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Outperformance continues, although valuations remain expensive

* FINEORG reported a better-than-estimated 1QFY23, with EBITDA margin at 27.3% (up 300bp QoQ) in 1QFY23 (its highest ever) and gross margin at 41.3% (down 110bp QoQ) after expanding in 4QFY22.

* Its plants are currently running at almost full capacity, and the management expects full capacity utilization by the end of Mar’23. As FINEORG’s customers are expanding their capacities, the management foresees huge opportunities in its existing product portfolio. It plans to set up a new plant for Food Additives only at Patalganga by Mar’24.

* It is also setting up a new JV in Thailand. Once set up, FINEORG will 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.

* FINEORG has been constantly enhancing its Food Emulsifiers through continued R&D and process integration. This segment witnessed a larger offtake during the COVID-19 pandemic. Growing awareness and demand for healthier and organic food are likely to propel usage of emulsifiers in India.

* Owing to the beat to our estimates in 1QFY23, we raise our FY23/FY24 revenue estimate by 20%/17%. We raise our EBITDA/EPS estimate for FY23 by 33%/ 35% and our FY24 estimate by 12% each. We expect gross margin to improve to 38% over the next couple of years, while EBITDAM is expected to be around similar levels in FY23-24.

* However, ever-increasing freight rates, shortages of containers, and rising fuel prices can challenge its near-term operations. We value the stock at 50x FY24E EPS to arrive at our TP of INR5,577. We maintain our Neutral rating.

Beat on EBITDA as EBITDAM expands sequentially

* Revenue grew 109% YoY and 25% QoQ to INR7.5b.

* Gross margin declined by 110bp QoQ to 41.3% in 1QFY23.

* EBITDAM stood at 27.3%, up 300bp QoQ and 13.5pp YoY.

* EBITDA came in at INR2.1b in 1QFY23, up 312% YoY and 41% QoQ.

* PAT stood at INR1.6b, up 350% YoY and 43% QoQ.

Valuation and view – maintain our Neutral rating

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

* We forecast a revenue/EPS CAGR of ~17% each over FY22-24. Easier procurement of palm oil, with the help of the new JV formed in Thailand, presents an upside risk to our call.

* The stock has delivered a strong performance of more than 48% over the last six months. It is trading at 53x FY24E EPS and 37x FY24E EV/EBITDA. We value the stock at 50x FY24 EPS to arrive at our TP of INR5,577. We maintain our Neutral rating on the stock.

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