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Short-term headwinds could pose a threat to growth

* Fine Organics (FINEORG) reported higher-than-estimated 4QFY23 results, with EBITDA at INR1.9b (our estimate of INR1.4b), EBITDAM at 26.8% (up 350bp QoQ), and gross margin at 39.1% (up 390bp QoQ). These were driven by factors including higher-priced contracts with customers, leading to better margins, as well as a decline in raw material costs and freight charges.

* All the plants (except the one in Patalganga) are currently operating at optimum capacity, and the management expects to achieve full capacity utilization for all the plants, including Patalganga, by end-Mar’24. Until a new plant is established, there is still a potential to enhance capacities through debottlenecking in the existing plants. The company has added several new products in the personal care, food, and coatings categories, representing ongoing developments in the overall scheme of operations.

* That being said, the management is still awaiting the land allotment from the Gujarat government which it expects will be finalized within the next couple of months. The board has already approved the capex plans for the company, but the official announcement will be made only when the land allotment is secured. As part of Plan B, the management has already started to look for an alternate land parcel in Maharashtra in case it is unable to acquire the land in Gujarat.

* While there is currently a temporary slowdown in the US and Europe due to de-stocking at the customers’ end, the management does not view it as a cause of alarm. Some larger customers wanted FINEORG to stock up inventories in the US and Europe during the quarter, and thus, the management is also evaluating possibilities of manufacturing facilities closer to the customers in the US. The team has visited to evaluate the land parcel for a greenfield expansion.

* The start of the Thailand JV has also been delayed and is now expected to start by Aug/Sep’23. We have not changed our estimates materially as of now keeping in mind all of the above. We expect the margin to contract nearer to its long-term average of 20%, after it outperformed in FY23, led by disruptions in the global economy. The valuations remain expensive and we reiterate our Neutral stance on the stock

Beat led by lower-than-expected RM cost and other expenses

* FINEORG’s 4QFY23 revenue stood at INR7b (up 16% YoY, down 7% QoQ)

* Gross margin expanded 390bp QoQ to 39.1%, while EBITDAM stood at 26.8% (up 350bp QoQ).

* EBITDA came in at INR1.9b (est. of INR1.4b, up 28% YoY, up 7% QoQ), with consensus beat of 18%.

* PAT stood at INR1.4b (est. of INR1.1b, up 25% YoY, up 5% QoQ), with consensus beat of 19%.

* For FY23, revenue was up 63% YoY at INR30.3b and EBITDA was at INR7.8b (up 124% YoY). PAT stood at INR5.9b (up 136% YoY)

* EBITDAM improved 7pp YoY to 25.8% in FY23.

* The Board declared a final dividend of INR9.

Valuation and view – Reiterate Neutral

* FINEORG has been constantly enhancing its Food Emulsifiers through continued R&D and process integration. These efforts have resulted in increased demand, particularly during the pandemic. Rising demand for healthier products and the evolving consumer preferences toward processed and packed convenience foods are expected to drive growth for the company.

? FINEORG is trading at 28x FY25E EPS and 20x FY25E EV/EBITDA. We value the company at 30x FY25E EPS to arrive at our TP of INR4,710. We reiterate our Neutral rating on the stock.

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