Q3FY20 Result Analysis: Fine Organics Industries ltd | Himatsingka Seide Ltd

Q3FY20 Result Analysis: Fine Organics Industries ltd | Himatsingka Seide Ltd

March 7, 202012:09 pm
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Fine Organics Industries Ltd- Q3FY20 Result Analysis

Fine Organics Industries Ltd is one of the largest manufacturer of oleochemicals in the world. Company’s products are used as polymer additives, food additives, cosmetic and pharmaceutical additives. Read more here

Lately, the company has been struggling with growth. One of the reason is that all the manufacturing units of the company was running at 100% capacity utilization and other would be slowdown in FMCG business growth. But a new large capacity has come up in August 2019. Since, any new expansion takes time to ramp up till it reaches optimum level of utilization. We can assume that it is going to take atleast a couple of quarter to start reflecting in numbers.

Post-expansion, the new facility started manufacturing manually for a couple of months and then gradually move to fully automatic production. Management expects the facility to run at around 30% utilization for the  year(FY20). And will take a couple of years to reach peak utilization.

Q3FY20 Result Analysis: Fine Organics Industries ltd | Himatsingka Seide Ltd
Fine Organics Industries Ltd- Q3FY20 Result Analysis​
Q3FY20 Result Analysis: Fine Organics Industries ltd | Himatsingka Seide Ltd

If you look at the numbers, although the revenue has not grown but the Gross margins have improved, both on a year-on-year basis as well as quarter on quarter basis. The improvement in gross margins was mainly due to lower raw material prices. The raw materials are derived mainly from palm and palm kernel oil. But the increase in gross margin was offset by higher depreciation cost(due to the commissioning of the new facility),  increase in operating expenses and employee costs.

Another venture Fine Zeelandia Pvt Ltd which is a 50:50 joint venture with Zeelandia group(Netherlands), the company is trying to get into a new segment with the introduction of premixes for pastry, bread etc. Since, it is altogether a new concept, the scale up in terms of revenue can be expected to be gradual.

The Q2FY20 performance appeared to be good primarily on account of very small tax payment and some amount of improvement in other costs.

Although the company has a number of moats but return of 55% in the last 6 months without much visibility in the growth of the revenue, doesn’t justify the valuation. The current price to earning stands at 43 as well as price to sales stands at more than 6 times(2x-3x should be a limit).

Q3FY20 Result Analysis: Fine Organics Industries ltd | Himatsingka Seide Ltd

Himatsingka Seide Ltd - Q3FY20 Result Analysis

Q3FY20 Result Analysis: Fine Organics Industries ltd | Himatsingka Seide Ltd
Himatsingka Seide Ltd - Q3FY20 Result Analysis​

Coming to one more company that I had covered earlier ‘Himatsingka Seide Ltd’, the struggle towards growth and margin continues. When I first wrote the blog on Himatsingka Seide Ltd in April 2019, it was the best performer among the peers with the stock price hovering around ₹220-250/share. Now, with the headwinds coming into the play the share price have dropped to around ₹90.

Himatsingka Seide Ltd is a vertically integrated export-oriented home textile company particularly with a focus in the bed linen segment which includes Sheet Sets, Pillowcases, Duvets, Comforters, Decorative Pillows, Bed skirts, Shams.

 

Along with the headwinds faced by the business, the Indian govt has also did, what it does best i.e. Tax demand that too RETROSPECTIVE (need to pay up from an earlier period due to change in govt policy). The ministry of textiles has retrospectively withdrawn benefits under MEIS scheme with effect from 7th March 2019. As a result, during the quarter the company reversed the MEIS benefit of ₹36.93 crores for a period from 7th March 2019 to 31st December 2019. 

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Coming to the company, they had taken mega expansion project of ₹1300 cr in 2015 targeted towards backward integration. But with the working capital included in the debt as of now has ballooned to ₹2813 cr as of Q3FY20. The net debt to EBITDA level stood at 4.75 which is too high. If things do not go as planned, it will lead to difficult times for the company. The company is trying to reduce working capital cycle by bringing down the inventory level. Plans to bring down the debt by 200-250 cr by FY21. Because of high level of debt, it is eating away ₹50 cr of profitability.

Among the expansion project, the last one was of Terry towel. The trial production began on Feb 20th, 2019 and started commercial production in Oct 2019. (Oct 03, 2019).

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In terms of financials, there is substantial decline in purchase of finished goods which is because of coming up of terry towel facility which the company was sourcing from outside earlier.

The bedding division has seen demand softening, the company continues to face problem continued headwinds in niche business in their Italian arm as well as drapery & upholstery unit. These 2 segments have seem structural shift in demand, with my limited experience, I would think it would be better to sell off these business or shut them down, instead of continue to burning money there.

Even the effort to expand business in Europe and India has not been able to garner any result.

Q3FY20 Result Analysis: Fine Organics Industries ltd | Himatsingka Seide Ltd
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Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

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