PL Stock Report: Fine Organic Industries (FINEORG IN) - Company Update – Weak demand in eurcamide to cloud earnings - HOLD

Fine Organic Industries (FINEORG IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: HOLD | CMP: Rs4,250 | TP: Rs4,252

Company Update – Weak demand in eurcamide to cloud earnings

Quick Pointers:

§ Global lacklustre demand of petrochemical to keep profitability in check.

§ No update on land allocation or capacity enhancement.

Fine Organics (FINEORG) reported a phenomenal ~69% YoY topline growth (average each quarter) from Q4FY21 to Q3FY23, post which revenue growth declined to 16% in Q4FY23 and then registered de-growth of 29%/43% YoY in Q1FY24/Q2FY24. We understand that de-growth is primarily due to weakness in demand of erucamide, the main product of FINEORG and will likely continue for a while. We do not change our estimates due to lack of any capacity additions and lackluster demand of key products. We expect ROIC at 40-45% over FY24-26E. The stock is trading at 31x FY24 EPS and 22x FY24 EV/EBITDA. We reiterate our ‘Hold’ rating with TP of Rs 4252 (unchanged) valuing it at 30x FY26 EPS of Rs141. Any development in land acquisition or any inorganic expansion will be key risks to our call.

Erucamide demand expected to be weak: Erucamide is the largest product of FINEORG which goes into polyethylene (PE) and polypropylene (PP) manufacturing. Our research suggests that due to lackluster demand of petrochemicals, demand outlook is likely to remain under stress. Erucic acid is derived from rapeseed oil which when mixed with ammonia over a catalyst, results in production of Erucamide – a key product of FINEORG. Erucamide is used as an anti-stick, anti-static agent in PE/PP manufacturing, dispersing agent in ink manufacturing. Production of paper, textile, foam-stabilizer and metal-wire drawing also make use of Erucamide. We believe Erucamide, demand to remain weak in near term and should improve post FY24E.

Petrochemical demand remains weak: Due to lack of global demand, cracker utilizations have declined to 77.5% in Q1FY24 before recovering marginally to 81.1% in Q2FY24. China is expected to continue capacity additions to remove import dependency for petrochemicals. It has already reduced its import dependency on HDPE from 52% in 2013 to 25% in 2023E. Similarly, in PP, it has reduced its dependency on imports from 27% in 2013 to 11% in 2023E. As a result of continued capacity additions, we believe global operating rates are expected to remain weak for some time to come.

Demand of Erucamide expected to remain weak: Polymer additives are indeed required in small quantities. For example, 0.05-3% (w/w) stabilizers are required for polymer while slip agents are required 0.1-1% (w/w). Although the quantities appear small, all together including high realizations with respect to base petrochemicals, form a substantial amount and when petrochem margins are under pressure, realizations of Erucamide are expected to be under pressure too, in our view.

Sluggish demand in export market persists: The domestic: export mix has reduced from 32:68 in FY23 to 50:50 in Q2FY24, owing to sluggish demand in the US & European markets. We believe exports to remain subdued and lead to lower profitability in near term.

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