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Export markets and stable RM prices drive performance

* Fine Organic Industries (FINEORG) reported higher-than-estimated EBITDA at INR1.3b (-29% YoY) in 4QFY24. EBITDAM contracted 140bp YoY to 25.4%, while gross margin improved 450bp YoY to 43.6%, primarily due to stable vegetable oil prices. Management does not expect any volatility in vegetable oil prices, at least for the next few months. PAT dipped 24% YoY to INR1b (est. INR590m).

* All plants are currently running at optimal capacity, except Patalganga-II, where there is still some headroom for capacity ramp up. Management guided that it would take another 3-4 years for Patalganga-II to reach optimum utilization. FINEORG is currently awaiting the official land allotment letter from the Maharashtra government (~30 acres) in SEZ that it expects anytime now. This would primarily cater to the export markets.

* It would take six months for environment clearance (EC) and another 18-24 months to set up the newer 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 end-FY26. Exports accounted for 55% of the total revenue for FINEORG as of 4QFY24. The commissioning of the Thailand JV plant is also now expected by end-Jun’24.

* Management highlighted that some regions have started showing demand recovery on a selective basis, while some headwinds still exist in the export markets, with lead time also increasing because of the Red Sea crisis. FINEORG is considering establishing manufacturing facilities closer to its customers in the US. This move is expected to enable the sale of products at a premium, leading to higher margins, given its US manufacturing base.

* Due to the outperformance in 4Q and subsequent upward revision in margin guidance from the management, we raise our revenue/EBITDA/EPS estimates by 5%/10%/9% for FY25 and by 5%/13%/13% for FY26. Valuations are expensive for a company that is going to have YoY earnings decline for the next two years (-8%/-2% in FY25/26). Reiterate SELL.

Beat across the board; EBITDAM contracts YoY

* Revenue stood at INR5.2b (-25% YoY). Gross margin expanded 450bp YoY to 43.6%, with EBITDAM at 25.4% (-140bp YoY).

* EBITDA stood at INR1.3b (est. of INR771m, -29% YoY), while PAT stood at INR1b (est. of INR590m, -24% YoY). An exceptional item of INR6m has been recorded toward insurance coverage for the fire at one of its plants in Jan’24.

* For FY24, revenue was down 36% to INR19.5b, while EBITDA stood at INR4.8b (-38% YoY). PAT was INR3.7b (-38% YoY). EBITDAM contracted 110bp YoY to 24.6% in FY24.

* The BoD declared a final dividend of INR10/share for FY24.

Valuation and view

* The long-term prospects remain robust as the company is in the Oleochemical industry and is primarily driven by R&D innovations over the years. However, we believe that the performance would be hit in the near to medium term by: 1) longer-than-expected commissioning of new capacities for further expansion, 2) existing plants that are running at optimum utilization with no further scope of debottlenecking, and 3) further delay in the start-up of the Thailand JV.

* The stock has underperformed the Nifty-50/Sensex by 24%/20% in the past one year. We estimate a compounded EBITDA/PAT decline of 5% each over FY24-26, with margin in the range of 21-22% during the same period.

* FINEORG is currently trading at ~40x FY26E EPS and ~27x FY26E EV/EBITDA. Valuations are expensive for a company that is going to have YoY earnings decline for the next two years (-8%/-2% in FY25/26). Reiterate SELL.

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