Fine Organic share price drops 3% after Q2; here’s why Motilal Oswal downgrades the stock

Fine Organic share price declined about 3 per cent in early trade on Tuesday, October 31, on the BSE, a day after the company reported its September quarter scorecard. The stock opened at ₹4,485.05 against the previous close of ₹4,591.05 and soon fell 2.85 per cent to the level of ₹4,460. Around 9:20 am, the stock traded 2.31 per cent lower at ₹4,485.

Fine Organic Industries, on Monday (October 30), reported a 49 per cent year-on-year (YoY) decline in its consolidated net profit at ₹103.37 crore for Q2FY24. The company's net profit in the same quarter last year was ₹202.63 crore.

Revenue from operations for the quarter stood at ₹540.49 crore, down 41.2 per cent YoY from ₹919.17 crore in the same quarter last year.

Fine Organic share price has performed poorly in the last one year. The stock is down about 22 per cent in the last one year while the equity benchmark Sensex is up 6 per cent in the same period.

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Motilal Oswal downgrades Fine Organic

Brokerage firm Motilal Oswal Financial Services downgraded the stock to sell because of the rich valuation of the stock.

The brokerage firm highlighted Fine Organics reported an in-line EBITDA of ₹100 crore in Q2FY24. EBITDA margin contracted 370 bps YoY to 22.1 per cent, while gross margin improved 370 bps YoY to 41.9 per cent, primarily due to a sharp decline in raw material costs.

"In a declining input cost scenario, the company would have to pass on the benefits of the same to the customers, and therefore, we expect its margin to contract further in the coming quarters," said Motilal Oswal.

The brokerage firm said the long-term prospects of the company remain robust as the company is in the Oleochemical space.

"Fine Organic has primarily been driven by R&D innovations over the years. However, we believe that the performance would be hit in the near to medium term due to: (1) the non-availability of land for further expansion as of now, (2) plants running at optimum utilisation with no further scope of debottlenecking, (3) longer-than-expected time being taken for setting up incremental capacities and a delay in the start-up of the Thailand JV," Motilal Oswal said.

The brokerage firm estimates a revenue, EBITDA and PAT CAGR of 5 per cent, 7 per cent and 9 per cent, respectively, over FY23-25 with a margin hovering around its long-term average of 20 per cent by FY25.

"Fine Organic is currently trading at nearly 43 times FY25E EPS (earnings per share) and about 30 times FY25E EV/EBITDA. The stock is at nearly 37 times one-year forward P/E (price-to-earnings ratio), which is expensive, to say the least, for a company which is going to post earnings decline for the next two years (-39 per cent in FY24E and -9 per cent in FY25E)," said Motilal Oswal.

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