CARE Rating has reaffirmed its rating on the bank facilities of Vinati Organics Limited (VOL).

The ratings assigned to the bank facilities of Vinati Organics  factor in its market leadership in its two key products, viz, in 2- Acrylamido 2 Methylpropane Sulfonic Acid (ATBS) and Isobutyl Benzene (IBB) in the global market.

CARE Ratings Limited (CARE Ratings) believes that the competitive advantage of VOL in both its product segments is expected to sustain in the medium term as the manufacturing processes are not easy to replicate and the same acts as entry barrier for new entrants.

The ratings also factor in the improvement in sales reported by VOL in FY22 (refers to the period April 1 to March 31) on the back of strong demand for ATBS (contributing to around 50% of the total sales for VOL).

Revenue from ATBS grew by 123% in FY22 on a YoY basis, while revenue from IBB declined by 34% over the same period. Furthermore, during the year FY21, VOL commenced commercial production of a new product, viz., butyl phenol, which contributed to around 12% to the total revenue of the company in FY22.

VOL is currently undertaking capex of around Rs. 580 crore (around Rs. 300 crore in VOL for ATBS capacity expansion and around Rs.80 crore in Veeral Organics Private Limited (VOPL; 100% subsidiary of VOL) which will enable it to manufacture additional derivatives of Isobutylene (IB)). As such, future revenue growth will be supported by increasing demand for ATBS and butyl phenols and incremental revenue from new IB derivatives.

The operating margins for VOL have declined to around 30% in FY22 (PY: 38%) owing to rising raw-material prices, higher freight cost due to shortage of containers and higher power and fuel costs due to significant jump in coal and gas prices. While rising input costs are passed on to the customers with a lag, the overall operating margins are expected to be lower than historical levels, albeit at healthy levels owing to changing product mix.

The ratings continue to derive strength from the long-track record and experience of the promoters in the speciality organic chemical industry. VOL continues to benefit from the long-term relationship with established and reputed clientele across various geographies. Backward integrated manufacturing process with zero discharge along with VOL’s cost-efficient operations acts as an entry barrier for new entrants. Furthermore, the rating derives strength from healthy cash flows from operations, favourable capital structure along with strong liquidity and debt coverage indicators.

The ratings continue to be tempered by the concentration of its total operating income from limited key products and susceptibility of VOL’s operating margin to raw material price/foreign exchange fluctuations.

Outlook: Positive

The positive outlook primarily reflects CARE’s belief that VOL’s business and financial risk profile will continue to remain strong and will further improve over the medium term. The revision in outlook also reflects expectations of VOL’s healthy revenue growth on back of increase in demand from existing products as well as effective diversification in product profile while sustaining PBILDT margins in range of 25-27% and with debt free profile and strong liquidity. The Outlook may be revised to ‘Stable’ on significant decline in PBILDT margins, and deterioration in capital structure due to increased debt levels or lower cash accruals.