Motilal Oswal Initiates “Sell” Rating On Fine Organic Industries with a Target Price of Rs 4,095

Motilal Oswal has taken a negative stance on Fine Organic Industries, recommending a “sell” rating for the stock and setting a target price of Rs 4,095 in their research report dated October 3, 2024.

Mixed Medium-Term Outlook

The global oleochemicals market, valued at $37.9 billion in calendar year 2023 and expected to grow to $65.4 billion by 2030, offers significant opportunities for Fine Organic Industries (FINEORG). The company is in a good position to take advantage of the increasing demand for sustainable products through strategic investments in research and development (R&D) and capacity expansion.

FINEORG is planning a greenfield expansion at JNPA (Mumbai) to enhance its export capacity and support international growth. Additionally, the company is looking into establishing manufacturing facilities in the U.S. or Europe. However, it is currently facing challenges related to capacity constraints and land acquisition, which could delay new capacity expansions by up to 30 months.

Currently, FINEORG’s shares are trading at about 44 times the expected earnings per share (EPS) for fiscal year 2026 and approximately 30 times the expected enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) for the same period. These valuations seem high for a company that is projected to see year-on-year earnings declines of 1% and 2% in FY25 and FY26, respectively. As a result, Motilal Oswal reiterates its “sell” rating with a target price of Rs 4,095.

Opportunities in the Oleochemicals Market

The oleochemicals market is poised for growth, with a projected compound annual growth rate (CAGR) of 6.3%. This growth is expected to be driven by the rising demand for sustainable, plant-based alternatives to petroleum-derived chemicals in industries such as food, personal care, and plastics.

Oleochemicals have a wide range of applications, including personal care products, food processing, polymers, cosmetics, lubricants, and biofuels. FINEORG operates in all these sectors, and with increasing global regulations favoring bio-based products to reduce the environmental impact of chemical manufacturing, the company is strategically positioned to benefit from these trends. Its investments in R&D, capacity expansion, and global market penetration should further enhance its position in the market.

Challenges Ahead

Despite the promising market, the medium-term growth outlook for FINEORG appears weak. The company is currently executing a greenfield expansion through its subsidiary, Fine Organic Industries (SEZ) Pvt Ltd, which is acquiring land at JNPA (Mumbai). This new facility is expected to support the company’s international growth strategy and improve export capacity.

FINEORG is also aiming to strengthen its export market presence by establishing manufacturing facilities in the U.S. and Europe. However, the company has faced difficulties in acquiring new land for expansion over the past two years. Current facilities are operating at full capacity, leaving little room for further expansion, with the exception of Patalganga-II, which still has some capacity for increase.

The company has been searching for land for expansion for nearly two years without success. Even if it begins the process today, it would take about six months to obtain environmental clearance and an additional 18 to 24 months to set up the new capacity.

Valuation and Conclusion

Long-term prospects for FINEORG remain positive, given its consistent growth through R&D innovations in the oleochemicals industry. However, the company is likely to face challenges in the near-to-medium term due to delays in the commissioning of new capacity, existing plants running at full utilization, and further delays in commercial production from a joint venture in Thailand.

Motilal Oswal estimates a compounded decline in EBITDA and profit after tax (PAT) of 1% each from FY24 to FY26, with margins expected to remain between 21% and 22% during this time. Given that FINEORG is currently trading at around 44 times FY26E EPS and approximately 30 times FY26E EV/EBITDA, these valuations appear high for a company facing a decline in earnings over the next two years. Therefore, Motilal Oswal maintains its “sell” recommendation with a target price of Rs 4,095.