Fine Organic Industries is a Buy for target price of INR 3,480 (22% Gain): HDFC Sec Research Report

In-line performance

Our BUY recommendation on Fine Organic Industries (FOIL) with a target price of INR 3,480 is premised on (1) constant focus on R&D, (2) diversified product portfolio, (3) capacity-led expansion growth opportunity, and (4) leadership in oleo-chemical based additives in the domestic and global markets with a loyal customer base. We expect FOIL’s PAT to grow at a 41% CAGR over FY22-24E, led by a 37% CAGR in EBITDA. In the absence of any major Capex in the coming years, the RoCE would expand from 16.7% in FY22E to 25.3% in FY24E. Q1 EBITDA/APAT were 1/2% above our estimates owing to a 7% rise in revenue, higher-than-expected other income, lower-than-expected tax outgo, offset by higher-than-anticipated other expense.

 Financial performance: Revenue grew 11/49% QoQ/YoY to INR 3.6bn. Exports continue to gain strong traction, while domestic business is impacted by the lockdown restrictions. The contribution of exports to the total revenue has increased from 55% to 62% currently. Gross margin came in at 32.3% (-114/-673bps QoQ/YoY) in Q1 on account of higher raw material costs and higher freight costs. FOIL has been instrumental in passing through the hike in raw material prices to its customers, and has now reworked contracts where the customers pay freight rate existing as on the shipping date. EBITDA came in at INR 5.2bn, +7/-1% QoQ/YoY with EBITDA margin coming in at 14.5% (-45/-732bps QoQ/YoY) in Q1. APAT came at INR 3.6bn (+13/+26% QoQ/YoY) in Q1.

 Joint venture: FOIL has made an investment by way of acquisition of 22,500 ordinary shares at a par value of THB 100 per share in Fine Organic Industries (Thailand) Co., Ltd. which is a JV formed to manufacture specialty chemical products and supply, export and distribute such products. FOIL holds a 45% stake in this JV.

 Change in estimates: We cut our FY22/FY23E EPS estimates by 6.2/4.1% to INR 46.1/66.1 per share to factor in the overall performance of Q1, change in our Capex assumption, and incorporation of the annual report of FY21.  DCF-based valuation: Our price target is INR 3,480 (WACC 10%, terminal growth 4.5%). The stock is trading at 42.9x FY23E EPS.