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Demand outlook strong; margins to remain subdued

* Fine Organic Industries (FINEORG) reported in-line revenues, while the gross margin stood at 31%, the lowest in the last 16 quarters. A broad trend was seen across companies due to a surge in freight costs, coupled with a rise in raw material costs.

* EBITDA at INR499m was a marginal beat of 7% on our numbers, with marginal decline in EBITDAM sequentially from 14.3% to 13.9%.

* Lower-than-expected depreciation resulted in a more pronounced beat of 16% on PBT and 21% on PAT.

* Higher disposable incomes, coupled with the rising trend of eating healthy, are expected to drive the global Food Additives market, with this trend catching up in India too. We believe the Indian Food Emulsifier / Polymer Additives market is expected to clock a ~7% CAGR each up to CY23E/CY26E. With its strong R&D capabilities, FINEORG stands to benefit from these trends.

* FINEORG is setting up a new joint venture facility in Thailand, with Oleofine Organics Thailand Co. (OFT) and Oleofine Organics Sdn. (OFM) – Malaysia. Once the JV is set up, FINEORG would have easier access to its primary raw material, palm oil – Indonesia, Malaysia, and Thailand are the major (88%) producers of palm oil globally.

* The company is trading at 37x FY23 EPS. Valuing it at 40x Sep’23 EPS, we reiterate our Neutral rating, with TP of INR3,134.

Highest ever quarterly revenues; input costs remain high

* Revenue was in line with our estimate at INR3.6b (+53% YoY; +12% QoQ). Exports accounted for 63% of total revenues in 1QFY22.

* EBITDA came in 7% above our estimate at INR499m (-3% YoY; +9% QoQ), with the EBITDA margin at 13.9% (the lowest in the last 16 quarters).

* That said, conversion cost was down 90bps QoQ to 17.2% (the lowest in five quarters) as operating efficiencies improved owing to recent capacity additions at its Ambernath and Patalganga (Phase-I) plants.

* PAT stood at INR349m (+22% YoY; +21% QoQ).

Valuation and view – maintain Neutral

* A ramp-up in the utilization levels of additional capacities by FY23 to optimal levels as well as the strong demand outlook for the Indian Food Emulsifiers market should help FINEORG grow at a faster rate than the industry.

* We forecast a revenue CAGR of ~18% over FY21–24E, with an EPS CAGR of 36% over the same period. The easier procurement of palm oil with the help of the JV formed in Thailand presents an upside risk to our call.

* The stock is trading at 37x/31x FY23/24E EPS and 24x/20x FY23/24E EV/EBITDA – after correcting 4% in the last month. We value the company at 40x Sep’23E EPS to arrive at TP of INR3,134.

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