Fine Organics Industries Ltd which came out with its IPO on June 20th 2018, got it’s shares listed on both the exchanges on 3rd of July 2018 at a premium of 5% over the higher end of the listing of ₹783. The objective of the IPO was a complete OFS of 25% share sale by company’s promoters i.e. no money goes to the company but to the promoters. Since the IPO, the share price has been on a continuous upward trend irrespective of the Indian market being hit by a number of crises, most notable among them was the liquidity crunch with NBFCs. Fine organics has given a handsome return of 74% till date.
Fine organics industries ltd: Share price movement
Fine Organics Industries Ltd: About the company
Although the brand ‘ Fine Organics’ traces its roots to the early 1970s, the company that got listed ‘Fine Organics Industries Ltd’ was incorporated in the year 2002. Based out of Maharashtra, the company is the largest Oleochemicals manufacturer in India and one of the top 10 in the world. There are only a handful of such large players around the world.
The company is export oriented with export contributing about 60% of sales and 40% catering to the Indian market.
At the time of IPO i.e. till 31st Dec 2017, the company had 387 products, 603 direct customers & 127 distributors catering to 5000+ clients which increased to 400+ products, 650 direct customers & 130+ distributors catering to 5000+ clients as on 31st December 2018.
Let us understand what are Oleochemicals:
Oleochemicals are chemicals derived from vegetable oil and animal oil & fat. In the case of Fine Organics Industries, they use only vegetable oil to derive their end product as usage of animal oil & fats are not permitted in India.
Fine organics industries ltd: Business Model & Key highlights
Fine Organics Industries Ltd- Business Model
Fine Organics Industries Ltd- Key pointers
Fine Organics Industries Ltd- Clients
Fine organics industries ltd: Plants & Joint Ventures
All of company’s plant are capable to manufacture any of the company’s product.
Fine organics industries ltd: Current Capacity
Fine organics industries ltd: Expansion
The 3rd Ambernath facility with a capacity of 32,000 TPA started commercial production from 27th August 2019. Even the Fine Zeelandia at Patalganga has started commercial production.
Fine organics industries ltd : Products
Polymer & Food additives are largest contributor of revenue at 72% & 20+% share respectively.
Polymer Additives
1. Slip additives: Reduces the friction between plastic and the other surface it comes in contact with. Reduce the coefficient of friction of a polyolefin film. Eg would be films, bottle caps, wires, cables, disposable syringes, car wipers. Largest producer in the world with 40% market share in India.
The product was manufactured on the request of Reliance industries in 1998 which took the company 2 years to develop. They were the pioneer for slip additives in the world.
2. Anti-fogging additives: Anti-fogging additives allow water to spread into a continuous and uniform transparent layer on the surface of films. This results in improved light transmission and transparency which has benefits in both agricultural and food packaging applications.
Food packaging benefits from anti-fogging additives by maintaining its clarity and transparency so the contents can be clearly seen by the consumer at the point of sale
Difference while using Anti Fog
Clearer visibility using Anti Fog additives
Uniform dispersion of water droplets
3. Anti-static additives: There is the build-up of electrical charges on plastic materials like films, furniture, flooring, and carpets, which results in attracting dust particles. Fine Organics Industries ltd’ s products help in mitigating the charges.
4. Lubricants: lubricants are used as flow improves and mould release agents in PVC pipes, fittings, profiles, foam sheets, tubing, hose pipes, wires and cables and also in engineering plastics for manufacturing white goods and automotive parts.
5. Processing aids: Processing aids improve the melt processability and handling of high molecular weight polymers and are used in filled compounds for packaging, furniture, and moulded articles of various plastic materials.
Food Additives
1. Anti-fungal agents or preservatives to increase life of products
2. Emulsifiers: Used to get desired aesthetic structure & texture. Prevent separation of oil & fat. Used in baked products, extruded foods, chocolates, confectionery, margarine,
3. Specialty additives: Some examples would be a) Finamul-87, blend of emulsifiers used to reduce fat in high-quality biscuits. b) Finagel, which is a batter-aerating agent used to make high-quality sponge with good volume, structure, sliceability and shelf life.
Cosmetic and Pharmaceutical additives
Enables the manufacture of cosmetic and pharmaceutical products with different structures like creams, gels, pastes, lotions, solutions, varnishes, sticks, powders, ointments and aerosols. They aid cosmetic products in achieving long-term physical stability for transport and storage, inhibit germination through moulds, yeast and bacteria, increase chemical stability of sensitive active agents towards atmospheric oxygen, and influence sensory perception like consistency, dispersion on the skin, scent (fragrance) and colour.
While reading the product description you might have realized that the company’s product provides an extra edge to the consumer and are quite critical to differentiate. Searching for the description of these products I came across multiple smaller companies in India providing similar product but I assume the criticality of the product makes the clients buy these additive from a reputed player and with the product contributing just 0.1% to 0.2% of the end product weight, getting a premium won’t be that of a issue for Fine Organics.
Fine organics industries ltd: Company Structure
Just prior to the IPO, the management in order to simplify the corporate structure amalgamated ‘Fine Speciality Surfactants Private Limited’ and ‘Fine Research & Development Centre Private Limited’ with Fine Organics Industries Ltd. Also, the company had a related partnership company ‘Olefine Organics’ which used to do the job work for the parent company. Fine Organics had plans to take over this company as well but needed MIDC approval to sub-lease the land which they got in Q3 FY19, thus simplifying the structure further. This would imply a positive intent of the management towards their shareholders.
The company is in the process of setting up wholly owned subsidiary in China. With China shifting towards greener alternatives, Fine organics’ products fine ready acceptance over there. The company is already exporting to China & find immense opportunity.
Positives & Negatives
Positives
Very high technological products: Handful of players worldwide
Product R&D as well as engineering R&D. The company has engineering R&D to come up with equipment corresponding to the newly developed products. {In a first, they are providing equipments to the German JV partner. I am sure you would be aware of the German strength in equipment manufacturing. A large percentage India’s factories run on their machines}
Highly regulated market: Stringent regulation in developed countries
High client stickiness: It takes 3 to 5 years for customers to approve their products.
Patents: The company has 5 patents in India and 4 patents globally.
Negatives
No long term contracts with clients
Supplier concentration: Two of the suppliers contribute 45% of supplies
Company’s Cash flow from operations < Profit After Tax
Given that company is R&D driven but interestingly the company does not disclose the amount of expenditure attributable to R&D
Fine organics industries ltd: Financials
Fine organics industries ltd: Annual Number analysis
Fine organics Industries ltd: Quarterly Number analysis
Valuations
Valuation wise the company looks expensive. In terms of Price to Sales, the company is trading at more than 4x the forward sales and 5x the TTM sales. If you look at the P/E ratio, the company trades at a 46 on TTM earnings as on 15th Oct 2019.
Although a lot is positive about the company, it needs a very conscious call with respect to taking any position in the company primarily with regards to expensive valuation.
Further reading: