Prabhudas Lilladher has upgraded Fine Organic Industries (FINEORG) to a Buy rating, setting a revised target price of Rs 5,852. This decision follows Fine Organic’s impressive growth trajectory, recent capex plans, and strong export performance. With a new greenfield project in the pipeline, the company is well-positioned to meet rising global demand. Below is a detailed breakdown of Fine Organic’s Q2FY25 performance and the growth catalysts supporting Prabhudas Lilladher’s recommendation.

Q2FY25 Performance Highlights Strong Revenue Growth

Revenue Increase Driven by Export Surge: Fine Organic reported standalone revenue of Rs 5.9 billion for Q2FY25, a 26% YoY increase and a 17% QoQ rise. Export sales contributed significantly, with a 48% YoY growth, accounting for 61% of the company’s total revenue. The growth was supported by strong global demand across product segments, making exports a major revenue driver.

Domestic and Export Sales Mix: Domestic sales represented 39% of revenue, while exports contributed 61%, underscoring Fine Organic’s strengthened position in the international market. This strategic balance highlights the company’s adaptability in both domestic and global markets.

Margin Pressures Amid Rising Input Costs

Gross Margin Affected by Input Price Fluctuations: The gross margin declined by 170 basis points sequentially to 40.5%, primarily due to a sharp increase in the prices of certain vegetable oils. This impacted profitability, although the company’s revenue gains helped offset some of the margin pressure.

EBITDA Margin Remains Steady: Despite the input cost challenges, Fine Organic maintained its EBITDA margin at 24%, consistent with Q1FY25. The company’s EBITDA grew by 37% YoY to Rs 1.4 billion, demonstrating resilience in cost management despite higher freight, power, and fuel expenses.

Expansion Plans: Rs 7.5 Billion Capex for New Greenfield Facility

New SEZ Facility at Jawaharlal Nehru Port Authority: Fine Organic has announced a Rs 7.5 billion investment to establish a new manufacturing facility at Jawaharlal Nehru Port’s Special Economic Zone (SEZ). This facility will replicate the company’s existing product lines, with commercial production expected to begin by FY27.

Revenue Projections from New Facility: The greenfield project is anticipated to generate peak revenue of Rs 15 billion at 2x asset turnover. This facility will be pivotal in meeting the projected increase in global demand for Fine Organic’s specialty chemicals, positioning the company for sustained growth in the coming years.

Positive Revisions in Financial Estimates

Increased Revenue and EBITDA Projections for FY26 and FY27: Prabhudas Lilladher has raised its revenue and EBITDA estimates, projecting a 4.4% increase in FY26E sales and a 9.4% increase in FY27E sales. The revised EBITDA estimates reflect a 7.6% increase for FY26E and a 16.3% rise for FY27E, underlining the expected impact of the new capacity on Fine Organic’s financial performance.

EPS Revisions and Target Price Adjustment: The updated EPS estimates for FY26 and FY27 are Rs 167.7 and Rs 187.0, representing growth of 7% and 15.8% over previous projections, respectively. Consequently, Prabhudas Lilladher has increased its target price to Rs 5,852, valuing Fine Organic at 33x FY26E/FY27E EPS.

Growth Drivers and Market Opportunities

Robust Demand for Specialty Chemicals: Fine Organic’s broad product portfolio and strong foothold in niche markets have driven demand, especially in food additives, polymers, and personal care segments. The company’s product applications are diverse, spanning multiple industries, providing resilience against cyclical demand fluctuations.

Export Growth Potential: With 61% of revenue derived from exports, Fine Organic is capitalizing on international market growth. The new SEZ facility will enhance production capacity, positioning the company to tap into new export opportunities and strengthen its global footprint.

Operational Efficiency and Cost Management

Focus on Cost Efficiency Despite Rising Expenses: Fine Organic’s focus on operational efficiency has helped maintain stable EBITDA margins, despite rising costs in freight, power, and raw materials. The company continues to optimize its cost structure through targeted investments in production technology and streamlined processes.

Capex Funding through Debt and Internal Accruals: The Rs 7.5 billion capex will be financed via a mix of debt and internal accruals, underscoring Fine Organic’s disciplined approach to capital allocation. This funding strategy allows the company to manage expansion without over-leveraging, maintaining a strong balance sheet.

Risks and Considerations for Investors

Volatility in Raw Material Prices: Fine Organic is exposed to fluctuations in the prices of raw materials like vegetable oils, which can impact margins. Continued monitoring of these costs will be essential to manage profitability effectively.

Execution Risks Associated with New Capacity: While the new SEZ facility is expected to boost revenue, potential delays in execution or regulatory challenges could impact the timeline and projected returns. Investors should consider these operational risks in evaluating the stock.

Valuation and Investment Outlook

Target Price Justification and Valuation Metrics: Prabhudas Lilladher’s Rs 5,852 target price is based on an EV/EBITDA multiple of 33x on FY26E/FY27E EPS. This valuation reflects confidence in Fine Organic’s growth potential from the new facility, as well as its established market position in specialty chemicals.

Attractive Growth Opportunity in Specialty Chemicals Sector: With its robust export growth, strong financials, and expansionary capex plans, Fine Organic is well-positioned for long-term growth. Prabhudas Lilladher’s Buy recommendation suggests a compelling opportunity for investors looking for exposure in the specialty chemicals sector.