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Recommendations India

Adi FInechem Limited Q4FY14 results update

May 28, 2014, Wednesday, 08:09 GMT | 03:09 EST | 11:39 IST | 14:09 SGT
Contributed by Nirmal Bang

Adi FInechem Limited (AFL) posted stellar results with Sales of growth of 50% yoy to Rs 44.3 cr, on back of commercialization of additional capacity (which got operational from Sept’13). Current Capacity utilization is 93%. Key highlight of the quarter was the improvement in margins which has moved to 25.4% from 24.5% in Q3FY14 and 12.6% in Q4FY13. Management has highlighted that strong margins is result of three factors: (1) higher economies of scale on the expanded capacity (2) Higher realizations especially from Nutraceuticals segment (3) Stable forex also helped the company in posting impressive margins.

Other Highlights

- AFL reported strong sales growth of 23.3% for FY14 at Rs 151.8 cr. For Q4FY14, sales grew by 50%

- Positive surprise during the quarter was remarkable improvement in margins which has moved to 25.4% in Q4FY14 taking the full year margins to 21.8% from 14% in FY13. This is on account of favorable product mix and higher economies of scale. Though major part of the improvement is sustainable (like economies of scale, higher realizations – which is at-least maintaining for the time being), still we believe that such levels would be difficult to witness again in future. We expect company to report EBITDA margins in the range of 20% for FY15E and FY16E.

- Higher margins pushed the ROCE of the company to impressive levels of 39.5%, which, we believe places the company among the highest percentile in the chemicals sector

- AFL has bonus Issue in the ratio of 1:10, third time in row. It has also declared dividend of Rs 1.5 per share

Valuation & Recommendation

Under the guidance and focused approach from new management, Adi Finechem has turned around its business strategy and signs of success are visible in numbers too. AFL trades at 9.0x/6.5x on FY15E/FY16E earnings which is we believe still provides scope for further upside. We expect stock to re-rate given its high return ratios, increasing capacity, focused management and improving profitability profile. The company’s expanded facility is expected to be operational from Oct’14 therefore it would get 4-5 months sales in FY15 however the full benefit of the expansion would be visible from FY16 onwards. We recommend a BUY on the stock with target price of Rs 206 (8x on FY16E), a potential of 24%.