depreciation 69 68 1.3 67 2.3 EBIT 883 391 125.8 850 3.9 Other Income & EO Items 107 50 112.8 121 (11.4) Interest 2.5 9 (73.3) 2 36.4 PBT 988 432 128.6 969 2.0 Tax 338 141 140.0 327 3.4 RPAT 650 291 123.1 643 1.2 EO Items (Adj For Tax) - - - APAT 650 291 123.1 643 1.2 AEPS (Rs/sh) 12.7 5.6 124.0 12.5 1.6 Margin Analysis Margin Analysis (% of Net Sales) 2QFY19 2QFY18 YoY (bps) 1QFY19 QoQ (bps) Raw Material Expenses % Net Sales 44.9 47.4 (256) 49.5 (460) Employee Expenses % Net Sales 5.3 7.7 (240) 5.2 16 Other Expenses % Net Sales 12.1 16.2 (412) 10.7 142 EBITDA Margin (%) 37.7 28.6 908 34.7 302 Tax Rate (%) 34.2 32.6 162 33.7 49 APAT Margin (%) 25.7 18.1 758 24.3 145 Page 2

Quarterly Performance Sales and Sales Growth EBITDA and EBITDA Margin Sales (Rs mn) Sales growth(%) - RHS EBIDTA (Rs mn) EBIDTA Margin (%) - RHS We expect sales growth of 28.5/20.5/18.6% in FY19E/FY20E/FY21E respectively. EBITDA margins are likely to be in the range of 29-31% going ahead. 3,000 2,500 2,000 1,500 1,000 500 0 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 80% 60% 40% 20% 0% -20% -40% -60% 1,200 1,000 800 600 400 200 0 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 40% 35% 30% 25% 20% 15% 10% 5% 0% Return Ratios EBITDA/OCF vs FCFF ROE(%) RoIC(%) EBITDA/OCF (%) FCFF (Rs mn) 45.0 2,500.0 We expect ROE/RoIC to be at 21.2/30.8% in FY20E. 40.0 35.0 30.0 25.0 2,000.0 1,500.0 1,000.0 500.0-20.0 (500.0) 15.0 (1,000.0) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Page 3

We expect ATBS volume growth is coming in at the back of Lubrizols exit Assumptions Iso Butyl Benzene FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Installed Capacity(MT) 16,000 16,000 16,000 16,000 16,000 16,000 25,000 25,000 25,000 Unit sold 13,493 13,898 14,315 14,744 14,744 14,302 12,872 15,060 17,620 YoY % 3.0% 3.0% 3.0% 3.0% 0.0% -3.0% -10.0% 17.0% 17.0% Utilisation 84.3% 86.9% 89.5% 92.2% 92.2% 89.4% 51.5% 60.2% 70.5% Realistion per unit (Rs/kg) 152 175 162 121 111 111 140 135 135 YoY % 29.2% 15.1% -7.1% -25.5% -8.5% 0.1% 26.5% -3.6% 0.0% Total sales value (Rs In mn) 2,047 2,426 2,322 1,782 1,630 1,582 1,802 2,031 2,377 YoY % 33.1% 18.5% -4.3% -23.3% -8.5% -3.0% 13.9% 12.7% 17.0% IBB capacity utilization stood at 50% in 2QFY19 The customized products which are export oriented are expected to be in the range of Rs 500-700 mn in the coming years too ATBS FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Installed Capacity(MT) 26,000 26,000 26,000 26,000 26,000 26,000 30,000 40,000 40,000 Unit sold 13,625 14,300 19,475 17,626 19,036 21,701 25,174 29,705 35,052 YoY % 9.0% 5.0% 36.2% -9.5% 8.0% 14.0% 16.0% 18.0% 18.0% Utilisation 52.4% 55.0% 74.9% 67.8% 73.2% 83.5% 83.9% 74.3% 87.6% Realistion per unit (Rs/kg) 163 197 180 152 150 174 256 269 282 YoY % -4.3% 20.7% -8.9% -15.4% -1.0% 15.8% 47.0% 5.0% 5.0% Total sales value (Rs In mn) 2,226 2,820 3,499 2,678 2,864 3,780 6,446 7,987 9,895 YoY % 4.3% 26.7% 24.1% -23.5% 6.9% 32.0% 70.5% 23.9% 23.9% Isobutylene FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Installed Capacity(MT) 12,000 12,000 12,000 12,000 15,000 15,000 15,000 15,000 15,000 Total Unit sold/production 8,400 9,600 12,000 11,525 12,990 14,944 16,737 18,056 19,596 YoY % 7.7% 14.3% 25.0% -4.0% 12.7% 15.0% 12.0% 7.9% 8.5% Utilisation 70.0% 80.0% 100.0% 96.0% 86.6% 99.6% 111.6% 120.4% 130.6% Realistion per unit (Rs/kg) 114.3 154.8 126.7 72.5 74.0 74.7 80.0 80.0 80.0 YoY % 50.1% 35.5% -18.2% -42.7% 2.0% 1.0% 7.0% 0.0% 0.0% Total sale value (Rs In mn) 560 867 887 508 544 604 763 771 778 YoY % 61.7% 54.8% 2.3% -42.7% 7.1% 11.1% 26.3% 1.0% 1.0% Change in estimates FY19 Old FY19 New YoY Gr (%) FY20 Old FY20 New YoY Gr (%) Net Sales 9,151 9,551 4.4 11,056 11,506 4.1 EBIDTA 2,592 2,792 7.7 3,222 3,450 7.1 APAT 1,740 1,882 8.1 2,137 2,298 7.5 Source: HDFC sec Inst Research Page 4

Peer Set Comparison MCap (Rs bn) CMP (Rs) RECO TP (Rs) EPS (Rs/sh) P/E (x) P/BV (x) ROE (%) FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E Alkyl Amines 11.9 581 BUY 978 36.7 41.2 18.4 15.8 14.1 4.0 3.4 2.8 23.7 23.0 21.8 11.9 581 BUY 978 31.5 Balaji Amines 14.7 454 BUY 763 38.6 43.2 13.1 11.8 10.5 3.0 2.3 1.9 23.2 19.5 18.2 14.7 454 BUY 763 34.7 Navin Fluorine International Ltd 31.7 643 BUY 944 33.4 40.4 17.7 19.3 15.9 3.2 2.9 2.6 19.8 15.8 17.0 31.7 643 BUY 944 36.4 Vinati Organics 72.4 1,408 BUY 1,218 50.3 60.6 50.3 28.0 23.2 9.1 6.9 5.4 28.0 26.0 25.3 72.4 1,408 NEU 1,218 28.0 Page 5

Income Statement (Rs mn) FY17 FY18 FY19E FY20E FY21E Net Revenues 6,408 7,434 10,430 13,158 16,675 Growth (%) 6.9 16.0 40.3 26.2 26.7 Material Expenses 3,005 3,776 4,769 6,182 7,857 Employee Expenses 419 490 529 582 640 Other Expenses 814 1,059 1,478 1,918 2,583 EBITDA 2,170 2,109 3,654 4,477 5,595 EBITDA Margin (%) 33.9 28.4 35.0 34.0 33.6 EBITDA Growth (%) 23.7 (2.8) 73.2 22.5 25.0 Depreciation 216 234 302 385 468 EBIT 1,953 1,876 3,352 4,091 5,127 Other Income (Incl. EO Items) 125 170 315 320 350 Interest 19 12 10 6 2 PBT 2,060 2,034 3,657 4,405 5,475 Exceptional Items PBT After Exceptional Items 2,060 2,034 3,657 4,405 5,475 Tax (Incl Deferred) 657 595 1,070 1,289 1,602 RPAT 1,403 1,439 2,587 3,117 3,874 APAT 1,403 1,439 2,587 3,117 3,874 APAT Growth (%) 40.1 2.6 79.8 20.5 24.3 Adjusted EPS (Rs) 27.3 28.0 50.3 60.6 75.4 AEPS Growth (%) 40.1 2.6 79.8 20.5 24.3 Balance Sheet (Rs mn) FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Share Capital - Equity 103 103 103 103 103 Reserves 6,697 7,864 10,382 13,369 17,050 Total Shareholders' Funds 6,800 7,967 10,485 13,471 17,153 Minority Interest - - - - - Long Term Debt 148 3 3 - - Short Term Debt 23 152 102 52 2 Total Debt 171 155 105 52 2 Long-Term Provisions & Others 730 837 737 637 337 TOTAL SOURCES OF FUNDS 7,700 8,959 11,327 14,161 17,492 APPLICATION OF FUNDS Net Block 4,676 4,568 4,340 5,955 6,037 CWIP 74 349 2,000 550 250 LT Loans & Advances 191 253 253 253 253 Other Assets - - - - - Total Non-current Assets 4,941 5,171 6,594 6,759 6,541 Inventories 651 822 1,060 1,545 1,964 Debtors 1,405 1,771 2,086 2,741 3,474 Other Current Assets 536 650 939 1,250 1,584 Cash & Equivalents 666 1,370 1,442 2,916 5,226 Short Term Loans & Advances 12 15 21 26 34 Total Current Assets 3,270 4,629 5,547 8,479 12,282 Creditors 327 634 616 868 1,108 Other Current Liabilities & Provns 183 206 198 208 222 Total Current Liabilities 511 841 814 1,077 1,330 Net Current Assets 2,760 3,788 4,734 7,402 10,952 TOTAL APPLICATION OF FUNDS 7,700 8,959 11,327 14,161 17,492 Page 6

Cash Flow (Rs mn) FY17 FY18 FY19E FY20E FY21E Reported PBT 2,060 2,034 3,657 4,405 5,475 Non-operating & EO Items (75) (109) (315) (320) (350) Interest Expenses 19 11 10 6 2 Depreciation 216 254 302 385 468 Working Capital Change (380) (316) (874) (1,195) (1,239) Tax Paid (535) (491) (1,170) (1,389) (1,902) OPERATING CASH FLOW (a) 1,304 1,383 1,611 1,893 2,455 Capex (990) (766) (1,725) (550) (250) Free Cash Flow (FCF) 314 617 (114) 1,343 2,205 Investments (9) 378 - - - Non-operating Income 731-315 320 350 INVESTING CASH FLOW (b) (268) (388) (1,410) (230) 100 Debt Issuance/(Repaid) (396) - (50) (53) (50) Interest Expenses (16) (11) (10) (6) (2) FCFE (1,402) (777) (1,785) (609) (302) Share Capital Issuance - (240.0) 0 0 0 Dividend (35) (32) (308) (370) (432) Others (15) 245 240 240 240 FINANCING CASH FLOW (c) (451) (37) (129) (189) (244) NET CASH FLOW (a+b+c) 586 958 72 1,474 2,310 EO Items, Others - - 52 - - Closing Cash & Equivalents 621 1,318 1,442 2,916 5,226 Key Ratios FY17 FY18 FY19E FY20E FY21 PROFITABILITY (%) GPM 53.1 49.2 54.3 53.0 52.9 EBITDA Margin 33.9 28.4 35.0 34.0 33.6 APAT Margin 21.9 19.4 24.8 23.7 23.2 RoE 22.9 19.5 28.0 26.0 25.3 RoIC (or Core RoCE) 30.6 25.6 38.3 38.6 43.5 RoCE 20.1 17.4 25.6 24.5 24.5 EFFICIENCY Tax Rate (%) 31.9 29.3 29.3 29.3 29.3 Fixed Asset Turnover (x) 1.5 1.5 2.1 2.2 2.3 Inventory (days) 38 43 43 48 48 Debtors (days) 83 93 85 85 85 Other Current Assets (days) 32 34 38 39 39 Payables (days) 19 33 25 27 27 Other Current Liab & Provns (days) 11 11 8 6 5 Cash Conversion Cycle (days) 123 127 134 138 139 Debt/EBITDA (x) 0.1 0.1 0.0 0.0 0.0 Net D/E (x) (0.1) (0.2) (0.1) (0.2) (0.3) Interest Coverage (x) 104.9 154.9 330.2 667.0 2,425.0 PER SHARE DATA (Rs) EPS 27.3 28.0 50.3 60.6 75.4 CEPS 31.5 32.5 56.2 68.1 84.5 Dividend 0.5 4.5 5.0 6.0 7.0 Book Value 132.3 155.0 204.0 262.1 333.8 VALUATION P/E (x) 51.6 50.3 28.0 23.2 18.7 P/BV (x) 10.6 9.1 6.9 5.4 4.2 EV/EBITDA (x) 33.1 33.7 19.4 15.5 12.0 EV/Revenues (x) 11.2 9.6 6.8 5.3 4.0 OCF/EV (%) 1.8 1.9 2.3 2.7 3.7 FCF/EV (%) (1.4) (1.1) (2.4) (0.8) (0.4) FCFE/Mkt Cap (%) (1.9) (1.1) (2.5) (0.8) (0.4) Dividend Yield (%) 0.0 0.3 0.4 0.4 0.5 Page 7

RECOMMENDATION HISTORY 1,900 1,700 1,500 1,300 1,100 900 700 500 Oct-17 Nov-17 Dec-17 Vinati Organics Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 TP Jul-18 Aug-18 Sep-18 Oct-18 Date CMP Reco Target 18-Jun-18 1,020 BUY 1,185 9-Jul-18 978 BUY 1,185 7-Aug-18 1,173 NEU 1,170 9-Oct-18 1,198 NEU 1,218 29-Oct-18 1,408 BUY 1,700 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12-month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12-month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12-month period Page 8

Disclosure: We, Archit Joshi, MBA, Nilesh Ghuge, MMS, Divya Singhal, CA, authors and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. 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