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Results ahead of estimates; valuations expensive

* Fine Organic (FINEORG) reported a beat on our estimates, with the EBITDA margin recovering to 17% in 2QFY22 (after being subdued in the last three quarters).

* As per our understanding, the volatility in key vegetable oil prices has reduced in the recent quarter, with prices peaking around current levels. Customers have accepted the current environment of high prices. Lower volatility may result in better ability to pass on prices to consumers.

* FINEORG has long-standing relationships with its suppliers, which enables it to source raw materials at competitive prices. Based on the aforementioned and the beat in 2QFY22, we revise up our FY22E EPS by 41%, while we keep our FY23–24E EPS unchanged.

* The company is setting up a new JV facility in Thailand. Once this is set up, FINEORG would have the advantage of easier access to its main raw material, with Indonesia, Malaysia, and Thailand being the major producers of palm oil globally.

* FINEORG has been constantly enhancing its food emulsifiers through continued R&D and process integration, which saw a larger offtake during the pandemic. Growing awareness and demand for healthier/organic food products would propel the usage of emulsifiers in the country.

* The company in its presentation highlighted an ever-increasing rise in freight rates, a shortage of containers, and a rise in fuel prices. These developments, we believe, could challenge operations over the near term. Maintain Neutral.

Huge beat on our estimates

* Revenue came in 14% above estimate at INR4.3b, with EBITDA at INR728m (+48% est., +49% YoY, +46% QoQ). The EBITDA margin improved to 17% (v/s 13.9% in 1QFY22; and 18.3% in 2QFY21) on gross margin improvement to 34%. PAT stood at INR500m in 2QFY22, translating to EPS of INR16.3 (v/s our estimate of INR9.9).

* Total revenue in 1HFY22 was up 57% YoY to INR7.9b, with EBITDA up 22% YoY to INR1.2b (margin contracted to 16% v/s 20% in 1HFY21). PAT was up 46% YoY to INR849m on lower depreciation and higher other income.

Valuation and view – maintain Neutral

* a) Ramp-up in the utilization of additional capacities to optimum levels by FY23-24E as well as b) the strong demand outlook from the Indian Food Emulsifiers market should help FINEORG grow at a faster rate than the industry.

* We forecast revenue CAGR of ~19% over FY21–24E, with an EPS CAGR of 35% over the same period. The easier procurement of palm oil, supported by the JV formed in Thailand, presents an upside risk to our call.

* Since our initiation, the company has delivered a strong stock performance of ~30% (over the last five months). We visited Fine Organics’ Ambernath plant, along with its R&D center at Mahape. Here are the key takeaways. The stock is trading at 48x FY23E EPS and 32x FY23E EV/EBITDA. We value the company at 40x Dec’23E EPS to arrive at our TP of INR3,575. Maintain Neutral.

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