HDFC Securities SELL recommendation on Vinati Organics with a discounted cash flow- based target price of INR 1,015 (WACC 10%, terminal growth 3.5%) is driven by (1) demand slowdown for the high-margin 2-Acrylamido 2- Methylapropane Sulphonic Acid (ATBS) that contributed ~60% to its revenue mix in FY20, (2) shift in revenue mix towards lower-margin Iso Butyl Benzene (IBB), which formed ~25% of the mix in 3Q versus 16% in FY20, and (3) slow ramp-up in the recently-commissioned Butyl Phenol product line. In the absence of a new product pipeline, we believe current valuations are high at ~33x FY23E EPS. 3Q EBITDA/PAT were 27/12% below estimates owing to a 10% decline in revenue, higher-than-expected opex, higher-than-anticipated depreciation, offset by higher-than-anticipated other income and lower-than- anticipated tax outgo.

Financial performance: 3Q EBITDA stood at INR 721mn, -13/-14% YoY/QoQ, owing to sluggish demand for ATBS and IBB in the quarter. EBITDA margin dropped to 32.3% (34.8/38.3/40.2% in 3QFY20/2QFY21/FY20).

Capex: The Capex plan of INR 1.5bn for manufacturing four new speciality chemicals, expanding the capacity of PTBBA plant, and the outlay of INR 0.6bn for new products and expansion are all on track. First revenues would accrue from 2HFY22 onwards. Expected revenue from the total Capex is ~INR 3bn at full capacity by FY25.

ATBS: Weakness in demand for ATBS continues in 3Q despite increased crude oil prices. The demand slowdown for ATBS is due to its reduced demand by the oil and gas industry that forms 25-30% of its global demand. It contributed 38% to the 3Q topline (35% in 2QFY21). The brownfield expansion of 14ktpa shall be completed by FY21 end, although the current demand for the product remains to be subdued and can be met through the existing capacity of 26ktpa.

Iso Butyl Benzene (IBB): Revenue contribution came at ~25% in 3Q. The product witnessed a good offtake and recorded the highest sales volumes in a quarter in 3Q. IBB capacity runs at a full capacity currently.

Butyl Phenol: The Butyl Phenol plant continued to run at a low capacity, given its muted demand in 3Q, although it is now showing traction.

Change in estimates: We cut our FY21 EPS estimate by 8.2% to INR 26.0 per share to factor in the overall performance in 9MFY21.