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Expensive valuation despite the decent performance

Fine Organic (FINEORG) reported a better-than-estimated result, with EBITDA margin at 17% (flat QoQ) in 3QFY22 (after posting a recovery in 2QFY22).

The volatility in key vegetable oil prices has subdued in the recent quarter with prices peaking around the current levels. Although, customers have accepted the current environment of high prices, lower volatility might result in better margin aided by price pass through to customers

FINEORG has long-standing relationships with its suppliers, which enable it to source raw materials at competitive prices. Factoring this along with the beat in 3QFY22, we raise our FY22E/23E/24E revenue by 7% each, while keeping our EPS estimates unchanged for the same period.

It is setting up a new JV in Thailand, once set up 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.

FINEORG has been constantly enhancing its Food Emulsifiers through continued R&D and process integration, which witnessed a larger off-take during the pandemic. Growing awareness and demand for healthier/organic food products are likely to propel usage of emulsifiers in the country.

However, an ever-increasing rise in freight rates, shortages of containers and rise in fuel prices could challenge its near-term operations. We value the company at 40x FY24E EPS to arrive at our TP of INR3,835 Maintain Neutral

Margin in line; revenue higher than our estimate

Revenue was 9% higher than our estimate at INR4.7b (up 57% YoY / 9% QoQ).

Gross margin contracted 80bp to 33% in 3QFY22, while EBITDAM came in line with our estimate at 17% (flat QoQ, up 160bp YoY).

EBITDA was at INR797m (7% higher than our estimate, up 74% YoY / 9% QoQ)

PAT stood at INR557m (8% higher than our estimate, up 99% YoY / 12% QoQ)

Revenue rose 57% YoY to INR12.6b, with EBITDA at INR2b (+39% YoY) in 9MFY22. PAT stood at INR1.4b (+63% YoY). However, EBITDAM declined 220bp to 16% during the same period.

Valuation and view – Maintain Neutral

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

We forecast ~22% revenue CAGR over FY21-24, with an EPS CAGR of 37% over the same period. 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 +27% over the last eight months. FINEORG is trading at 38x FY24E EPS and 26x FY24E EV/EBITDA. We value the company at 40x FY24E EPS to arrive at our TP of INR3,835. Maintain Neutral with a potential upside of 4%

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