Investment Idea

INDIA l Institutional Research l Chemicals l 26th May 2021

Valiant Organics Ltd.
CMP: Rs1632, MCap: Rs44.3 bn l Fair Value: Rs2670
Eureka in the lab
We believe that Valiant Organics Limited (VOL), a chemical company with focus on Fair Value 2670 Key Data
Bloomberg Code VORG IN
specialty chemicals and expertise in processes like Chlorination, Ammonolysis, CMP 1632 Curr Shares O/S (mn) 27.2
Hydrogenation, and Acetylation, is a standout in the chemical space, characterised by a Diluted Shares O/S(mn) 28.0
differentiated business model with products across the value chain, decades of experience Upside 64% Mkt Cap (Rsbn/USDmn) 44.3/608.2
Price Performance (%) 52 Wk H / L (Rs) 1926/626
in Chlorophenols products, high entry barriers, reputed clientele, and high return ratios.
1M 6M 1Yr 5 Year H / L (Rs) 1926/132
The company has made significant investments to enhance capacities, which will help VORG IN 17.8 Daily Vol. (3M Avg.) 71,080
5.0 NA
boost revenue growth. The stock appears undervalued as compared to its specialty NIFTY 5.0 18.3 68.2
chemical peers in light of its robust financials and business model. We value VOL at INR Source: ACE Equity, Bloomberg, MNCL Research
2670 on 24x EV/EBITDA on FY23E, an upside of 64% from CMP.
Shareholding pattern (%)
▪ Unique, integrated business model: VOL has evolved from a niche chlorophenol Particulars Mar-21 Dec-20 Sept-20 Mar-20
manufacturer to a diversified chemical company with a product portfolio of ~22 Promoter 42.7 42.8 42.3 47.8
products. The company’s USP is its backward and forward integrated business model FPIs 1.8 1.8 2.1 0.0
coupled with products across the value chain. This integrated model has enabled the DIIs 2.7 2.8 3.3 0.3
company to effectively manage its supply chain and drive operational efficiency. Others 52.8 52.5 52.3 51.9
Through a chain of subsidiaries (including step-down) and promoter companies, VOL Source: Ace Equity
ensures effective control over RM fluctuations. This is an optimal strategy that ensures
not just growth but relative margin stability. Why should you read this report?
• An under-researched stock idea in the crowded
▪ Strategic expansion to begin paying off: VOL has incurred capex of ~Rs4.4bn during
chemical space
FY19-21 and we believe enhanced capacities should steer revenue growth for the next
couple of years. The company increased capacities of Chlorophenols products by 3.75x
in FY20, which at full utilization could contribute ~Rs3-4bn to revenues. It also Diverse and reputed clientele
undertook expansion of hydrogenation and ammonolysis process products. VOL
undertook an additional capex of Rs1bn at its Jhagadia plant for 3 new projects. We
believe high-value products, enhanced capacities, opportunity for import substitution
coupled with GOI’s Make in India initiatives support the high growth potential of the
company. Demand growth from end-user industries should add to the momentum.
▪ Diversification to newer products to steer exponential growth: VOL has forayed into Source: Company, MNCL Research
new products such as Para Amino Phenol (PAP) and is building PAP capacities of
10,000MTPA with the potential of Rs2.8-3bn contribution at peak utilization. Global
demand for PAP has increased in the recent past due to supply constraints. This bodes
well for the company as global players are trying to find alternative sources.
Furthermore, management plans to set up facilities for manufacturing Paracetamol and
other drug intermediates/APIs to increase the share of pharmaceuticals and other high-
value products.
▪ Outlook: We assign a 24x EV/EBITDA on FY23E thus deriving at a fair value of INR 2670.
This diverse chemical player should command a higher multiple in line with specialty
chemical peers due to its superior return ratios, customer stickiness, low debt levels
and, consistent cash flows. We believe the company is aptly placed to capture buoyancy Srishti Jain
in the specialty chemical segment driven by rising demand and shift in the supply chain. srishti.jain@mnclgroup.com
Risks to the thesis include muted demand, commodity price volatility and, a major
revival of Chinese competition.

Financials (Rs mn) FY19 FY20 FY21P FY22E FY23E CAGR FY22-23E
Revenue 6,923 6,749 7,548 9,127 10,484 17.9%
EBITDA 1,798 1,803 2,052 2,546 2,988 20.7%
EBITDA margins - % 26.0 26.7 27.2 27.9 28.5
PAT 1,213 1,239 1,145 1,446 1,731 20.2%
EPS (Rs/share) 49.1 45.6 42.2 53.3 63.8
ROE - % 78.2 38.8 25.7 25.8 25.2
ROCE - % 59.6 28.7 21.4 21.6 22.0
P/E (x) 20.8 50.5 38.7 30.6 25.6
EV/EBITDA (x) 7.4 18.0 22.4 17.8 14.9
Source: Company, MNCL Research Estimates

In the interest of timeliness, this document is not edited

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 ’One of its kind’ Integrated business model
Valiant Organics Limited manufactures key intermediates for sectors such as agrochemicals and
pharmaceuticals and is one of the leading manufacturers of Chlorophenols in India. VOL has 5
manufacturing facilities situated in Sarigam, Tarapur, Vapi, Jhagadia, and Ahmedabad (zero
discharge facilities with multipurpose plants) and a product portfolio of around 22 products. Over
the years, VOL witnessed exponential earnings growth led by acquisitions and capacity
expansions. The company derives superior margins compared to peers owing to cost optimization
and backward, forward and, vertically integrated model. Future growth triggers include:
▪ Augmented earnings due to mix of enhanced capacities and increased utilization
▪ Low-cost operations with integrated facilities
▪ Entrance into value-added products

Unique business model with products across value chain

VOL’s distinctive feature is its ability to expand its product value chain through a combination of
backward and forward integration. The company derives 2 fold benefits from the same: i)
effective cost management and lower dependence on suppliers ii) ability to move up the value
chain with value-added products. Intermediates industry is competitive and price sensitive,
requiring companies to be price competitive to maintain profitability. Strategically expanding into
products related to its current value chain enables VOL to garner profitability and maintain
margins. The company recently expanded into Ortho Nitro Anisole and Para Nitro Anisole as a
part of its backward integration plan which is used in the manufacturing of products such as
Ortho Anisidine and Para Anisidine (pre-dominantly dye and pigment intermediate). Through
forward integration, it expanded product offering to value-added products and we believe these
products would contribute to revenue growth.
Exhibit 1: Illustrations of VOL’s presence across product value chain

Source: Company, MNCL Research

Valiant Organics Ltd. 2

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 Future Growth Potential
▪ Entering newer products: VOL has forayed into production Para Amino Phenol (PAP) and is
PAP is a Key Starting Material building capacities of 10,000MTPA resulting in an Rs2.8-3bn contribution to revenues at peak
for the production of capacity. PAP prices surged over the last couple of months on the back of the temporary
Paracetamol (around 80% of closure of a Chinese facility and a rise in demand for paracetamol. This supply constraint
PAP produced is used in the places valiant in a sweet spot as many Indian manufacturers are on the lookout for new
manufacturing of Paracetamol) supply partners. A part of capacity should be used by Bharat Chemicals (step subsidiary) for
and production of the same is captive production (Bharat Chemical is planning a capacity expansion of Paracetamol from
incentivised under the PLI 4,000MTPA to 15,000MTPA). VOL also undertook capacity expansion to produce 1,000MTPA
scheme. Ortho Amino Phenol (OAP) as a part of the import substitution strategy. Part of OAP should
be captively consumed as RM, thus positively impacting EBITDA margins.
▪ Future growth opportunities: The management is considering setting up facilities for
manufacturing paracetamol and other drug intermediates/ APIs to increase the share of
pharmaceuticals and other high-value products. Brownfield expansion/ projects can be
undertaken at the 68,000 sq. metres land bank at Sayakha and 12,000 sq. metres at Dahej for
any such expansion.

Exhibit 2: PAP import trend-India (TPA) – Opportunity for import substitution

30,500
25,678
25,500 23,681 24,312
22,399
21,098 20,838
20,500 19,312

15,500

10,500

5,500

500
FY15 FY16 FY17 FY18 FY19 FY20 FY21
(Apr-Feb)
Source: Ministry of Commerce and Industry, MNCL Research

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 Tailwinds witnessed by End-user Industries
VOL’s products find applications in several industries such as agro-chemical, pharmaceutical,
rubber, and dyes and pigment industries, and veterinary drug manufacturing. Due to clamp
down in China, gaps have opened up in the chemical supply chain and India (and many
emerging countries) is aggressively looking at opportunities to close those gaps. Over the
years, Indian chemical players have positioned themselves as credible partners and are now
aptly placed to reap the benefits of these global changes. Indian Agrochemical industry as
seen in exhibit 2 is expected to grow by 5.5% CAGR during 2019-25, while the Indian API
industry is expected to grow by 8.1% CAGR during 2020-25. The Dyes and pigments market is
expected to grow by 11.5% CAGR during 2019-25 and specialty chemical in itself is expected
to grow at 11.3% CAGR during 2019-24.
Exhibit 3: Revenue Break-up (FY20)
Growth in specialty chemicals is Increased demand from textile,
buoyed by the recently adopted paints and coating, and plastic
‘China +1’ strategy by global industries to drive demand of
Pigment & dyes and pigments. Demands
chemical players as well as the
Specialty Chem, Dyes, 20%
need to de-risk supply chain post from middle-class population and
30%
turbulence faced by companies increase in discretionary spending
over the last couple of years provide a fillip to end-user
Pharmaceutical Agrochem, 40% industries
Growth in Indian Active (API), 10%
Growth in agrochem industry is
Pharmaceutical Industry (API) is
driven by low acreage area,
attributable to increased
growing population, increased
incidence of chronic diseases,
loss of yield due to pests/ unusual
increased focus on export, shift
monsoon and increased off-
to specialty segment and,
improved R&D patent molecules providing
potential to generic agrochem
companies

Exhibit 4: Growth Trend of Indian Chemicals Market (USD bn) Exhibit 5: Indian Agrochemical Market Trend(USD mn)
150 4000 3,798
3500
3000 2,760
100 2,540
2014 2,350
2500 2,090 2,180
2,010
136 133 2019 2000
50
76 78 2024F 1500
51 48 1000
23
0 7 12 500
Commodity Specialty Chemicals Others
Chemicals 2014 2015 2016 2017 2018 2019 2025F
Exhibit 6: Indian API Industry Growth Potential (Rs bn) Exhibit 7: Dyes and Pigments Market Trend(USD bn)
1300 1,186 14
1,098
1100 1,018 12
944 10 12.4
871
900 805 8
747
688 6
700 637
586 4
542 7.2
2 5
500
0
2015 2019 2024F
Source: Industry Sources, MNCL Research

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 Superior Financials:
VOL delivered a strong performance over the last 5 years with revenue growth of CAGR 70.7%
and PAT growth of 62% attributable to organic (enhanced capacities) and inorganic (Abhilasha
Tex-Chem Pvt. Ltd and Amarjyot Chemicals Ltd) growth. Even though the company is in expansion
mode, it has been able to maintain low debt levels (Debt/Equity ratio of 0.37 in FY21) due to its
operational efficiencies. Going forward, we expect revenue to grow at a CAGR of 17.9% during
FY22-23 led by additional capacities and increased product offering. On the margins front, the
company has been maintaining EBITDA margins over 25% attributable to efficient supply chain
management, cost optimisation, and backward integration initiatives. The company has superior
return ratios (ROE of 25.7% and ROCE of 21.4% in FY21) as compared to its peers due to its
integrated business model. We assign a 24x multiple on its FY23 EBIDTA arriving at an Enterprise
Value of Rs71.1bn and a target price of INR 2670, an upside of 64% on CMP.
Exhibit 8: VOL Financials (Consolidated)
Rs mn FY20 FY21P FY22E FY23E Drivers
Revenue 6,749 7,548 9,127 10,484 Uptick in utilization of enhanced capacities
EBITDA 1,803 2,052 2,546 2,988
Improved product profile and cost
EBITDA margins 26.7% 27.2% 27.9% 28.5%
efficiencies
EBIT 1,645 1,839 2,249 2,653
Other Income 63 59 65 72
Interest 23 50 80 94 Decrease in capitalization on interest cost
PBT 1,685 1,849 2,235 2,631
Tax 423 540 626 737
Adj. PAT 1,239 1,145 1,446 1,731
EPS (Rs/sh) 45.6 42.2 53.3 63.8
Debt/ Equity 0.32 0.37 0.27 0.19 Increased debt for on-going capex
ROCE - % 38.8 25.7 25.8 25.2
ROE - % 28.7 21.4 21.6 22.0
Source: Company, MNCL Research Estimates

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 Intrinsic Valuation
Exhibit 9: Valuation
Rs mn
EBITDA 2,998
Ascribed EV/EBITDA 24x
EV 71,711
Add: Net Debt + MI 618
Fair Market Cap 72,330
No. of shares (mn) 27.2
Fair Value/ share (Rs) 2670
Source: Company, MNCL Research Estimates

Exhibit 10: Industry Analysis

Company Type FY23E EV/EBITDA Consensus
Deepak Nitrite Ltd Commodity Chemicals 14.9
Tata Chemicals Ltd Commodity Chemicals 8.6
Balaji Amines Ltd Commodity Chemicals 18.5
Fluorochemicals, specialty, technical textiles and packaging
SRF Ltd 13.9
films
UPL Ltd Diversified Chemicals 7.8
Aarti Industries Ltd Specialty Chemicals (benzene based intermediates) and APIs 19.5
Vinati Organics Ltd Organic intermediates, monomers and polymers 26.8
Navin Fluorine International Ltd Fluorine chemistry 26.6
Laxmi Organic Industries Ltd Specialty Chemicals 26.9
Alkyl Amines Chemicals Ltd Specialty Chemicals 38.7
Rossari Biotech Ltd Specialty Chemicals 31.8
Industry Average 21.3
Source: Bloomberg, MNCL Research Estimates

The company has emerged as a specialty chemical player owing to inorganic acquisitions and
expansion of product portfolio to specialty products. Its superior financial performance also
reflects those of specialty chemical players, however, we believe certain existing products of the
company can be considered a part of the commodity gamut. To further strengthen our conviction,
we took the average of FY23 EV/EBIDTA consensus of varied players across verticals in the
chemical space and derived at as Industry average EV/EBITDA multiple of 21.1x.
Considering this, we believe our valuation of VOL at Rs2670 on 24x FY23 EV/EBITDA is reflective of
the financial performance of the company. Currently, the company is valued at a 22.4x FY21
EV/EBIDTA and at current valuation of 15x FY23 EV/EBITDA, we believe the company merits
upside owing to high return ratios of 20s%+, low leverage coupled with strong liquidity position
reflecting company’s judicious financial planning, enhanced utilization of expanded capacity and,
integrated business facilities. Thus, we value the company at 24x FY23 EV/EBIDTA.

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 Case Study
We can associate the possible opportunity in VOL’s journey to the episode of FY12-15 as seen in
the case of Vinati Organics Limited that saw a re-rating opportunity on the back of enhanced
capacity expansion coupled with the company moving up the value chain (similar triggers present
in VOL’s case). The company undertook expansion in most of its products/plants and increased
capacities, leading to multifold growth. Revenue post expansion, during FY12-14, grew by 24.7%
CAGR, while PAT during the same period grew by 25.4% leading to higher return ratios as seen in
Exhibit 13 and a significant increase in valuation.
Exhibit 11: Financial of Vinati Organics Limited during capacity expansion phase
Growth
Particular FY11 FY12 FY13 FY14 FY15
FY12-14
Revenue 3226.5 4474.6 5528.6 6961.3 7717.3 24.7% CAGR
EBITDA margins - % 22.66 20.60 20.76 21.50 24.19
PAT 519.7 548.1 686.6 861.5 1157.9 25.4% CAGR
EPS (Rs/share) 5.26 5.55 6.95 8.72 11.22
ROE - % 42.79 33.14 32.06 31.25 31.12 (189bps)
ROCE - % 36.36 31.28 27.23 30.89 37.75 (40bps)
P/E (x) 6.75 7.49 7.43 16.04 23.42 114.3%
EV/EBITDA (x) 5.60 5.63 5.75 9.26 13.69 64.4%
Source: Ace Equity, MNCL Research

Exhibit 12: Capacity Expansion

Product FY11 FY12 FY13 FY14 FY15
ATBS 12,000 26,000 26,000 26,000 26,000
IBB 14,000 16,000 16,000 16,000 16,000
IB 12,000 12,000 12,000 12,000 12,000
TBA 500 1,000 1,000 1,000 1,000
HPMTBE - 7,000 7,000 7,000 7,000
Source: Company, MNCL Research

Exhibit 13: EV/EBITDA and PE growth trend

60.00
50.00
40.00
30.00
20.00
10.00
0.00
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
EV/EBITDA(x) Adjusted PE (x)
Source: Exim Bank, MNCL Research

This growth in the case of Vinati Organics Limited further builds our conviction of the growth
opportunity/ path that lies ahead for Valiant Organics Limited.

Valiant Organics Ltd. 7

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 Company Background
Valiant Organics Limited commenced operations as a single product company in 1984 and has
now evolved to a diversified multi-product chemical manufacturer with focus on specialty
chemicals. Promoters of the company, Gogri Group (promoters of Aarti Group companies), have
been the architects of the VOL’s growth. The 35 years of legacy has helped the company establish
itself as a highly reliable partner with high quality-innovative products. The company’s product
selection complements its existing product portfolio, reaping the benefits of cost synergies and
seamless integration. VOL’s multiproduct plants enable the company to manufacture customized
products while leveraging economies of scale. VOL exports to Asia, Europe, and US and is looking
to penetrate newer geographies. The company remains focused on moving up the value chain
with high-margin products on the back of growing opportunities in the specialty chemical
segment.
Exhibit 14: Journey

• Established
Valiant Chemical
as 1997 • Incorporated as a
private limited
2016 • Acquired
Abhilasha Tex-
2019 • Listed on Main
Board of BSE
Corporation with a • Expanded product company • Listed on the SME Chem Pvt. Ltd. • Acquired Amarjyot • 1 : 1 Bonus shares
single product – range to include Board of the BSE Chemical issued
Meta Chloroanilin chlorophenols • Incorporated
wholly owned
subsidiary Valiant
1984 2005 2017 Specialty Chemical 2020
Limited

Source: Company, MNCL Research

Exhibit 15: Organizational View

Valiant Speciality
Chemical Limited
(100% ownership of VOL)
Valiant Organics Limited
(VOL)
Bharat Chemicals
Dhanvallabh Ventures LLP
(62.5% ownership of
(65% ownership of VOL)
Dhanvallabh)

Source: Company, MNCL Research

MNCL Research’s AQCG Score

Quadrant 1: >=72%
We analyse companies accounting quality and corporate governance based on MNCL’s
Quadrant 2: 65% - 71.9%
proprietary Accounting Quality & Corporate Governance (AQCG) score, which accounts for 15
Quadrant 3: 60% - 64.9% different attributes in the accounting and corporate governance domain for at least 5 years. This
Quadrant 4: <60% proprietary score has been back-tested on BSE 500 companies and enables us to assess the
accounting and corporate governance practices of the company.
VOL’s AQCG Score: 65.7% and 2nd quadrant
As VOL’s consolidated Interpretation of the score: A score of 65.7% signifies that VOL’s financial reporting and
figures for the last 5 years governance policies are widely in compliance with accepted regulations. The company misses the
are not available, we first quartile score due to high CWIP/Gross Block, Capex/EBITDA and, Capex as % to OCF as the
performed analysis on
company is aggressively expanding via Capex, venturing into new age products and hence growing
standalone data.
inorganically. We believe these aspects should improve once the Capex cycle tapers and thus, it
does not raise any concern.

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 Downside risks to the thesis
One key risk in the thesis is related to increase in borrowings to fund the large expansion plans.
However, considering its past performance we believe VOL should maintain D/E on lower levels.
Second key risk is related to fluctuation in prices of commodity chemicals and crude oil impacting
the margin profile of the company. Change in environmental policies by the Indian government
could have an adverse effect on the company. The re-emergence of Chinese players poses
another risk for the company as it would change current market dynamics.

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VOL’s price chart

2000

1500

1000

500

0
May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21
Valiant Organics

Source: Bloomberg

Analyst holding in stock: NO

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Buy: Upside by >15%, Accumulate: Upside by 5% to 15%, Hold: Downside/Upside by -5% to +5%, Reduce: Downside by 5% to 15%, Sell: Downside by >15%

Monarch Networth Capital Ltd. (www.mnclgroup.com)

Office: - 9th Floor, Atlanta Centre, Sonawala Lane, Opp. Udyog Bhavan, Goregaon (E), Mumbai 400 063. Tel No.: 022 30641600

Valiant Organics Ltd. 11

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