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Margin under pressure due to weak medium-term outlook

* Fine Organic Industries (FINEORG) reported revenue of INR6b, 7% above our estimate, while EBITDA was INR1.4b (6% above; up 37% YoY) in 2QFY25. EBITDAM expanded 190bp YoY to 24%, while gross margin contracted 140bp YoY to 40.5%. PAT increased 43% YoY to INR1.1b (our est. INR1b). There was strong demand from the international markets, as exports contributed 61% of the revenue in 2Q, while domestic sales accounted for 39% of total revenue.

* All plants are currently running at optimal capacity, except Patalganga-II, where there is still some headroom available for capacity ramp-up. FINEORG recently 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 the export markets. Management announced a capex of INR7.5b 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) and expects approvals in the coming months. That said, it would take six months for EC and another 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 the growth to commence until the beginning of FY28. Exports account for more than 50% of the total revenue for FINEORG. The Thailand JV has started production trials and is in the process of product standardization.

* Management highlighted that the higher input costs in 2Q were due to the sharp increase in prices of some of the vegetable oils. The freight costs and lead time were higher in 2Q, which adversely affected operational efficiency. Rising power and fuel costs also contributed to increased overall expenses. However, the overall demand for its products remained stable both in the domestic and international markets.

* Due to the outperformance in 2QFY25, we raise our revenue/EBITDA/PAT estimates by 9%/19%/24% for FY25. We factor in the new capex announced and cut our FY26/FY27 EPS by 4%/13%. FINEORG is currently trading at ~44x FY26E EPS and ~30x FY26E EV/EBITDA. Valuations appear expensive for a company that is going to experience earnings decline during FY24-27. We reiterate our Sell rating on the stock with a TP of INR3,885.

Operating performance above estimates, PAT beat led by higher OI and lower depreciation

* Revenue stood at INR6b (+7% vs. our est.; +26% YoY). Gross margin contracted 140bp YoY to 40.5%, with EBITDAM at 24% (+190bp YoY).

* EBITDA was INR1.4b (est. of INR1.3b, +37% YoY).

* PAT stood at INR1.1b (est. of INR1b, +43% YoY).

* For 1HFY25, revenue was INR11b (+10% YoY), EBITDA stood at INR2.6b (+3% YoY), while PAT came in at INR2.1b (+10% YoY). EBITDAM was 24% (-150bp YoY). The implied 2HFY25 revenue/EBITDA/PAT growth is 31%/35%/37% 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 due to the following: 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 revenue/EBITDA/PAT CAGR of 11%/0%/-5% over FY24-27, with margin in the range of 20-21% during the same period. FINEORG is currently trading at ~44x FY26E EPS and ~30x FY26E EV/EBITDA. Valuations appear expensive for a company that is going to experience earnings decline during FY24-27. We reiterate our Sell rating on the stock with a TP of INR3,885.

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