What’s Wrong with Fine Organics?

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Fine Organics Share Price Movement

The stock performance of Fine Organics has been anything but FINE for the past 6 months as it has lost more than 10% in price terms, while the wider stock market (NIFTY )has given +28 % during the same period.

Therefore, an investor might be on his edge watching the stock. nevertheless, in this blog, we shall try to fathom the depths of the business and find out what is wrong with the company.

Company Overview

Fine Organics Industries Ltd. (FOIL) is the largest manufacturer of oleo chemical-based additives (chemicals derived from natural oils and fats of plant origins) in India, with a strong global presence.

Having started off as a manufacturer of 2 products in 1973, Fine Organics has gradually scaled it up to 400+ products currently.

The company is a strong global competitor in oleo chemical-based additives and currently a global leader in Slip Additives.

Fine Organics Company Overview

Investment Rationale

Fine Organic is the largest manufacturer of oleo chemical-based niche additives in India.

It is among the five largest global players in polymer additives and among leading global players in specialty food emulsifiers.

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Fine Organic’s product portfolio comprises over 400 products including food additives, polymer additives, emollients for cosmetics, additives for rubber etc.

Although the volume of additives used in end products is low, these are very critical in imparting the requisite properties to the products which give Fine’s products ready buyers.

Further, Fine’s in-house developed technology, processes, and solution-based approach to customers has led to long-standing relationships with most clients and also created strong entry barriers for competitors.

The shift from synthetic chemicals-based additives to oleo-chemicals-based additives is also a growth generator for the company.

Fine’s management has been conscious about increasing the composition of value-add products in its mix of portfolio ad has been prudent in capital allocation.

Key Products

It derives 30% revenue from Food, 40% from Packaging (Polymer-based) & Rest 30% of other businesses catering to Cosmetics/Pharma/specialty segments.

Products Portfolio of Fine Organics

Growth Driver

The domestic food additives market is going to grow at a fast pace ensuring future business for the company. Given the per capita consumption of bakery, chocolates, snacks are lower than the global average, which is expected to improve due to change in the lifestyle.

This translates into more consumption of emulsifiers resulting in better visibility for Fine Organics since it has a 90% market share in India.

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Plants

Fine Organics Operational Facilities and Plants
PatalGanga plant became operational

In August 2019, the 3rd Ambernath Facility became operational for plastic, rubber, and cosmetic additives, which was expected to drive revenue growth.

However, the topline has not grown despite this capacity addition. Meaning utilizations have been low. Nov 2020, Patalganga Operational dedicated to food additives.

Due to the plant locations nearby Mumbai and the metropolitan grappling under Covid-19 the future looks clouded in terms of operational issues that may appear in short term.

Operating Leverage

Let us look at the Gross Fixed Asset Turn Over ratio of the past few years:

It has been nearly 3.5 x on an average till FY19. FY20 the Asset Turnover was low due to capitalization of Ambernath 3rd facility in Q2FY20 with negligible sales generation.

However, if we take a long-term view then the company is expected to maintain a 3.5x asset turn on the upcoming capacity.

Hence, incremental revenues are expected to be Rs 550 crore by FY23-24 from Ambernath capacity and Rs 220 crore by FY25 from Patalganga.

Therefore, the company seems to offer operating leverage going forward.

Let us dig deeper on the Raw material supply side.

As the key RM for this company are Palm Oil, Soyabean Oil & Sunflower oil, so let us try to see the per-unit costs of these items:

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As we can see that the rising cost has hit the companies financials badly leading to shrinking in Company’s Operating Profit Margin (OPM)

Further, the regulatory outlook for vegetable oil importers is not sanguine with FM hitting hard with an increase in import tax

Financial Indicators of Fine Organics

Fine Organics Revenue
RoCE of Fine Organics

Also Watch: A Detailed Video on What’s Wrong with Fine Organics

Conclusion

The Company is a fundamentally sound company with no debt on the balance sheet.

The Raw material prices are expected to pinch the company’s margin in the future also until they vertically integrate.

Also, it seems that the Covid headwinds will drag the stock prices down. However, the valuation at 57 PE does not offer a margin of safety.

So we keep this stock under our watchlist.

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Disclaimer: For education purposes only.

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Amitabh Vatsya

Amitabh Vatsya

Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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