Adi Finechem - A Quantum Leap - Nirmal Bang

Adi Finechem (AFL), India's leading oleochemicals/neutraceuticals manufacturer, is the only producer in India of dimer acid and tocopherol, which accounted for 53.2% of its FY14 revenue. The change in promoters in FY10 turned around the fortunes of AFL. After strengthening its raw material sourcing, manufacturing process and supply chain in the backdrop of strong demand, AFL is aggressively expanding its capacity by 150% over FY13-FY15E via brownfield capex. With a 57.7% rise in EBITDA/tn in FY14, expected 40.4% volume CAGR and a reduction in its D/E ratio likely from 0.61x to 0.17x, AFL is expected to post EBITDA/PAT CAGRs of 32.3%/36.6%, respectively, over FY14-FY16E. AFL stock trades at 11.1x/6.9x FY16E P/E and EV/EBITDA, respectively. Aggressive growth coupled with healthy operating cash flow/free cash flow of Rs381mn/Rs170mn, respectively, a 222bps RoCE improvement at 35.0%, lean capex and a declining D/E ratio likely over FY14-FY16E make a case for re-rating of AFL's valuation multiple. We have assigned Buy rating to AFL with a target price of Rs417 based on 16.5x/10.2x FY16E P/E and EV/EBITDA respectively, up 49% from the current market price.

Brownfield capex to provide healthy volume growth at a lower cost: AFL uses byproducts of vegetable oil processing units to make finished products and as a result, its manufacturing costs are ~30% lower than peers. As AFL provides products based on import-parity prices with added advantages of just-in-time delivery, better quality and threemonth fixed pricing, it has been a preferred supplier for most clients. AFL can substitute a large portion of its clients' requirement, which is met through imports currently. After strengthening its raw material sourcing, manufacturing process and supply chain, coupled with strong demand, AFL is aggressively expanding its capacity by 150% via brownfield capex over FY13-FY15E. AFL increased the capacity by 39% at 25,000tn in September 2013 and is further increasing it by 80% to 45,000tn by December 2014. This may provide a healthy 40.4% volume CAGR over FY14-FY16E versus a 25.5% CAGR over FY10-FY14.

Healthy cash flow and return ratios: Post turnaround in FY10, the new promoters of AFL cut inventory days from 142 to 41 and ex-cash working capital needs from 29.8% to 19.5% over FY08-FY13. AFL invested a mere Rs151mn over FY10-FY13 and increased its capacity from 8,000tn to 18,000tn. With a lower capex because of brownfield expansion, control over working capital and improved profitability, AFL is likely to improve RoCE from 21.6%/32.8% in FY13/FY14, respectively, to 35.0% in FY16E, generate healthy operating cash flow of Rs381mn and cut the D/E ratio from 0.61x to 0.17x over FY14-FY16E, despite a 150% capacity expansion, which is likely to aid the next phase of growth beyond FY16.

Sustainable growth in margins and healthy cash flow: EBITDA/tn improved 57.7% at Rs17,138, and operating margin improved 799bps in FY14 as: 1) AFL started selling an additional product called sterol which contributed to EBITDA without much costs, as it was earlier getting wasted in the manufacturing process, 2) Share of exports increased to 36.2% in FY14 from 26.8% in FY13, which enjoy higher margins, 3) Fall in manufacturing costs, and 4) Favourable INR-USD movement. We expect a significant part of margin improvement to continue on the expanded capacity as well in FY15/FY16. With enough scope for improving efficiency and falling power and fuel costs, operating margin can improve further with a minimum capex/opex in FY17 post stabilisation of its expansion plan. With healthy volume growth and stable margins, net profit may post a 36.6% CAGR over FY14-FY16E.

Shares of ADI FINECHEM LTD. was last trading in BSE at Rs.319 as compared to the previous close of Rs. 321.2. The total number of shares traded during the day was 20943 in over 382 trades.

The stock hit an intraday high of Rs. 323 and intraday low of 315. The net turnover during the day was Rs. 6677946.

Source : Equity Bulls

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