Buy Fairchem Speciality; target of Rs 595: KR Choksey
KR Choksey is bullish on Fairchem Speciality has recommended buy rating on the stock with a target price of Rs 595 in its research report dated April 19, 2018.
April 19, 2018 / 06:27 PM IST
KR Choksey's research report on Fairchem Speciality
Fairchem Speciality Limited (FSL), a Fairfax company, is an exclusive formation of specialty chemicals company from the merger of Adi Finechem Ltd (manufacturer of oleochemicals and nutraceuticals) and Privi Organics India Ltd (manufacturer of Aroma chemicals). The combined entity caters to various industries ranging from printing inks, paints, adhesives & paper coatings, flavors & fragrance, pharmaceuticals, and FMCG. FSL possesses manufacturing capacity of 45000 MTPA of Adi and 22000 MTPA of Privi located in Western India with more than 65 products in its basket. FSL’s exquisite business model of processing finished goods from waste products serves as a platform for organic as well as inorganic growth in the area of specialty chemicals. Going forward, global market for oleochemicals / nutraceuticals / aroma chemicals is projected to grow at 6% / 7% / 7% CAGR over FY17-20E. Given FSL’s dominant presence in all three segments coupled with company’s capex plan to the tune of INR 2600 mn over FY17-FY20E, we believe the company should register volume / revenue CAGR of 16% / 22.4% respectively over the same period.
On the valuation front, the company currently trades at two year forward P/E multiple of 19x. Going forward, we believe FSL should fetch premium valuations on account of i.) strong industry tailwinds, ii.) robust volume growth due to increase in manufacturing capacity, iii.) negotiation of contracts at significantly higher prices as compared to 2017 for pinene based aroma chemicals, iv.) improvement in operating margins and v.) staggering growth in return ratios. Accordingly, we value the company at a P/E multiple of 25x on FY20E and arrive at a target price of INR 595/share resulting into an upside of 29.4% from the CMP of INR 460/share. We assign a “BUY” rating on the stock.
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