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Margin decline continues; outlook remains uncertain

* Fine Organic Industries (FINEORG) reported revenue of INR5.2b in 3QFY25, 19% below our estimate. EBITDA stood at INR1b (34% miss; up 13% YoY). EBITDAM contracted 170bp YoY to 20%, while gross margin contracted 360bp YoY to 38.2%. PAT increased 28% YoY to INR890m (our est. INR1.2b). There was a slight QoQ dip in demand from export markets. Exports contributed 56% of revenue, while domestic sales accounted for 44% of total revenue.

* In 2QFY25, certain vegetable oil prices increased notably in the domestic market, impacting input costs, and the trend continued in 3QFY25. Freight costs declined as rates stabilized, leading to normalized operational expenses in 3Q. The company's Badlapur manufacturing unit also resumed operations in 3Q after being disrupted since Jan’24 due to a fire incident at a neighboring plant.

* All plants are currently running at optimal capacity, except for Patalganga-II, where there is still some headroom available for capacity ramp-up. FINEORG has signed a lease deed with the Jawaharlal Nehru Port Authority (JNPA) to set up a manufacturing unit for the next 60 years situated at the SEZ (land parcel of ~29.2 acres). This would primarily cater to export markets. Management announced a capex of INR7.5b in 2QFY25 and plans to start commercial production by FY27, with no further guidance on capacity/revenue/asset turn.

* FINEORG has already applied for environment clearance (EC), which is currently in progress. That said, it would take 18-24 months to set up new capacities. Although the greenfield capacity is expected to take care of growth for the next 10 years, we do not expect growth to commence until FY28. Exports account for more than 50% of the total revenue for FINEORG.

* Considering the underperformance in 3Q, we cut our revenue/EBITDA/PAT estimates by 6%/12%/9% for FY25. FINEORG is currently trading at ~37x FY26E EPS and ~27x FY26E EV/EBITDA. Valuations appear expensive for a company with no earnings growth during FY24-27. We reiterate our Sell rating on the stock with a TP of INR3,570.

Miss on operating performance; margin contracts YoY and QoQ

* Revenue stood at INR5.2b (19% below our est., +22% YoY). Gross margin contracted 360bp YoY to 38.2%, with EBITDAM at 20% (-170bp YoY).

* EBITDA stood at INR1b (est. INR1.6b, +13% YoY). PAT stood at INR890m (est. INR1.2b, +28% YoY).

* For 9MFY25, revenue was at INR16.3b (+14% YoY) and EBITDA was at INR3.7b (+6% YoY). PAT was at INR3b (+14% YoY). EBITDAM was at 22.7% (-170bp YoY).

Valuation and view

* The long-term prospects for FINEORG remain robust, as the company operates within the oleochemicals industry and has consistently driven growth through R&D innovations over the years. However, we anticipate that its performance may be adversely affected in the near-to-medium term by the following factors: 1) longer-than-expected delays in the commissioning of new capacities for expansion; 2) existing plants operating at optimum utilization with no potential of debottlenecking; and 3) further delays in the commencement of commercial supplies from the Thailand JV.

* We estimate a CAGR of 11%/-1%/0% in revenue/EBITDA/PAT over FY24-27, with margin in the range of 19-20%. FINEORG is currently trading at ~37x FY26E EPS and ~27x FY26E EV/EBITDA. Valuations appear expensive for a company with no earnings growth during FY24-27. We reiterate our Sell rating on the stock with a TP of INR3,570.

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