Feb 22, 2017

Fineotex Chemical Ltd

Recommendation (Rs.)

CMP (as on Feb 21, 2017) 35

Target Price 40

Previous Target Price 35

Upside (%) 15

Stock Information

Mkt Cap (Rs.mn/US$ mn) 3873 / 58

52-wk High/Low (Rs.) 41 / 21

3M Avg. daily volume (mn) 0.2

Beta (x) 1.4

Sensex/Nifty 28762 / 8908

O/S Shares(mn) 111.3

Face Value (Rs.) 2.0

Shareholding Pattern (%)

Promoters 72.0

FIIs 0.1

DIIs 0.1

Others 27.8

Stock Performance (%)

1M 3M 6M 12M

Absolute 21 39 29 51

Relative to Sensex 13 25 26 24

Source: Bloomberg

Relative Performance*

Source: Bloomberg; *Index 100

Decent Performance under Macroeconomic Pressure; Business Traction

to Continue: Fineotex Chemical recorded decent set of result as consolidated

sales grew by 1.1% YoY (largely in line) to Rs. 298 Mn in Q3FY17 as against of

Rs. 294 Mn in Q3FY16. In such a challenging business environment, the

consolidated sales volume surged by ~10.0% YoY on the back of high demand

from end users and increased client portfolio during the period. EBITDA margin

also got increased by 379 bps YoY to 23.7% in Q3FY17 as against of 19.9% in

Q3FY16 substantiating strong operating performance of the business during the

aforesaid period. Such performance has been the outcome of constant focus on

high yield chemicals and innovation. PAT has shown growth of 10.1% YoY to Rs. 44

Mn as against of Rs. 40 Mn in Q3FY16. The PAT margin stood at 14.9%, up by 122

bps YoY basis.

In 9MFY17, the revenue increased by 2.9% to Rs. 887 Mn as compared to

Rs. 862 Mn YoY basis. EBITDA stood at Rs. 205 Mn showing a growth of 11.0% YoY

along with EBITDA margin recorded at 23.1%, gaining by 169 bps YoY. PAT is at

Rs. 141 Mn showing strong growth of 16.8% YoY.

“Aquastrike VCF” addition to portfolio - supports topline growth: During

the quarter, the company succeeded in getting approval of its new product by the

name of “Aquastrike VCF” (a non-toxic mosquito life cycle killer) from Ministry of

Health in Malaysia, Singapore Public Utility Board, Vietnam and Cambodia by their

respective authorities while approval from European authorities is awaited. Going

forward, this newly launched product along with management move to expand its

geographic reach will contribute in substantial growth in top line.

Valuation and Outlook

We continue to maintain our positive outlook on the company’s business on the

back of healthy balance sheet with zero debt, robust return ratio, continuous

dividend paid, high entry barrier business due to long approval process & validate

(> 12 month) from customer end, continued improvement in quality of products and

its properties and new additions of customer base coupled with product approvals

coming from various international countries will augur well for the company.

Currently, the stock is trading at P/E 18.5x to FY18E EPS. Looking at brighter

growth prospects, we have revised target price to Rs.40 valuing stock at P/E 21.2x

of FY18E EPS which represents to 15% upside with “BUY” recommendation for

the period of 12-15 months.

For private circulation only. For important information about Karvy’s rating system and other disclosures refer

to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>,

Thomson Publishers & Reuters

Exhibit 1: Valuation Summary

YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E

Net Sales 867 1020 1087 1175 1272

EBITDA 92 165 265 289 319

EBITDA Margin (%) 10.7 16.2 24.4 24.6 25.1

Net Prot 65 129 170 188 211

EPS* (Rs.) **0.6 1.2 1.5 1.7 1.9

RoE (%) 10.6 18.3 20.3 19.5 19.2

PE (x)

10.2 19.4 21.3 20.7 18.5

Source: Company, Karvy Research, *Adjusted for stock split of 1:5, **Adjusted bonus shares issued in proportion of 1:1 on face value

of Rs. 10,

Represents multiples for FY14, FY15 & FY16 are based on historic market price

Earnings Revision (%)

YE Mar FY17E FY18E

Sales (%) 2.9 2.9

EBITDA (%) 3.1 3.7

PAT (%) 3.2 5.2

Source: Karvy Research;

Company Update

India Research - Stock Broking

BUY

Analyst Contact

Kishor Kumar

040 - 3321 6277

kishor.kumar@karvy.com

Materials-Chemicals-Specialty Chemicals

Fineotex Chemical Ltd

Bloomberg Code: FTXC IN

110

130

150

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-16

Aug -16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Fineotex Chem ical Ltd

Sensex

Feb 22, 2017

Fineotex Chemical Ltd

Exhibit 2: Q2FY17

YE Mar (Rs. Mn) Q3FY17 Q2FY17 QoQ % Q3FY16 YoY % 9M FY17 9M FY16 YoY%

Turnover 298 294 1.4 294 1.1 887 862 2.9

Expenditure 227 225 0.9 236 (3.7) 682 677 0.7

EBITDA 71 69 2.9 59 20.3 205 185 11.0

Depreciation 2 2 4.2 1 30.0 5 4 22.0

Interest 1 1 40.0 1 42.6 3 3 1.7

Other Income 12 16 (21.1) 13 (2.0) 34 27 28.7

PBT 80 82 (2.1) 69 15.8 232 205 13.2

Ta x 26 21 22.3 22 16.3 68 65 4.9

PAT 44 53 (16.1) 40 10.1 141 121 16.8

EBITDA Margin (%) 23.7 23.4 36 bps 19.9 379 bps 23.1 21.4 169 bps

EBIT Margin(%) 27.3 28.1 (83) bps 23.7 354 bps 26.5 24.1 238 bps

Net Prot Margin (%) 14.9 18.0 (311) bps 13.7 122 bps 15.9 14.0 189 bps

Source: Company, Karvy Research

Exhibit 3: Quarterly Revenue Trend & Revenue growth

Source: Company, Karvy Research

Exhibit 5: Quarterly Gross Margin (%)

Source: Company, Karvy Research

Exhibit 7: Quarterly PAT & PAT Margin (%)

Source: Company, Karvy Research

Exhibit 4: Raw Material as % of sales (%)

Source: Company, Karvy Research

Exhibit 6: Quarterly EBITDA & EBITDA Margin (%)

Source: Company, Karvy Research

Exhibit 8: Quarterly Effective tax rate (%)

Source: Company, Karvy Research

31.7%

26.4%

31.0%

31.7%

30.6%

32.4%

32.0%

29.2%

26.1%

32.5%

20%

24%

28%

32%

36%

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Quarterly Effective tax rate Trend (%)

14.4%

13.7%

16.1%

14.4%

14.0%

13.7%

17.4%

14.8%

18.0%

14.9%

10%

15%

20%

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

PAT (Rs. Mn)

PAT Margin (%)

22.7%

17.7%

22.5%

22.7%

21.9%

19.9%

26.7%

22.3%

23.4%

23.7%

10%

15%

20%

25%

30%

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

EBITDA (Rs. Mn)

EBITDA Margin (%)

41.2%

35.5%

35.4%

41.2%

37.0%

36.6%

44.1%

40.2%

41.5%

42.4%

30%

34%

38%

42%

46%

50%

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Gross Margin (%)

51.9%

54.4%

48.4%

51.9%

46.4%

46.3%

51.0%

44.5%

43.8%

51.5%

40%

45%

50%

55%

60%

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Raw Material as % of sales (%)

254

314

294

285

296

294

298

-20%

-10%

10%

20%

30%

105

210

315

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Revenue (Rs. Mn)

YoY Growth (%)

QoQ Growth (%)

Feb 22, 2017

Fineotex Chemical Ltd

Change of Estimates: We have revised up the revenue estimates for FY17E and FY18E by 2.9% on the back of better

performance in adverse condition during the quarter and continuing increase demand by end user industries for high yield

specialty chemical and increase customer base. We revise up the EPS to Rs.1.9 from Rs.1.8 in FY18E.

Exhibit 9: Quarterly Margins Trend (%)

Source: Company, Karvy Research

Exhibit 10: Change in Estimates

YE Mar (Rs. Mn)

FY17E FY18E

Old New % Change Old New % Change

Net Sales 1142 1175 2.9 1236 1272 2.9

EBITDA 281 289 3.1 308 319 3.7

EBITDA Margin (%) 24.6 24.6 4 bps 24.9 25.1 19 bps

Adj. Net Prot 183 188 3.2 201 211 5.2

EPS (Rs.) 1.6 1.7 3.2 1.8 1.9 5.2

Source: Company, Karvy Research

20%

40%

60%

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17

Gross Margin (%)

EBITDA Margin (%)

EBIT Margin (%)

PAT Margin (%)

Exhibit 11: PE Band

Source: BSE, Karvy Research

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-16

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Avg P/E

1SD

2SD

-1SD

P/E (RHS)

Key Risks

 Intense competition.

 Foreign exchange risk.

 Switching sticky customers.

Feb 22, 2017

Fineotex Chemical Ltd

Financials

Exhibit 12: Income Statement

YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E

Revenues 867 1020 1087 1175 1272

Growth (%) (9.6) 17.7 6.6 8.0 8.3

Operating Expenses 774 855 822 886 953

EBITDA 92 165 265 289 319

Growth (%) 10.7 16.2 24.4 24.6 25.1

Depreciation & Amortization 3 5 6 8 11

Other Income 28 45 33 36 39

EBIT 118 205 292 317 346

Interest Expenses 4 3 4 3 0

PBT 112 202 289 314 346

Tax 33 56 91 99 106

Adjusted PAT 65 129 170 188 211

Growth (%) (7.6) 98.7 31.9 10.6 12.2

Source: Company, Karvy Research

Exhibit 13: Balance Sheet

YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E

Cash & Cash Equivalents 127 100 95 96 145

Trade Receivables 219 217 254 257 279

Inventory 114 104 115 117 125

Loans & Advances & Others 184 177 158 161 163

Investments 158 293 390 421 484

Net Block 76 117 131 203 271

Total Assets 879 1008 1142 1255 1468

Current Liabilities & Provisions 147 166 145 160 170

Debt 7 10 30 0 0

Other Liabilities 77 69 53 80 109

Total Liabilities 231 244 229 240 279

Shareholders Equity 112 225 225 223 223

Reserves & Surplus 535 539 688 793 967

Total Networth 648 763 913 1015 1189

Total Networth & Liabilities 879 1008 1142 1255 1468

Source: Company, Karvy Research

Feb 22, 2017

Fineotex Chemical Ltd

Exhibit 14: Cash Flow Statement

YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E

PBT 112 202 289 314 346

Depreciation 3 5 6 8 11

Interest 4 3 0 3 0

Tax Paid (26) (43) (102) (99) (106)

Inc/dec in Net WC (59) 4 (42) 7 (22)

Other Income (25) (43) (14) (36) (39)

Other non cash items 1 (9) (30) 0 0

Cash ow from operating activities 9 120 106 196 191

Inc/dec in capital expenditure (7) (52) (15) (80) (80)

Inc/dec in investments 142 (97) (87) (31) (63)

Others (16) 25 5 36 39

Cash ow from investing activities 119 (124) (98) (75) (104)

Inc/dec in borrowings (28) (19) 20 (30) 0

Dividend paid (6) (6) (35) (37) (37)

Interest paid (4) (3) (0) (3) 0

Cash ow from nancing activities (38) (28) (15) (110) (37)

Net change in cash 90 (32) (6) 11 49

Source: Company, Karvy Research

Exhibit 15: Key Ratios

YE Mar FY14 FY15 FY16 FY17E FY18E

EBITDA Margin (%) 10.7 16.2 24.4 24.6 25.1

EBIT Margin (%) 13.6 20.1 26.9 26.9 27.2

Net Prot Margin (%) 7.5 12.7 15.7 16.0 16.6

Dividend Payout Ratio (%) 17.3 8.7 19.7 17.9 15.9

Net Debt/Equity (x) (0.2) (0.1) (0.1) (0.1) (0.1)

RoE (%) 10.6 18.3 20.3 19.5 19.2

RoCE (%) 12.2 19.5 22.0 20.8 20.2

Source: Company, Karvy Research

Exhibit 16: Valuation Parameters

YE Mar FY14 FY15 FY16 FY17E FY18E

EPS (Rs.)* 0.6 1.2 1.5 1.7 1.9

DPS (Rs.)* 0.1 0.1 0.3 0.3 0.3

BVPS (Rs.)* 5.8 **6.8 8.1 9.0 10.6

PE (x)

10.2 19.4 21.3 20.7 18.5

P/BV (x)

1.0 3.3 4.0 3.8 3.3

EV/EBITDA (x)

6.4 15.0 13.7 13.4 12.1

EV/Sales (x)

0.7 2.4 3.3 3.3 3.0

Source: Company, Karvy Research, *Adjusted for stock split of 1:5, ** Bonus shares issued in proportion of 1:1 on face value of Rs. 10 in

FY15.,

Represents multiples for FY14, FY15 & FY16 are based on historic market price

Feb 22, 2017

Fineotex Chemical Ltd

Stock Ratings

Absolute Returns

Buy : > 15%

Hold : 5-15%

Sell : <5%

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