Weekly note to members on 3rd december 2007(control print and vinati was suggested the same day)
Scripscan:Vinati Organics Ltd
Introduction:Vinati Organics is engaged in the business of producing IBB (Iso Butyl Benzene) and ATBS (2-Acrylamido 2 Methylpropanesulfonic Acid).
Why i like the counter?
1)The company with a capex of about Rs.35crs is presently expanding its ATBS facilities from 3k MT to 8k MT and the same is expected to be completed by June 2008.This expansion will make the company the world's second largest producer of ATBS.ATBS is a specialty monomer used in oilfield and mining chemicals, water-treatment, acrylic fiber, personal care, emulsions, adhesives etc. The world demand for ATBS is growing steadily and is expected to increase 2 to 3 fold with the production of enhanced oil recovery polymers.The company is in the process of finalizing long-term supply agreements for ATBS with worlds largest buyers based in USA and Europe.
2)The company has entered into a long-term supply agreement with BASF, USA, world's lamest producer of Ibuprofen. The company has increased its Isobutyl benzene (IBB) manufacturing capacity to 14000 TPA and is the world's largest producer with 70% market share.IBB is one of the key raw materials for making Ibuprofen.The supply agreement warrants BASF to buy majority of its IBB requirements from the company up to 2011. The contract can be renewed for additional three years and is expected to contribute up to Rs 240 crore in revenue in the first five years. As per the contract the monthly selling price of IBB is adjusted based on monthly world prices of key raw materials and exchange rate, thus minimizing the company's exposure to these variables.The production and supplies have ramped up since July and the coming quarters should reflect all the developments.
3)The company is planning to convert its ATBS production facility into an Export Oriented Unit from a Domestic Tariff Area.It is understood that the process would get completed by these year itself.It means that the profits from the sale of ATBS could be tax-free for the next couple of years.
4)ATBS/Na-ATBS&TBA:At present except the company there are only 2 other major producers of these monomers in the world.As suppliers of these products are limited,customers remain very keen to work for a new source of supply.All the major users of these products are based in Europe or U.S.A.,thus they prefer to enter into annual contracts.
5)The company falls on the vagaries of currency fluctuation as it exports its products mostly.At present on some cases its passing the extra costs to its customer.Going forward,The Company is aiming at minimizing foreign currency exposure by entering in to forward contracts and negotiating currency risk-sharing deals with customers.
6)Crude oil is one of the prime inputs for the products of the company and in the last few months it increased significantly.Vinati on to a certain extent was able to pass the hike to its customers. Incase of IBB,Vinati has a long term price escalation clause with BASF.On the ATBS front the company faces competition in terms of dollar pricing from majors like Lubrizol.The company though is confident of maintaining margins in this specialty monomer by passing the price fluctuation to its customers.
7)On asking the management about their new product application,they clarifies by saying "We are working on projects such as producing the versatile and high value monomer Tertiary Butyl Acrylamide (TBA.TBA is a high margin product for us and realization per kg is in the range of $5.We have already sent samples to various customers and we expect trial orders to begin soon".Tertiary Butyl Acrylamide or TBA finds its application mainly in the making of hair gel and water treatment polymers.
8)The company recently rewarded its shareholders by issuing them 1 free shares for every 2 shares held.These certainly entails a lot of conviction in the company as it shows the confidence of the management in the growth prospects of the company.
Conclusion:The company is expected to end the year with sales of about 150crs.Profits could be around 15crs resulting an EPS over 15rs.At present price of 100 its just quoting at 6.6 times its fy08 earnings.With escalating product prices,industry leadership,enhanced capacity utilization,new long-term contracts and roubust business prospects,Vinati organics may just prove to be another of my scrips which satiates ones desires through tremendous capital appreciation in the coming days.
I can be reached at: [email protected]