FREE

Fine Organics Industries' Q3FY20 results (Outperformer) - Higher fixed costs dents profitability

Q3FY20 result

• In Q3FY20, FOIL reported revenues and  EBITDA below our est
• Revenues grew 3% yoy to Rs2.6bn, slightly below our estimate of Rs2.7bn. The miss was due to the impact from raw material pass through. Further, capacity constraints in the past led to overutilization of plants. However, with the commissioning of the new 32,000t plant, the stress on existing plants reduced causing utilisation levels to normalise during the quarter.
• Favourable raw material procurement costs to sharp 450bps expansion of gross margins to 42.5% (est: 40%).
• Higher operating expenses (up 39% yoy) and employee costs (up 19% yoy) on recent commissioning of new Ambernath capacity restricted further margin expansion. EBITDA margins improved by 138bps to 21.6% (below est: 22.3%). EBITDA grew by 9.6% yoy to Rs574m ( est: Rs619m)
• Despite substantial 171% yoy increase in depreciation cost, lower tax rate (26% vs 39.3% in Q3FY19, est: 25%) - company switched to new tax regime led to 6.5% yoy growth in PAT. Reported PAT stood at Rs358m ( below est :Rs421m)

Key positives: Gross margin expansion

Key negatives:  Increase in operating expense and depreciation

Impact on financials:  Cut FY20E/21E/22E EPS by 7%/14% and 11% respectively to factor in higher operating expenses and depreciation

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. Maintain Outperformer with revised target price of Rs2,228 (30x FY22E P/E)