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Initiating coverage: Fine Organics Industries (Outperformer) - A fine leader in a sunrise industry

Green additives, a sunrise industry, is gaining prominence as an eco-friendly and sustainable solution in the additives industry (critical component used in several end-user products such as plastics, food, etc). Fine Organics (FOIL) is a key manufacturer of oleochemical-based additives (derived from natural vegetable oils) with a manufacturing capacity of 69,300tpa. FOIL has strong domestic and global presence with exports comprising ~55% of revenues. Three key factors underpin FOIL’s business model: 1) Robust R&D, 2) proprietary technology, and 3) a sticky customer base. FOIL is in midst of aggressive capacity expansion and expects to almost double capacity by adding 62,000tpa (includes two JVs of 10,000tpa each), of which, one JV and a new capacity of 32,000t have been recently commissioned. Post strong 43% PAT growth in FY19, we estimate 14% revenue and 23% PAT CAGR with 30-35% return ratios over FY19-22E. Growing preference for premium and bio-degradable products, and stricter regulations are industry tail winds. We initiate coverage with an Outperformer rating and target price of Rs1,775 (25x FY21E PER).

A niche player in specialised additives: FOIL is a dominant player in the oleochemical-based additives industry, characterised by high entry barriers and a sticky customer profile. Propriety technology and strong R&D capabilities add to the company’s competitiveness versus global peers. Leveraging on its strengths, FOIL is looking to enhance its presence in plastic and food additives and venture into niche end-user segments like cosmetics, feed nutrition, etc.

Aggressive capacity expansion: 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. The company posted 10.7%/10.1% revenue/EBITDA CAGR over FY14-18. With regulatory hurdles behind, FOIL is now investing ~Rs2bn over FY19-21E to add 42,000tpa capacity (69,300tpa currently). We expect new capacities to operate at peak utilisation within 4 years of commissioning and contribute additional Rs6-7bn to revenues (asset turnover of 3-4x), which would translate into 15%+ revenue/EBITDA CAGR over next 5 years.

Premium valuation justified; initiate with an Outperformer rating: FOIL has emerged as a key global player (a domestic player until 2000) in an industry dominated by few large players. 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 FOIL. At 22x FY21E PER, we see room for upside, supported by strong earnings visibility and healthy return ratios. We initiate coverage with an Outperformer rating and a target price of Rs1,775.