Equity Research: Valiant Organics

Considering the integrated business model, superior financial performance, healthy balance sheet with improving re- turn ratios, the company has good long-term growth prospects. We foresee 25.7% revenue CAGR, EBITDA expansion of 23.2% CAGR, and 29.5% growth in earnings over FY21-24E.

Starting as a single product manufacturing company in 1984, Valiant has established itself as a lead- ing producer of Chlorination, Ammonolysis, Acetylation, Hydrogenation, and Methoxylation based spe- cialty products in India. It manufactures a wide portfolio of products used as intermediates in several end-user industries and several value-added products. The company derives 88% of its revenue from the domestic market and 12% from exports. End-use Industries wise 40% revenue derived from Agro- Chemical, 30% from Speciality Chemical, 20% from Dye and Pigment, and the rest 10% from the Pharmaceuticals. The top 5 products contribute 77%, and the top 5 customers contribute 35% of the total operating revenue. VOL has strong list of clients such as BASF, Lanxess, Bayer Crop Science, Coromandel, Gujarat Insecticides Ltd etc. 

VOL has growing at a very fast pace in the last ten-years using both organic as well as inorganic methods i.e. by expanding the manufacturing capacity of its plants as well as acquiring other compa- nies. Over the last three years (FY19-21) VOL has incurred capex of ~INR 4.4bn and the enhanced capacities to continue its strong revenue growth momentum for next 2-3 year. In light of the growing demand, VOL increased Chlorophenol capacity (by 3.75x) to 18,000 MT per annum by completing the expansion at the Sarigam plant (in FY20). They also added Ortho Nitro Anisole and Para Nitro Anisole to their portfolio. VOL has increased the capacities of our hydrogenation products from the earlier 18,000 MTPA to 26,000 MTPA. Further, the company is increased the Ammonolysis capacity at Tara- pur and Vapi plants from ~13,000 MT per annum to 16,000 MTPA. The company commences opera- tions of Para Amino Phenol (PAP) by completing Phase1 in Q4 FY21. However, due to technical diffi- culties in achieving the desired specification, the large production was delayed, which is expected to ramp up from Q3 FY22. The Ortho Amino Phenol (OAP) manufacturing is expected to commence in Q4FY22 with a significant ramp-up in FY23. Both of these products (PAP and OAP) are import substi- tute opportunities. Further, in order to benefit from surging and high growth API segment, company is expanding its API business which will increase the pharma revenue share in coming years. The Com- pany plans to incur ~INR 1.25bn as Capex during FY 2021-22 (INR 0.6bn for Pharma Intermediaries project, INR 0.3bn towards PAP process enhancements and INR 0.35bn towards other units’ P&M and maintenance). Going forward, the Company continue to utilize ~INR 1.20bn – 1.50bn as growth capex every year. 

Integrated operations provides stability in margin 

VOL has carried both backward and forward integration projects focussing on high value products, thereby, driving efficiency. The backward integration at the Jhagadia plant helped the Company manu- facture its raw materials in-house, leading to significant cost savings and superior profit margins. The company is moving up and down the value chain in Hydrogenation and PAP-Paracetamol business to insulate itself from volatility in pricing and climbing the ladder in speciality product segment to improve the product mix. As per the government policy for Make in India, the Company is planning to apply for environmental clearance for drug Intermediates / API as import substitutes. It is also aiming to go for both organic and inorganic growth. VOL is leveraging its extensive domain experience and integrated manufacturing operations as part of forward integration. VOL is also working towards reducing plants’ energy requirement per unit of output and achieved moderate cost savings by converting high- pressure steam from manufacturing processes to power the plants. All these strategies are helping the company in maintaining consistency in product quality and optimizing the resources while lowering the production costs and maintaining healthy margins. The company’s FY21 EBITDA margin stood at 27.2%, majorly fuelled by higher realization of paracetamol. However, higher raw material prices and inability to pass through has impacted H1FY22 margin performance (Console EBITDA margin in H1FY22: 18.8%), mainly due to sharp run-up in the key raw materials prices like Phenol and PNCB (collectively account 40%). Although, management expects a sharp recovery in the margin Q3 on- wards as the prices of most raw materials are now stabilizing, and the company is passing on price increase to the customers. For FY22, management guided a 22% EBITDA margin which means 25% EBITDA margin in H2FY22. Going ahead, The Company is targeting to achieve sustainable EBITDA margins in the range of 22-25%. 

VOL is the only company in India to commercially manufacture PAP (key intermediate used to manufac- ture Paracetamol). The company has installed a capacity of 12,000 TPA (Capex incurred of INR2.2bn). A significant part of the capacity approx. 7,000 TPA would be used by its step-down subsidiary Bharat Chemical( Paracetamol manufacturer) and would sell the rest to the market. On a operational front, due to technical difficulties in achieving the desired specification, the actual production was delayed. However, The management highlighted that they had corrected the technical issues faced by PAP pro- duction. Currently, working towards consistent manufacturing of PAP with small batches and expects large batch commissioning of the product from Q4FY22. Since March 2020, PAP prices have increased from INR 207/kg to INR 598/kg (5 years Avg INR 259/ Kg). Management expects PAP prices to decline going forward as other domestic manufacturers' commence their production. We expect PAP production of 4000-4500MT in FY22, on the back of better ramp up in H2FY22 due to commencement of large batch production. With faster absorption of PAP capacity, we expect by FY24e its contribution to overall sales to reach 26%. 

VOL’s capacity expansion in line with rising demand in end-user industries provides strong revenue visibility. During FY16-21, VOL has clocked revenue growth CAGR of 70.7% with an average asset turnover of 2.1x. We expect similar asset turnover on incremental CAPEX, which translates into an additional INR 8-9bn to revenues at peak utilization over the next 3-4 years. We expect VOL to deliver a 25.7% revenue CAGR over FY21-24e driven by the benefit of capex, new products' launch, and expanding geographical reach. Over the last 5 years, the company has maintained average RoCE of more than 40% with the average RoE of the company being strong at 40.8% in FY21. Chlorophenol business (23% of revenue) remains a high ROCE business for VOL. Post the acquisition of two Aarti group companies (Abhilasha and Amariyot) and the new capex lined up, we expect VOL to generate an average ROCE of 31.4% over FY22e-24e. Historically, the company has touched ~30% operating mar- gins and this is attributed to its unique product selection strategy, backward integration approach and focus on high-value products, thereby driving efficiency. We expect VOL to post-healthy 23.2% EBITDA CAGR over FY21-24E led by the backward integration approach, commercialization of new products adopted in Hydrogenation and PAP-Paracetamol chemistry; we believe the company can able to main- tain EBITDA margins in the range of 22-25% in the long term. The Cash conversion cycle is expected to remain stable at 35- 40 days over FY22-24. Despite the continued Capex, the company’s debt-to-equity ratio would fall to 0.1x in FY24e, against 0.37x in FY21. Similarly, Net debt/ EBITDA ratio is expected to improve from 0.8x in FY21 to –0.1x by FY24E. 

Para-Aminophenol (PAP) Market Overview 

Para-aminophenol (PAP) is classified into different categories based on its purity. The most commonly available qualities are 98% pure, 99% pure and 99.5% pure. Based on the purity, its cost also varies. Based on its quality and physical state, the price range of para-aminophenol purchased through retail- ers in India varies from INR 400/kg to INR 1000/kg. As per the industry reports, globally around 90% of para-aminophenol is used to synthesise Paracetamol, whereas 5% each of it is used for preparing rubber antioxidants and dyes. According to a report by Marketwatch, The global PAP market is valued at $443 mn in 2020 is expected to reach $553mn by the end of 2026, growing at a CAGR of 3.2% during 2021-2026. Currently, China is the largest producer of PAP, having a expected manufacturing capacity of nearly 1,10,000 tonnes per annum (TPA). Globally the major producers of PAP are Taixing Yangzi (35,000 TPA), Liaoning Shixing (40,000 TPA), Anuhi Bayi Chemical (60,000 TPA) etc. India is one of the major consumers of PAP. In India, the demand for PAP is nearly 40,000 TPA, and most of it (around 28,000 to 30,000 TPA) is met through imports from China. In 2020, due to the COVID-19 pan- demic, the supply of p-aminophenol and other essential Key Starting Materials (KSMs) and Active Pharmaceutical Ingredients (APIs) from China saw a sudden surge in the prices. If we specifically con- sider p-aminophenol, its price increased by almost 100% compared to the previous year. While during the last year, the price of PAP imported from China was around INR 301/kg compared to the current price of INR 598/kg. Moreover, the constant face-off between India and China at the border added fuel to the fire. The outburst in the prices due to the pandemic and the ongoing friction with China led the Indian Government to introduce a PLI scheme to reduce our dependence on China and promote the manufacturing of these Key Starting Materials (KSMs) and Active Pharmaceutical Ingredients (APIs) in our country itself. Para-Aminophenol, the main ingredient required for the production of Paracetamol, also comes under the list of KSMs and hence is eligible for the PLI scheme. If all the planned invest- ments fructify, India’s PAP capacity could rise substantially, which therefore can meet a significant portion of domestic demand. 

Financial performance to improve further 

VOL’s capacity expansion in line with rising demand in end-user industries provides strong revenue visibility. During FY16-21, VOL has clocked revenue growth CAGR of 70.7% with an average asset turnover of 2.1x. We expect similar asset turnover on incremental CAPEX, which translates into an additional INR 8-9bn to revenues at peak utilization over the next 3-4 years. We expect VOL to deliver a 25.7% revenue CAGR over FY21-24e driven by the benefit of capex, new products' launch, and expanding geographical reach. Over the last 5 years, the company has maintained average RoCE of more than 40% with the average RoE of the company being strong at 40.8% in FY21. Chlorophenol business (23% of revenue) remains a high ROCE business for VOL. Post the acquisition of two Aarti group companies (Abhilasha and Amariyot) and the new capex lined up, we expect VOL to generate an average ROCE of 31.4% over FY22e-24e. Historically, the company has touched ~30% operating margins and this is attributed to its unique product selection strategy, backward integration approach and focus on high-value products, thereby driving efficiency. We expect VOL to post-healthy 23.2% EBITDA CAGR over FY21-24E led by the backward integration approach, commercialization of new products adopted in Hydrogenation and PAP-Paracetamol chemistry; we believe the company can able to maintain EBITDA margins in the range of 22-25% in the long term. The Cash conversion cycle is expected to remain stable at 35- 40 days over FY22-24. Despite the continued Capex, the company’s debt-to-equity ratio would fall to 0.1x in FY24e, against 0.37x in FY21. Similarly, Net debt/ EBITDA ratio is expected to improve from 0.8x in FY21 to –0.1x by FY24E. 

Historical Financials:

Estimated Financials:

Conclusion:

VOL commands a leadership position in the domestic Chloro Phenols market and is the key producer of Para Nitro Aniline (PNA) in India. The company is fully integrated and has an import substitution opportunity persisting for products like Para Anisidine (PA) and Ortho Amino Phenol (OAP), while Para Amino Phenol (PAP), currently has limited availability domestically and is mainly imported. Over the last five years, The Company has maintained a superior EBITDA margin profile (+25%). However, the sharp increase in the input costs combined with a delay in the passing-through price increase to the customers led to a 660bps contraction (vs 5 yr Avg) EBITDA margin in the H1FY22. Although man- agement expects a sharp recovery in the margin Q3 onwards as the prices of most raw materials are now stabilizing, the company is passing on the price increase to the customers. Going ahead, The Company is targeting to achieve sustainable EBITDA margins in the range of 22-25%. Considering the integrated business model, superior financial performance, healthy balance sheet with improving re- turn ratios, we are optimistic about the company's long-term growth prospects. We foresee 25.7% revenue CAGR, EBITDA expansion of 23.2% CAGR, and 29.5% growth in earnings over FY21-24E. At the CMP (INR 702), the stock trades at 12.6x FY24e EPS and 8.1x EV/EBITDA. We value the company at 20x FY24e earnings.

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  Vaibhav

  25 July, 2022, 3:53 pm
  Detailed and insightful analysis.
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