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Fine Organics Industries' Q2FY20 results (Outperformer) - Strongprofitability

Q2FY20 result

• FOIL reported revenues in line with our estimates, while EBITDA was slightly above our est
• Revenues grew by 5% to Rs2.7bn in line with our est. We believe recently commissioned 32,000t capacity has marginally contributed to the revenue growth as pre-Q2, FOIL operated at optimum utilisation levels.
• Favourable raw material procurement costs and improvement in product mix led to sharp 420bps expansion of gross margins to 41% (est: 39%).
• Higher operating expenses (up 27% yoy) and employee costs (up 22% yoy) restricted further margin expansion. EBITDA margins improved by 145bps to 23.8% (est: 22.8%). EBITDA grew by 11.8% yoy to Rs651m ( est: Rs625m)
• Despite higher depreciation costs (up 52% yoy) , lower tax rate ( 8% vs 44.1% in Q2FY19 ,est :25%) with the company switching to new tax regime led  to strong 79.7% yoy growth in PAT. Reported PAT stood at Rs570m ( above est :Rs443m)

Key positives: Gross margin expansion

Key negatives:  Increase in operating expense and depreciation

Impact on financials:  No change in earnings estimates

Valuations & view

FOIL’s inability to undertake expansion (due to delays in regulatory approvals), despite high capacity utilisation and strong demand for its products, has impeded its growth in the past. Going forward, we expect step up in revenue growth once new capacities (32,000t in Ambernath and 10,000t JV), ramp up. Further, FOIL has been continuously expanding its product portfolio to offer complex and customised solutions to its customers. Leveraging its R&D capabilities the company is striving to increase its presence in niche segments like cosmetics and feed nutrition to capitalise on growing opportunities within these segments. FOIL’s strong balance sheet with superior 30-35% return ratios reflects the robustness of its business model. High entry barriers in the industry underpin our premium valuations for the company. At  23 x FY21E PER, we see room for upside, supported by strong earnings visibility and healthy return ratios. Maintain Outperformer with revised target price of Rs2,130 (30x FY21E P/E)