Hold Fine Organic Industries, target Rs 1,250: Anand Rathi

Anand Rathi has a hold call on Fine Organic Industries with a target price of Rs 1,250.

The current market price of Fine Organic Industries is Rs 1,295.80.

Time period given by the brokerage is one year when Fine Organic Industries price can reach the defined target.


View of the brokerage-
Capacity doubling, leading manufacturer in the industry: Fine Organics is one of the top-five globally in plastic additives, and sixth in food additives. With its FY19-21 62,000-tonne capacity expansion, its capacity would nearly double from 69,300 tonnes to 131,300. The capex is well timed as the company is operating at nearly 85 per cent capacity. Further, it is focusing on increasing sales of higher-margin products and other specialty products such as feed nutrition additives. The expansion in capacity and product range would drive growth.

Niche business, strong entry barriers: A lengthy, expensive customer product-acceptance process, innovative & complex technology, unique product formulations and manufacturing processes are strong entry barriers.

Financials to normalise: We expect 19 per cent revenue and 13 per cent earnings CAGRs over FY19-21. We believe the margin would normalise to 19 per cent (21.5 per cent in 9M FY19) in coming years. Further, higher depreciation and increased interest expenses would lower the PAT CAGR to 13 per cent against 19 per cent topline CAGR. Over FY19-21, the RoE and RoCE are expected to be above 19 per cent.

Valuation: The stock trades at 29x FY20e and 23x FY21e EPS. On an EV/EBITDA multiple, it is valued at 18x FY20e and 15x FY21e. We initiate coverage on Fine Organics, with a Hold and a TP of `1,250. Though we are optimistic about its profit drivers, the recent stock run-up restricts the potential. At present valuations, we believe the stock has priced in the expected growth.

Risks: Raw-material-price fluctuations; considerable dependence on some suppliers.