The offer-for-sale of specialty chemicals player Fine Organic Industries opens today. The promoters are selling 76.65 lakh shares valued at ₹600 crore.

The company manufactures green additives from oleochemicals (chemicals derived from vegetable oils), which are primarily used in the food, plastic, cosmetics, paint and other industries.

Fine Organics is the largest manufacturer of oleochemical-based additives in India and a strong player globally. With over 44 years in operations, the company is well-positioned to capitalise on the high entry barriers in the industry, thanks to stringent quality standards demanded by end-users. Strong R&D capability and future expansion plans further improve the prospects. Steady growth in revenue, coupled with healthy margin and low leverage put it on a sound footing on the financial front.

At the upper end of the price band — ₹783 — the issue is valued at nearly 24 times its annualised earnings for FY18. This compares favourably with the valuation of its listed peer Galaxy Surfactants, which trades at a PE multiple of 28 times.

High-growth business

The offer is attractive for investors with a long-term perspective. The small market capitalisation of the stock, however, renders it vulnerable in a broad-based market correction. The company operates in two additive segments — plastic, and food & others. In the nine-month period ended December 2017, revenue share from plastic and food & others stood at 72 and 28 per cent, respectively. The company enjoys prominent position in both the segments globally; being the fifth- and sixth-largest players in oleo-plastic and oleo-food additives segments, respectively. According to CRISIL, the global oleochemicals market is expected to grow at a compounded annual growth of 5 to 6 per cent between 2016 and 2020, with the domestic market expected to clock growth of 10 to 15 per cent in the same period.

Increased spending in construction, auto and consumer sectors and improving economic growth could drive demand for the company.

The complex manufacturing process for extracting additives from oleochemicals raises the entry barrier in this space. Further, these products need to meet high quality standards of end-users with many end-user companies taking three to five years to approve additives. This results in customers sticking with only the established players. The company’s three facilities have a combined installed capacity of approximately 64,300 tonnes a year and the facilities are running at around 90 per cent capacity utilisation. It plans to double the installed capacity base by commissioning new facilities with incremental capacity addition of around 67,000 tonnes over the next two years.

The company’s strong R&D capability has improved its production processes, and the quality of its products; it has also helped create new additives and downstream products. Fine Organics has developed and launched 46 new products since April 2014.

The risk for the company primarily stems from the fact that it generates around 60 per cent of the total revenue from exports, thus pegging up the forex risk. Adverse currency movement can, therefore, impact the company’s earnings, though the company is hedging a part of its forex risk.

Two, primary raw materials for Fine Organics are vegetable oils, of which 20-25 per cent are imported. Any changes in import tariffs or adverse weather conditions can increase input costs.

Robust financials

The consolidated revenue and net profit of the company grew 13 and 21 per cent CAGR, respectively, over FY15-17. In FY17, its consolidated revenue and net profit stood at ₹778 crore and ₹78 crore, respectively. In the nine month ended December 2017, the company’s consolidated revenue and net profit were at ₹580 crore and ₹61 crore, respectively.

Annualised revenue by extrapolating the numbers for nine months reveals that topline growth was flat compared to the previous fiscal, impacted by the transition to GST. Operating profit rose 15 per cent annually over FY15-17. Operating margin for the nine months to December 2017 was 18 per cent.