Fine Organic Industries - Fine-tastic future - HDFC Securities

Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities and Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

Our BUY recommendation on Fine Organic Industries (FOIL) with a target price of INR 3,910 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 42% CAGR over FY22-24E, led by a 37% CAGR in EBITDA. In the absence of any major Capex over the next two years, the RoCE would expand from 19% in FY22E to 28% in FY24E. The constant focus on R&D and availability of capacity will enable the company to remain competitive and expand its customer base. Given the capacity expansion-led growth, FOIL's capability to generate 20%+ returns on reinvested profits, and unique business model with high entry barriers, its PER of 42.9/31.0x FY23/24E looks contextually low.

Margins on an upward trend from here

High input costs lead to a drop in margins: FOIL's margins have been under pressure for over a year, owing to, (1) the volatile and high raw material prices, (2) high freight cost impacted by global supply chain disruption. The rise in prices of vegetable oils, which are the key raw material, is attributable to many factors such as shifting of the demand from food basket to fuel basket, increase in buying by China, labour issues due to lockdowns in Indonesia and Malaysia, climatical impact on soya producing areas and imposing of import duties on palm oil in India, which is the world's largest importer of it.

Reduction in the volatility of raw material prices: Raw material prices continue to be high currently, but aren't as volatile, owing to (1) reduction in import duty on vegetable oils by the government of India, (2) reduction in the ceiling rate of its crude palm oil (CPO) export levy by Indonesia, and (3) reduction in excessive buying done by China.

Steps taken by the company to protect its margins: FOIL has completed most of its long-term (over 1 year) contracts, and is now only getting into short-term (~3 months) contracts. It has been successful in renegotiating contracts with its customers to take the raw material price hike. In order to reduce the blow of higher freights costs, the company has introduced a new system of FOB pricing where customers are charged freight prevalent at the time of shipment.

We expect these changes along with better plant utilisation to drive the EBITDA margin by 542bps from 18% in FY21 to 23% in FY24E.

Growth to be backed by capacity expansion

The remaining portion of the 10ktpa capacity dedicated to food additives at Patalganga will get commissioned by FY22 end. With the addition of this facility, the total capacity of the company will reach 111.3ktpa. All the plants are expected to reach optimum utilisation by FY24E.

FOIL has acquired a 45% stake in Fine Organic Industries (Thailand) Co. Ltd., which is a JV, formed to manufacture food additives in Thailand. The company plans to initially use up the existing capacity at the plant with minor changes in the plant and manufacture a few products immediately. Once travel resumes, the company will send its project team to evaluate opportunities there and come up with a Capex plan, post which the company shall augment its product and process portfolio.

Shares of Fine Organic Industries Limited was last trading in BSE at Rs. 3507.2 as compared to the previous close of Rs. 3267.85. The total number of shares traded during the day was 20581 in over 4935 trades.

The stock hit an intraday high of Rs. 3593.15 and intraday low of 3267.4. The net turnover during the day was Rs. 71197277.

Source : Equity Bulls

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