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Global disruptions continue to benefit; valuations still expensive

* Fine Organics (FINEORG) reported a better-than-estimated result, with EBITDA at INR2.1b (v/s our estimate of INR1.4b), EBITDAM at 25.8% (-150bp QoQ) and gross margin at 38.2% (-310bp QoQ). The management highlighted that disruptions existed in 2QFY23 as well.

* All the plants (barring Patalganga) are currently running at optimum capacity and the management expects full capacity utilization by end-Mar’23 for all including the Patalganga plant. FINEORG’s customers are also expanding their capacities and therefore the management foresees huge opportunities in the existing product portfolio. It plans to set up a new plant by Mar’24E.

* The company has set up a JV in Thailand with production likely to start by endFY23. FINEORG would have the advantage of easier access to its main raw material, with Indonesia, Malaysia, and Thailand being the major (88% share) producers of palm oil globally. The phase-II of capacity expansion will take some months from the date of the start of production in phase-I.

* Owing to the beat in our estimates in 2QFY23 and outperformance in 1H, we raise our revenue/EBITDA/EPS for FY23E/FY24E by 19%/36%/43% and 15%/ 30%/37%, respectively. We expect its gross margin to improve to 38% in the next couple of years, while EBITDAM is likely to be at the 21-23% range.

* FINEORG is trading at 41x FY24E EPS of INR152 and 30x FY24E EV/EBITDA of 29.6x. We value the company at 45x FY24E EPS to arrive at our TP of INR6,860. Maintain Neutral as its valuations remain expensive.

Beat on EBITDA; EBITDAM contracts for the first time in five quarters

* FINEORG’s revenue was at INR8.3b (+93% YoY, +10% QoQ), in 2QFY23.

* Gross margin contracted 310bp QoQ to 38.2%. While EBITDAM was at 25.8% (-150bp QoQ, +8.9pp YoY).

* EBITDA came in at INR2.1b (est. of INR1.4b, +194% YoY, +4% QoQ). PAT stood at INR1.6b (est. of INR994m, +228% YoY, +4% QoQ) during the quarter.

* For 1HFY23, revenue was up 100% to INR15.8b and EBITDA was at INR4.2b (+242% YoY). PAT stood at INR3.2b (+278% YoY) during the quarter.

* EBITDAM improved 11pp YoY to 26.5% in 1HFY23.

Valuation and view – maintain Neutral due to its rich valuations

* FINEORG has been constantly enhancing its Food Emulsifiers through continued R&D and process integration, which witnessed a larger off-take during the pandemic. Rising demand for healthier products and changing consumer preferences for processed and packed convenience foods are expected to drive growth for the company.

* The stock has delivered a strong performance of +48% over the last six months. FINEORG is trading at 41x FY24E EPS and 30x FY24E EV/EBITDA. We value the company at 45x FY24E EPS to arrive at our TP of INR6,860. We maintain our Neutral rating on the stock due to its rich valuations.

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