31 May 2025: Fine Organic (FINEORG IN) has been guiding that its facilities are fully utilized except Patalganga, primarily a food emulsifier plant. While erucamide remains the mainstay of the company as per our understanding, food emulsifier segment in developed markets offers a good opportunity for growth. Fine Organic has often showed its intent to foray into developed markets. Against the backdrop of 22% ROCE and 34% ROIC in past five years (excluding supernormal FY23) that the company has been making in India, it becomes important to see what kind of margins and returns one would make if it were to start manufacturing in a developed country like the US. In a segment with limited information, our report concludes from Corbion-Kingswood recent transaction that even in the US, the segment offers a good ~15% EBITDAM and ROCE of ~15%.
- Food emulsifiers segment: Through various functionalities like emulsion stability/uniformity, viscosity control, aeration, suspension and influencing sensory attributes, food emulsifiers provide better texture and feel, extended shelf-life, optimized production, fat reduction among other product benefits. In food segment, these are used in dairy products, confectionary, processed meat, ice-creams among others. Emulsifiers also find usage in personal care and polymers. Corbion, which focused on its strengths in fermentation, divested its food emulsifier segment in 2024 at ~12x trailing EBITDA, as per our calculations.
- Corbion made ~15% EBITDAM & ~15% ROCE: Corbion’s focus had changed largely to fermentation a couple of years back when it decided to divest its non-core businesses of food emulsifiers. This segment remained largely flat in past few years with revenue CAGR of 1.4% during FY19-23. It sold off the segment comprising of two plants in the US and related employees at USD362mn to Kingswood Capital, implying ~12x trailing EV/EBITDA, as per our calculations.
- JNPA SEZ to start in FY27 end: The EC has been obtained while few other minor approvals are being obtained. The company intends to shift large part of its existing export basket to JNPA. With existing fixed asset turnover, this could double the revenues of the company by FY29.
- Valuation and recommendation: Fine Organic is trading at 28x FY27 EPS of Rs170 (consensus Rs150, FY25 EPS Rs134). Although the management guides that the capacities are fully utilized except at Patalganga, export data suggests that quarterly volumes in Q4FY25 were ~15% below the peaks seen in recent times. Additionally, implied realization also appears bottomed out. Considering the boost that could come from the Indian expansion and possible foray into developed markets, we value the stock at 32x FY27 EPS of Rs170 and raise the target price from Rs4,930 to Rs5,440 and reiterate our Buy recommendation on the stock.