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Recommendations India

Adi FInechem Limited Q1FY15 results update

August 14, 2014, Thursday, 18:33 GMT | 13:33 EST | 22:03 IST | 00:33 SGT
Contributed by Nirmal Bang

Adi FInechem Limited (AFL) posted results in-line with our expectations with Sales 38.7% yoy to Rs 43 cr, on back of commercialization of additional capacity (which got operational from Sept’13). Current Capacity utilization is 97%, higher than Q4FY14’s 93%. EBITDA margins have improved by ~370 bps yoy to 20.4% however down from Q4FY14 25.4%. Current margins are in-line with long term sustainable margin range of the company’s estimates.

Other Highlights

- AFL reported strong sales growth of 38.7% yoy for Q1FY15 at Rs 43 cr.

- The company is in the expansion mode and increasing its capacity from 25000 mt to 45000 mt with capex of Rs 30 cr out of which Rs 21 cr has already been spent. The whole capex is funded through internal accruals. The expanded facility would be operational from end of Q3FY15. The full benefit would be visible from Q4FY15 onwards. However, due to this ongoing expansion the company has schedules plant shutdown in Q2FY15, which would impact the sales volume during the Q2.

- Oleochemicals contribute around 2/3rd of revenues and the contribution is likely to move up further as the expansion is skewed towards oleochemicals than nautraceuticals

- As the scope for demand and raw material procurement is limited beyond 45000 mt capacity, the company has already started the process for growth beyond FY16 and is thinking of venturing into new products. As per management, though new products would require new raw materials, but suppliers and end customers would be same, thus monetizing its strong relationships on both ends.

Valuation & Recommendation

The stock has re-rated since our initiation (on 12th March at Rs 128) and currently trades at 13.9x/9.9x PE on FY15E/FY16E earnings and 8.5x/6.2x EV/EBITDA respectively. Considering the strong return ratios, healthy balance sheet (debt: equity ratio 0.37x/0.19x in FY15E/FY16E) and robust growth (on the back of 2.5x capacity expansion in 1.5 years) which is backed by equally strong demand, we believe the stock has still potential to move upwards from current levels. Still, considering the recent one sided up-move and on subdued Q2 expectation we expect the stock to consolidate at current levels, which should be used by investors to accumulate the stock from one year perspective. We recommend a HOLD on the stock with target price of Rs 279 (12x on FY16E), a potential of 21%.