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Fine Organic Industries IPO: Subscribe for the long term

Incorporated in 2002, Fine Organic Industries is the largest manufacturer of oleo-chemical based additives in India.

Anubhav Sahu @anubhavsays

Fine Organic Industries is the leading manufacturer of plastic and food additives. The end markets for the company are consumer businesses. Strong growth outlook of end markets and growing emphasis on environmental friendly ingredients that the company manufactures make it a worthy bet.

While the company offers a high earnings visibility, the pricing of the initial public offering (IPO) is at a premium and hence suitable only for those with a long term investment horizon.

The company enjoys a strong moat governed by technical know-how and quality control, helping it meet its regulatory needs and client product requirements.

IPO size

The about Rs 600 crore IPO is an offer for sale from promoters (divestment of 25 percent stake). This implies a market capitalisation (mcap) of Rs 2,401 crore post-listing at the upper price band of Rs 783 per share. The issue opens on June 20 and closes on June 22.

Company: At a glance

Incorporated in 2002, Fine Organic Industries is the largest manufacturer of oleo-chemical based additives in India. Around three-fourth of its revenue accrues from the plastic additives business, which is used to improve various functional and processing properties for plastic, packaging and petrochemical industries. The balance is contributed by the food additives (emulsifiers, preservatives) and other end markets like personal care and feed nutrition.

The company’s manufacturing plants are located at Ambernath, Badlapur and Dombivli, with total capacity of 64,300 tonne. Some of the major fast moving consumer goods (FMCG) companies and plastic processors across the globe are its clients.

Food emulsifiers and slip additives are key products where company has a dominant presence in international markets.

Current capacity (tonne)

Source: Company

Value chain: Oleochemicals based products

Source: Company

Oleochemicals are chemicals are derived from natural oils and fats of plant origins. Oleochemicals can be categorised into basic oleochemicals and their downstream derivatives. The technology for manufacturing base oleochemicals is easily available, as a result there are many manufacturers and products are commoditised. Manufacturing of green additives from base oleochemicals is a highly specialised process and only a few players have the technical know-how.

Over the years, these oleochemicals have become essential to a variety of industries such as coatings, surfactants, plasticisers, lubricant additives (slip and anti-block additives), cosmetics, soaps, detergents, textiles, plastics and organic pesticides. In recent years, there has been a rapid increase in natural fatty acid derivatives usage as additive materials in several industries by replacing potentially harmful petrochemicals. Being derivatives of vegetable fats and oils, these products are also environmentally friendly.

Strong technical know-how

Its key strength lies in the technical know-how related to chemistry and application in the olechemical value chain. The company spends about 2 percent of its revenue on research and development and has a 15 member team, which is responsible for 46 new product launches since April 2014.

In-house capabilities for plant designing has been instrumental for quicker commissioning of new plants and lower capex requirement, resulting in better return ratios.

Other entry barriers

Besides limited access to intellectual property and process technology, the reason why there is limited manufacturers in this industry is also due to lengthy (3-5 years) and expensive customer product approval process and strict regulatory requirements across the globe.

Feed nutrition: New growth levers

The company’s existing feed nutrition additives application focuses on the poultry industry and tends to substitute antibiotics and improve nutrition. This product has been recently commercialised and the management intends to export to selected international markets like Europe and the United States. Fine Organic Industries has also developed a nutrition additive that increases milk yield from cattle. The management expects to commercialise it on a larger scale.

Capacity and expansion plans

Its current capacity is near optimum utilisation levels. The management is expanding its Ambernath facility by 32,000 tonne (capex: Rs 130 crore) with a 70:30 debt-to-equity funding. This facility is expected to be operationalised by Q4 FY19 with broadly three production lines: food additives, cosmetics additives and feed nutrition.

Its joint venture (Fine Zeelandia) with the Dutch baking ingredient company Zeelandia in Patalganga would be operational within a month and produce bakery pre-mixes (10,000 tonne capacity) for India and neighbouring markets.

It has planned another JV with Germany’s Adcotec with a capacity of 10,000 tonne in Leipzig. This facility is expected to operationalise by Q3 FY20 and produce food emulsifiers for European clients.

Along with these, the company also envisages to add 10,000 tonne of new capacity in Patalgana. However, the timeline is not stipulated. In the medium term, the management plans to nearly double its manufacturing capacity.

Capacity expansion plans (tonne)

Source: Company

Risk factors

Raw materials (around 60 percent of sales) are derived from vegetable oils like rapeseed, palm, palm kernel, sunflower, castor, soybean and rice bran. The same was impacted by respective supply-demand dynamics, which includes factors like usage as a biofuel.

About 70 percent of these requirement is sourced domestically while raw materials derived from palm and palm kernel oil, in particular, are imported. Last year, imposition of import duties on crude palm oil (from 7.5 percent to 40 percent) by the government had affected the cost of palm oil derived raw materials.

Exports constitute about 65 percent of its sales, which exposes it to the vagaries of currency fluctuation. The latter is partially offset by the natural hedge provided by the high import of raw materials.

Peer group

Source: Moneycontrol Research, Company *Note: Implied mcap based on upper price band in IPO

The company is a formidable player in oleochemical-based applications and enjoys strong entry barriers in terms of intellectual property, regulatory requirements, quality control, client and product approvals and reach. The growing trend towards usage of environmental-friendly additives in end-markets, which cater to human consumption, supports product demand.

Medium term growth in earnings is expected to be driven by volume growth from new capacities and better product mix.

At the IPO price band, the implied valuation multiple is demanding and bakes in near term growth. Hence, this issue may not be suitable for investors looking for short term gains. We do see the possibility of strong double-digit earnings growth in the future. So, investors with a long term investment time horizon may choose to subscribe.

For more research articles, visit our Moneycontrol Research page
First Published on Jun 20, 2018 03:55 pm
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