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INVESTMENT RATIONALE

Deals in Niche and Specialized products… VOL deals in products with technological entry barriers. Over a period of time it has developed exclusive production techniques and thus enjoys economies of scale. The products are next generation products having wide application in various sectors. Strong leadership in IBB and ATBS segment… VOL is leader in IBB (Isobutyl Benzene) holding 60.0% share in global market. In ATBS segment, company ranks second in the world with 25.0% market share. It is in the process of increasing the capacity for ATBS which will enhance its position further. Backward and Forward Integration… VOL is well integrated in backward and forward ways. The dependency on foreign supplier for raw material used in ATBS has been reduced with setting up of IB (Isobutylene) plant. On the forefront, long term supply contracts with the clients provide visibility in production. Higher Margins by controlling the Operational Costs… With a planned expenditure of ` 330 mn, VOL is setting up 5MW power plant for captive consumption. The project will be operational by FY 2013. This will help in lowering down the operational costs by ` 70‐80 mn thus improving its operating margins in future. On the Growth Track with introduction of New Products… VOL’s new products in the pipeline are following the similar track of being specialized in nature. Introduction of PAP (Para Amino Phenol) is currently in the pilot project stage. Diacetone Acrylamide (DAAM) is another high value monomer, where it is commissioning plant of 1,000 mtpa.

OUTLOOK & VALUATION Vinati Organics Limited (VOL) was established in 1989 and manufactures specialty organic intermediaries and monomers. VOL is the world’s largest manufacturer of Isobutyl Benzene (IBB) and second largest manufacturer of 2‐Acrylamido 2‐Methylpropane Sulfonic Acid (ATBS). IBB is an organic, neutral, aromatic specialty chemical used as a basic raw material for Ibuprofen, which is an anti‐inflammatory analgesic drug used in medical treatment. ATBS is a specialty monomer widely used in oil‐field recovery, water treatment, acrylic fiber manufacturing and personal care products. Other high value products are Normal Butylbenzene (NBB), Hexenes, N‐Tertiary Butyl Acrylamide (TBA) and Aromatic Solvents. At CMP of ` 81, the stock is available at an attractive valuation of 8.2x its FY12E earnings of ` 9.9. We recommend investors to BUY the stock below ` 80 for initial target price of ` 99 (10.0x FY12E Earnings).

KEY FINANCIALSY/E Mar. Revenue

(` mn)APAT(` mn)

AEPS(`)

AEPS (% Ch.)

P/E (x)

ROCE (%)

ROE (%)

P/Sales(x)

FY09 1,905.0 251.3 5.1 (66.9) 15.9 29.6 38.7 2.1FY10 2,317.6 400.4 8.1 59.3 10.0 32.9 40.4 1.7FY11E 3,092.9 410.7 8.3 2.6 9.7 23.0 30.2 1.3FY12E 3,870.1 489.8 9.9 19.3 8.2 25.8 27.2 1.0

Please refer to important disclosures at the end of the report For private Circulation Only.

Sushil Financial Services Private Limited Member : BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]

October 27, 2010 BUY PRICE ` 81 TARGET ` 99

Techno Speak

Specialty Chemical

SHARE HOLDING (%)

Promoters 74.92

FII 0.31

FI / MF 0.05

Non Promoters 2.15

Public & Others 22.57

STOCK DATA

Reuters Code Bloomberg Code

VNTI.BO VO IN

BSE Code NSE Symbol

524200 VINATIORGA

Market Capitalization*

` 3,999.2 mn US$ 89.7 mn

Shares Outstanding* 49.3 mn

52 Weeks (H/L) ` 98 /51

Avg. Daily Volume (6m) 34,163 Shares

Price Performance (%)

1M 3M 6M

5 ‐ 3

200 Days EMA: ` 72

*On fully diluted equity shares

EQUITY ANALYST Alok Deora | +91 22 4093 4014 [email protected]

RESEARCH ASSOCIATE Shilpi Jain | +91 22 4093 4004 [email protected]

Vinati Organics LimitedInitiating Coverage

October 27, 2010 2

Vinati Organics Limited

COMPANY OVERVIEW VOL has been operating in the chemical manufacturing industry since 1992. It was co‐promoted by Mr. Vinod Saraf along with Maharashtra Petrochemicals Corporation Limited. It has achieved record success in setting up the highly technical plants for manufacturing IBB and ATBS. The company has positioned itself as a powerful entity in the industry by providing innovative solutions through its unique products and technology.

BOARD OF DIRECTORS Members of the Board Designation

Mr. Vinod Saraf Managing Director

Mr. Girish M. Dave Non‐Executive Director

Mr. Mohit Rajesh Mutreja Director ‐ Finance

Mr. Chintaman Bhaskar Gokhale Director

Ms. Vinati Saraf Mutreja Executive Director

Ms. Viral Saraf Mittal Director‐ Corporate Strategy

MANUFACTURING FACILITIES Mahad Factory The plant was installed in 1989 with technical collaboration of Institut Francais du Petrole (IFP), France. It is located in Raigad district of Maharashtra. It is mainly for the production of Isobutylbenzene (IBB) and Normalbutylbenzene (NBB).

From the initial production capacity of 1,200 MT for IBB, the current production capacity has reached to 14,000 MT. It enjoys 60.0% share in global market for this particular product. The facility is remarkable as it has consistently helped the company to maintain 99.8% purity level in IBB, against international standards of 99.5%. The plant is environment‐friendly and manages to treat the effluents and secure additional revenues.

Ranked among ‘Top 10 fastest

growing companies in India’ for 2009.

By ET group.

Ranked 7th among ‘Top 100 fastest growing

companies in India’ By ET Intelligence Group

for 2010.

Listed amongst Forbes Asia’s 200 Best Under a Billion

Companies.

October 27, 2010 3


Lote Factory The plant was installed based on breakthrough technology developed with the aid of National Chemical Laboratories (NCL), Pune. It is located in Ratnagiri district of Maharashtra. This facility is primarily used for production of 2‐Acrylamido 2‐Methylpropane Sulphonic Acid (ATBS), Sodium Salt of ATBS (NaATBS), n‐tertiary Butylacrylamido (TBA). At this plant, the company has been able to successfully purify and produce a marketable by‐product – Tertiary butyl acrylamide (TBA). It is also reutilizing the ATBS waste and making a polymer named ‘vintreat cap’. These practices have been quite useful in maintaining the environmental safety and in enhancing the revenues as well.

PRODUCTS Since inception, VOL’s focus has been on manufacturing niche organic chemicals. The two key products, Isobutyl Benzene (IBB) and 2‐Acrylamido 2‐Methylpropane Sulphonic Acid (ATBS) play a very critical role in various important industries like Pharmaceutical, Oil Recovery, Water treatment and Chemical etc. Company enjoys oligopolistic market situation in both of its products.

AROAMTICS

Isobutylbenzene Normal Butylbenzene Hexenes C10 Aromatic Solvent

ISO 9001:2000 Certification for IBB and ATBS

By Certification Body of TUV South Asia Pvt. Ltd.

INDUSTRIAL MONOMERS ATBS Sodium Salt of ATBS N‐Tertiary Butyl Acrylamide N‐Tertiary Octyl Acrylamide Diacetone Acrylamide

National Safety Award in 2005 for Lote‐Parshuram

facility in Maharashtra By Govt. Of India

NEW PRODUCTS

Isobutylene High Purity MTBE Methanol

INDUSTRIAL POLYMERS

Vintreat ‐ 243 Vintreat ‐ 343 Vintreat ‐ 238 Vintreat ‐ 230 Vintreat ‐ 245 Vintreat ‐ 140

Vintreat ‐ CAP

Export Recognition award in 2006‐07 for Basic Chemical Group From Government of

Maharashtra.

October 27, 2010 4


Very few companies in world have succeeded in achieving the competence in production of these products and VOL is one of them. As years passed by, the production processes got refined and now it is striking fortunes in exploiting even the residual portion of the main products.

ATBS (Acrylamido Tertiary Butyl Sulphonic Acid) This is a specialty monomer which is in the form of white powder and acts as Co‐monomer. It is multi‐usage product applied in various industries like oil‐field recovery, water treatment, acrylic fiber manufacturing, adhesives, paper and pulp industry and personal care products. The key inputs for this chemical are the derivatives of petroleum crude. As the global crude oil prices have scaled up the world demand for ATBS will increase by 2‐3 fold. It is essentially used in Enhanced Oil Recovery. It acts as water absorbent which helps them in separation of oil and water from the sludge which is left at the end. Thus the oil recovery can be improved.

Raw Material The key input for ATBS is Isobutylene (IB) which previously was imported from Europe and Taiwan in pressurized tanks. In this process the company had to pay high logistics cost which was around 20.0%‐30.0% of Sales. Thus, it opted for backward integration and has set its own plant with 12,000 tpa capacity. From this, 4,000 tons will be for captive consumption and balance will be sold in the market.

Current Market Scenario There are only 3 manufacturers of ATBS in the world viz. Lubrizol USA (14,000 tpa), Toagosei Japan (6,000+ tpa) and VOL India. Demand is much higher than the current total supply. The installed capacity of VOL is 10,000 tpa which will be increased to 18,000 tpa in coming years. This will make the company market leader in this niche segment. Manufacturing Capacity for ATBS

0

5000

10000

15000

20000

ATBS capacity (mtpa) 1000 3600 12000 18000

2002 2006 2009 2012 (expected)

Source: Company, Sushil Finance Research Estimates

18 times increase in capacity by 2012

Stands 2nd in world for ATBS capacity with 25.0% market

share.

October 27, 2010 5


VOL is yet in the process of adding up the capacity for ATBS. Market demand for the same is expected to grow 2‐3 times. Thus, with 18,000 mtpa capacity in place by 2012, company will become the global leader in this specialized category as well.

Isobutyl benzene (IBB) Isobutyl Benzene is an organic, aromatic, neutral, colourless liquid. It is also known as 2‐methyl‐ 1 phenylpropene. It is a single‐use product required in the manufacture of Ibuprofen, an analgesic and anti‐inflammatory drug. It is also used as specialty solvent in perfumery industry.

Raw Material IBB is manufactured out of toluene, propylene, methanol, potassium carbonate, sodium metal etc.

Current Market Scenario VOL is market leader in IBB with 60.0% market share with production capacity of 14,000 tpa. The global market is growing at 5.0% annually but company has managed to grow at much faster pace. The expertise in technology and early entry benefits have aided the company to gain over pricing and volume. Thus, slowly the Chinese players had to quit this niche segment as VOL posted strong competition. On the whole the company could intensify its global market share.

Manufacturing Capacity of IBB

0

5000

10000

15000

IBB capacity (mtpa) 1200 3000 5000 10000 14000

1993 1995 1997 2006 2009

Source: Company

VOL started the production of IBB at Mahad facility in 1993 with a capacity of 1,200 mtpa. In the initial years, this was the flagship product in the company’s portfolio and at that time the overall market demand was also growing. Currently, the demand for IBB has matured and company has no plans for further capacity expansion. The growth has saturated at 5.0% pa for IBB. Thus, going forward VOL will shift its focus from IBB to ATBS and other high value products. The capacity utilization of IBB plant is almost 90.0%‐95.0% and is sufficient enough to cater to the market demand.

Largest Manufacturer of IBB in the world with

60.0% market share.

11.5 times increase in capacity till 2009

October 27, 2010 6


Other Products Normal Butylbenzene (NBB)

It is a specialty solvent used in synthesis of intermediates like Ortho‐Butyl Aviline & Para‐Butyl Aniline. The product is also used in LCD.

Hexenes (C‐6 Aliphatic Hydrocarbons) Used in various forms like thinners, solvent extractions, tyre retreading and as octane booster for Gasoline.

C 10 Aromatic Solvent The product is used in paints, coatings, inks, cleaning solvents, agrochemicals and pesticides formulations.

N‐Tertiary Butyl Acrlamide (TBA) The product is used as monomers in cosmetics, acrylic polymers and acts as adhesives.

NaATBS It is the Sodium Salt of ATBS which is in liquid form. Volume wise 1.0kg of ATBS equals 2.0kg of NaATBS.

SEGMENTAL ANALYSIS

Over the last few years, VOL has been trying to improve its sales mix and increase the contribution of high margin ATBS segment to the topline. The sales‐mix data shows a decreasing trend for IBB segment. In 2008, this segment contributed 68.0% to the topline, which was down to 58.0% in 2009 and was further reduced to 54.0% in 2010. Going forward VOL will restrict the contribution to almost 30.0% from this particular segment. The ATBS and Na‐ATBS segment combined together contributed 27.0% to the topline in 2008, while in 2009 it was increased to 36.0% and in 2010 the same was further increased to 44.0%. The trend clearly shows that VOL is keen on enhancing the sales of its high‐end products. VOL is aiming to achieve 56.0% contribution from this segment by 2012‐13. VOL is practicing the methodology of clean and safe production processes. It is trying to generate revenues by further processing the residual portion. The contribution from this and other new chemicals will stand between 5%‐10%.

October 27, 2010 7


INDUSTRY ABSTRACT Indian Scenario Over the last fifteen years the Indian chemicals industry has graduated from manufacturing principle chemicals in a highly regulated market to being a mature industry in a liberalized economy. Until 1991, India had a closed economy, with the domestic chemical industry enjoying protection in the form of differential import duties on raw materials and finished chemical products. Chemical manufacturing was largely controlled by licensing regulations. The chemical industry is among the fastest growing ones in India. The bulk of chemicals produced in India comprise either upstream products or intermediates, which go into a variety of manufacturing applications including fertilizers, pharmaceuticals, textiles and plastics, agrochemicals, paints and dyes.

Specialty Chemical Segment Specialty chemicals have a huge role in global economy. Not even a single industry can exist without the use of specialty chemical. In virtually every process of step followed in any industry the use of specialty chemical can be found. Even in agriculture specialty chemical is being used to increase the production of crops. Some major areas apart from agriculture, where specialty chemical is used are construction & pipes, electronic materials, ink and graphics, fabric care, packaging, paint and coating, paper and board, personal care, photo and digital imaging, plastics and rubber, textile and fibers, water treatment and in automotive areas. Under the category specialty chemical there are several subcategories like

*Adhesive chemicals Mining chemicals

*Aromatic chemicals Agricultural chemicals

*Cosmetic chemicals Battery chemicals

*Cleaning chemicals Construction chemicals

*Coating chemicals Automotive chemicals

VOL has placed itself strategically in the specialty chemical industry. At this stage, it is enjoying the benefits from the buyers and sellers side. The core competency achieved in production, quality and pricing coupled with the growing importance of products has turned VOL as preferred choice of the buyers.

* These are the

chemical segments in which VOL’s products are

useful.

October 27, 2010 8


COMPETITIVE SCENARIO IBB IBB is primarily manufactured in India, China and the US with total market size of 22,000 TPA. It is estimated to grow by approximately 5.0% annually going forward. Other companies involved in manufacture of IBB include:‐

Herdilla chemicals (SI Group) – Capacity to manufacture 3,500 TPA Few Chinese manufacturers – Capacity to manufacture 500 TPA Albermarle, U.S.A – Manufacture only for captive consumption

Being the world leader in IBB, VOL does not plan to go for capacity expansion as the current capacity is sufficient to cater to the demand for IBB. Along with IBB, VOL also manufactures side derivative products of IBB which is Normal Butylbenzene. ATBS Currently, there are only three manufacturers of ATBS in the world. VOL is the only Indian company and second largest company in world in terms of capacity. Global ATBS market is estimated to grow by 10.0%‐15.0% annually going forward. Other companies involved in manufacture of ATBS include:‐

Lubrizol, U.S.A – Capacity to manufacture 14,000 TPA Toagosei, Japan – Capacity to manufacture more than 6,000 TPA

ATBS current stands at the 2nd place currently with manufacturing capacity of 10,000 TPA. With its capacity expansion programme which is expected to complete by Q1 FY 2012, its capacity would enhance to 18,000 TPA. This will also make it the world market leader in production of ATBS. VOL does not face significant competition in terms of pricing from other two suppliers of ATBS. Majority of Toagosei’s manufactured ATBS is used for its captive consumption and only balance in sold in the market.

October 27, 2010 9


UNIQUE POSITIONING IN THE INDUSTRY VOL is placed strategically in the specialty chemical industry. It manufactures monomers which act as a base for polymer and other complex chemicals. It has the benefits of working with world’s finest and strongest chemical players. It enters into long‐term contracts for supply and thereby forecasts the demand for its products. The agreements are fairly priced whereby company jointly shares the risks and returns with its clients.

WHY VINATI ORGANICS…??

Placed strategically‐ the ATBS product commands for expensive and specialized technology for its production and small players at this stage feel the heat of competitive pricing and economies of scale put upon by Vinati.

Less lucrative for the big players to enter‐ new big players will not enter as they can’t enjoy the large volume game due to limited demand for these niche products.

Increase in crude oil prices will indirectly boost the demand for ATBS ‐ as crude oil prices soar, the oil exploring companies will pay more attention in extracting the oil to the fullest as the product acts as water absorbent in the sludge left at the end of oil well. Oil recovery can be enhanced with the usage of ATBS.

The exclusive tie ups‐ the technology partners of the company will not share the information with other players and thus there persists technical barrier for new players to achieve this quality and pricing.

Vinati produces & sells Specialty Monomers which is the base for

various polymer producing companies.

Giant‐sized Polymers and Chemical manufacturers like BASF, Rohm&Haas, Ciba, Nalco and Clariant process the

monomers further and sell to end‐user companies.

The polymers are then sold to end‐users like ONGC, Reliance and other refining companies.

October 27, 2010 10


FINANCIAL RATIO STATEMENT Y/E March FY09 FY10 FY11E FY12EGrowth (%) Net Sales 30.2 21.7 33.5 25.1APAT 65.3 59.3 2.6 19.3EBITDA 50.6 55.6 11.7 29.9Profitability (%) EBITDA Margin 20.1 25.5 21.3 22.2Adj. PAT Margin 12.8 16.7 12.8 12.2ROCE 29.6 32.9 23.0 25.8ROE 38.7 40.4 30.2 27.2Per Share Data (Rs.) Adj. EPS 5.1 8.1 8.3 9.9Adj. CEPS 5.9 9.7 10.1 12.1BVPS 13.1 20.1 27.6 36.5Valuations (X) PER 15.9 10.0 9.7 8.2P/BV 6.2 4.0 2.9 2.2EV / EBITDA 11.5 7.6 7.5 5.8EV / Net sales 2.4 2.0 1.7 1.3Mcap / Net sales 2.1 1.7 1.3 1.0Turnover Days Debtors days 47.9 50.2 52.0 52.0Creditors days 42.7 35.4 36.0 36.0Gearing Ratio Total Debt to Equity 0.8 0.6 0.8 0.6

Source: Company, Sushil Finance Research Estimates

BALANCE SHEET STATEMENT `.mn

As on 31st March FY09 FY10 FY11E FY12EShare Capital 98.7 98.7 98.7 98.7Reserves & Surplus 550.3 893.1 1,262.7 1,703.6Net Worth 649.1 991.9 1,361.5 1,802.3Minority Interest ‐ ‐ ‐ ‐Secured Loans 448.4 569.9 1,069.9 1,069.9Unsecured Loans 61.2 61.3 61.3 61.3Total Loan funds 509.6 631.2 1,131.2 1,131.2Deferred Tax Liability 58.6 87.2 87.2 87.2Capital Employed 1,217.3 1,710.2 2,579.8 3,020.7Net Block 447.0 796.3 1,605.9 1,897.4Goodwill 434.3 383.7 383.7 383.7Investments ‐ ‐ ‐ ‐Inventories 120.6 188.9 214.7 264.7Sundry Debtors 279.2 358.7 440.6 551.4Cash & Bank Bal 18.9 17.9 86.9 125.4Other Curr Assets 74.7 105.8 105.8 105.8Current Assets 493.3 671.4 848.1 1,047.3Curr Liab & Prov 157.3 141.1 257.8 307.8Net Current Assets 336.0 530.3 590.3 739.6Miscellaneous Exp ‐ ‐ ‐ ‐Total Assets 1,217.3 1,710.2 2,579.8 3,020.7

PROFIT & LOSS STATEMENT `.mn

Y/E March FY09 FY10 FY11E FY12E

Net Sales 1,905.0 2,317.6 3,092.9 3,870.1

Other Op Income 53.2 84.5 108.3 135.5

Raw Mat. Consumed 1,219.2 1,328.3 1,888.7 2,323.2

Manufacturing Cost 125.5 210.5 288.1 360.5

Staff Cost 88.4 114.9 149.3 194.2

Admin and Selling Exp 132.1 136.9 192.1 240.3

Total Expenditure 1,565.2 1,790.4 2,518.2 3,118.2

PBIDT 393.0 611.6 682.9 887.4

Interest 41.4 44.2 79.2 79.2

Depreciation 32.7 49.6 90.4 108.4

PBT incl OI 318.9 517.9 513.3 699.7

Tax 67.6 117.5 102.7 209.9

PAT 251.3 400.4 410.7 489.8

Minority Interest ‐ ‐ ‐ ‐

APAT 251.3 400.4 410.7 489.8

CASH FLOW STATEMENT `.mn Y/E March FY09 FY10 FY11E FY12EPBIT 318.9 517.9 513.3 699.7Depreciation 32.4 48.9 90.4 108.4Provision for Tax (67.6) (117.5) (102.7) (209.9)Chg in Working cap (26.2) (195.3) 9.0 (110.7)Chg in others 5.9 28.6 ‐ ‐Cash flow from operations 263.5 282.6 510.1 487.5

Chg in Gross PPE (71.0) (398.2) (900.0) (400.0)Chg in Investments (325.1) 50.6 ‐ ‐Chg in others ‐ ‐ ‐ ‐Cash flow from investing (396.1) (347.6) (900.0) (400.0)

Chg in debt 166.7 121.6 500.0 ‐Chg in Share Capital ‐ ‐ ‐ ‐Dividend Paid (28.9) (57.6) (48.0) (57.3)Chg in others ‐ ‐ 7.0 8.3Cash flow from financing 137.8 64.0 458.9 (49.0)

Chg in cash 5.2 (1.0) 69.0 38.5

Cash at start 13.7 18.9 17.9 86.9

Cash at end 18.9 17.9 86.9 125.4

October 27, 2010 11


RISKS AND CONCERNS Almost 75.0% of the sales are outside the country. Any turmoil on the global front will badly affect the company sales. Thus the company should increase its footage on domestic front as well in order to balance the portfolio and mitigate the foreign currency risk.

The main raw materials required to manufacture IBB are petroleum based products and the prices are linked to crude oil. The margins may be affected adversely if dollar strengthens.

The business of the company is based on complex technology which is subject to obsolescence risk. The company continuously needs to upgrade its technical support used in its manufacturing, research and development facilities.

OUTLOOK & VALUATION

Vinati Organics Limited (VOL) was established in 1989 and manufactures specialty organic intermediaries and monomers. VOL is the world’s largest manufacturer of Isobutyl Benzene (IBB) and second largest manufacturer of 2‐Acrylamido 2‐Methylpropane Sulfonic Acid (ATBS). IBB is an organic, neutral, aromatic specialty chemical used as a basic raw material for Ibuprofen, which is an anti‐inflammatory analgesic drug used in medical treatment. ATBS is a specialty monomer widely used in oil‐field recovery, water treatment, acrylic fiber manufacturing and personal care products. Other high value products are Normal Butylbenzene (NBB), Hexenes, N‐Tertiary Butyl Acrylamide (TBA) and Aromatic Solvents. At CMP of ` 81, the stock is available at an attractive valuation of 8.2x its FY12E earnings of ` 9.9. We recommend investors to BUY the stock below ` 80 for initial target price of ` 99 (10.0x FY12E Earnings).

Please Note that our technical calls are totally independent of our fundamental calls.

Additional information with respect to any securities referred to herein will be available upon request. Sushil Financial Services Private Limited and its connected companies, and their respective directors, Officers and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof.

This sheet is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken in preparing the above, We claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk.

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