Vinati Organics Faces 23% Drop: HDFC Securities Issues ‘Sell’ Call Amid High Valuation in Chemical Stocks

HDFC Securities, a leading brokerage firm, has kept its ‘sell’ rating for chemical company Vinati Organics due to its high stock valuation. The firm set a target price of ₹1,491 for the stock, which suggests a potential 23% decline from its current levels.

“Right now, the stock is trading at 50/40.2 times its estimated earnings for FY25 and FY26, which we find quite high. That’s why we’re maintaining our SELL recommendation with a target price of ₹1,491,” the brokerage noted, although it remains optimistic about the company’s long-term prospects.

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Growth Potential for Vinati Organics

HDFC Securities mentioned that Vinati Organics is positioned for solid growth in the next few years. The company is making significant investments in new projects and expanding its range of products. According to the report, the company will launch projects worth ₹800 crore in the upcoming two quarters, which could boost revenue and earnings growth by 19% and 20%, respectively, between FY24 and FY27.

Reasons for Investment

1. Expanding Product Range:
Vinati Organics is investing ₹500 crore in its subsidiary, Veeral Organic Private Limited, to create new products like MEHQ, Guaiacol, Anisole, and Isoamylene derivatives. These products cater to industries such as pharmaceuticals, personal care, agrochemicals, and polymers. The company will have production capacities of 5,000 metric tons per annum (MTPA) for Anisole, 3,000 MTPA for MEHQ, and 2,000 MTPA for Guaiacol. The plants will be fully operational by Q3 FY25. MEHQ will mainly be exported to China, while Guaiacol will serve both domestic and international markets.

2. Strengthening Subsidiary Integration:
The company is also building a 10,000 MTPA Isoamylene plant to enhance its butyl phenol value chain, which will help maintain profit margins. Additionally, it is integrating Veeral Additives with Vinati Organics to protect margins in the antioxidants segment. Veeral Additives, which produces phenolic antioxidants used in various materials, contributed ₹130 crore to the company’s revenue in FY24. The company aims to capture 60-70% of the domestic market and grow its exports in this segment, which could generate up to ₹700 crore at full capacity.

3. Expanding ATBS Capacity:
Vinati Organics is the market leader in ATBS (a chemical used in various industries), holding 65% of the market. The company is expanding its ATBS production capacity from 40,000 MTPA to 60,000 MTPA to meet rising demand. The expansion, which will cost ₹300 crore, will be completed by H2 FY25. The company has already seen strong sales of high-grade ATBS molecules in FY24, which is expected to drive revenue growth.

Financial Overview

In FY24, Vinati Organics saw a 6.5% decline in revenue to ₹1,938.8 crore, while EBITDA fell by 11% to ₹508.6 crore. The company’s EBITDA margin decreased to 26.2%, down by 132 basis points. During FY24, the company spent ₹360 crore on expanding its facilities and launching niche products.

Looking ahead, HDFC Securities projects that the company’s revenue will grow by 21% in FY25 and FY26 due to better use of its antioxidant business and the launch of new products. The return on equity (ROE) is expected to improve from 15.5% to 17% by FY26, and the company is expected to generate ₹330 crore in free cash flow over the next two years.

While Vinati Organics is set for considerable growth with its strategic investments, high stock valuations have led HDFC Securities to maintain a cautious outlook. Despite the long-term potential, the brokerage warns of a possible short-term price correction.