Motilal Oswal Sees A Potential Upside Of 39% From This Mid Cap Stock

The mid cap stock of Vinati Organics is a recommended stock to buy by Motilal Oswal for investors as per the analyst coverage report. A potential gains of 39% are visible from this stock as the report coverage shows demand outlook and realizations.

About Vinati Organics

Vinatic Organics is a leading manufacturer of specialty chemical and organic intermediaries with a sustained market presence spanning over 35 countries in the world. Since the inception in 1989, the company has evolved from being a single product manufacturer to an integrated business, offering a wide range of products to some of the largest industrial and chemical companies across US, Europe and Asia.

It has an integrated model and is the largest producer of Isobutyl Benzene (IBB) and 2-Acrylamido 2 Methylpropane Sulfonic Acid (ATBS), among other chemical compounds. The market share of these two combined compounds manufactured from the company is greater than 65%.

Robust demand drivers for ATBS

According to the report, ATBS is a versatile chemical compound that is used in various industries including oil. For oil it has great demand as the oil rigs have increased globally. Oil drilling activities have increased in parts of US, Europe and other parts of the globe to shift focus from Russian oil dependency because of Russia-Ukraine war.

"Oil drilling activities remain vigorous globally as the countries move away from their dependence on Russian oil and gas. Average global rig counts have risen 10% since the Russia-Ukraine conflict started in Mar'22. According to Baker Hughes, the global rig counts have increased to an average

of 1,747 in CY22 from an average of 1,361 in CY21 with North America's rig count being at an average of 897 in CY22 v/s an average of 606 in CY21. Average rig counts in Europe have risen 47% to 115 in Dec'22 v/s Mar'22 level."

The reports also states, "the global ATBS market stood at USD7.7billion in CY21 and it is expected to increase to USD17billion by end-CY28, reporting ~12% CAGR during the period. In line with all the above, Vinati Organic has announced an expansion of its ATBS capacity by 50% to 60ktpa (>65% global market share) from 40ktpa, which is likely to come online in 2HFY24."

Export realizations

As per the Motilal Oswal coverage report, the exports realization is line with Brent prices. "Exports accounted for 69% of Vinati Organic's overall revenue in FY22. ATBS is the largest product of Vinati Oragnic and currently contributes 48% to its overall revenue (53% in FY22). Vinati Organics also enjoys more than65% global market share in IBB, which is one of the main raw materials used in production of Ibuprofen. Demand for both remains strong after a lackluster FY21 and FY22. Export sales for 9MFY23 at 43,353 metric tonnes were similar to that of the 9MFY22 level."

According to the report, "overall export realizations for VO stood at approcaimately USD3/kg in 3QFY23, flat v/s 2QFY23. During the same period, Brent has corrected 11% QoQ to USD88.4/barrel of crude oil. That being said, if we look at a much longer period, our research suggests that the realizations move in line with Brent prices."

'Buy' Stock of Vinati Organics at a price target of Rs 2,740

Motilal Oswal coverage report states the reason for a 'buy' view on this mid cap stock, ATBS demand outlook remains quite strong going forward in FY24 estimates. Through its subsidiaries, the company commences production of MEHQ, Guaiacol, and Iso Amylene and antioxidants.

In terms of valuation the analyst asks investors to buy this mid cap stock of Vinati Organics. "The stock is trading at 32x FY24 estimated earnings per share (EPS) and 25x FY24 estimated enterprise value (EV)/earnings before interest tax depreciation and amortization (EBITDA), with return ratios of 23-26%. It had a fixed asset turnover of 2x as of FY22. We value the company at 35x Dec'24 estimated EPS to arrive at our target price of Rs 2,740."

The stock price per share closed at Rs 1881.50, with an intraday growth of 2.74%. If you invest in this mid cap stock at the current market price of Rs 1930.35 you will probably earn massive returns of Rs 43.96%. Its 52-week high is at Rs 2372.95 per share and 52-week low is at Rs 1675.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.