Updated: Sep 21
Company Name – Fine Organic Industries Limited (Fine Organic)
Current Share Price – INR 4,717 (July 26, 2023)
Market Cap – INR 14,462 cr
1. What is interesting about the stock?
Over the last millennium, there have been significant changes in the food habits of humans. These changes have been driven by a variety of factors, including technological advances, global trade, cultural exchange, and changing dietary preferences.
One of the most significant changes has been the shift from a primarily agricultural and locally sourced food supply to a more global and industrialized food system. Advances in transportation and preservation technologies have made it possible to transport and store food products over long distances, allowing people to access a wider variety of foods than ever before.
Another major change has been the increasing consumption of processed and convenience foods. With the rise of industrial food production and urbanization, people have become more reliant on packaged and prepared foods. There has been increasing use of preservatives and emulsifiers. Initially, we used fossil fuel-based chemicals for such purposes but now that is being replaced with more natural/organic options. One such natural/organic option is Oleochemicals.
Oleochemicals are chemicals that are derived from natural oils and fats, typically vegetable oils and animal fats. The term "oleo" is derived from the Latin word "oleum," which means oil. Oleochemicals are produced by a process called saponification, which involves reacting oils, and fats with an alkaline substance, such as sodium hydroxide.
Oleochemicals have various applications in various industries, including cosmetics, food, and household products. They are commonly used as surfactants, emulsifiers, solvents, and lubricants. Some of the most common oleochemicals include fatty acids, glycerin, and fatty alcohol.
The production of oleochemicals is considered to be more environmentally friendly than the production of petrochemicals, which are derived from non-renewable fossil fuels. Oleochemicals are biodegradable and renewable, and they can help to reduce dependence on fossil fuels.
Some of the world's largest manufacturers of oleochemical food additives are Cargill, DuPont, BASF SE, and Fine Organic.
Fine Organic Industries Limited is an Indian multinational corporation that operates in the chemicals and food additives industry. The Company was founded in 1970 by Prakash Damodar Kamat and has its headquarters in Mumbai, India.
Fine Organic specializes in the production of various food additives, such as emulsifiers, anti-foaming agents, and preservatives. The Company's products are used in a variety of industries, including food and beverage, cosmetics, pharmaceuticals, and agriculture.
Some of the notable products of Fine Organic include Fine Zeal, Fine Brite, and Fine Fettle. These products are used as emulsifiers, anti-caking agents, and preservatives in various food products.
Company has a global presence, with operations in countries such as the United States, Europe, and Asia. Company derived ~70% of revenue from exports in FY23.
Some of the Company's key customers include:
Food and Beverage Industry - Fine Organic supplies food additives, such as emulsifiers, anti-foaming agents, and preservatives, to major food and beverage manufacturers in India and other parts of the world. Some of its key customers in this industry include Nestle, Mondelez, Britannia, and PepsiCo.
Personal Care Industry - Company supplies specialty ingredients, such as emollients, conditioning agents, and emulsifiers, to major personal care product manufacturers in India and other parts of the world. Some of its key customers in this industry include L'Oreal, Unilever, Procter & Gamble, and Johnson & Johnson.
Plastics Industry - Fine Organic supplies plastic additives, such as slip agents, anti-block agents, and anti-oxidants, to major plastics manufacturers in India and other parts of the world. Some of its key customers in this industry include Reliance Industries, SABIC, and LyondellBasell.
Textiles Industry - Company supplies specialty chemicals, such as softeners, lubricants, and surfactants, to major textiles manufacturers in India and other parts of the world. Some of its key customers in this industry include Arvind Mills, Raymond, and Aditya Birla Group.
In 2018, Fine Organic went public with an initial public offering (IPO) size of ~ INR 600 cr.
Company has been a big beneficiary of COVID supply chain disruption – increased volume growth, and pricing power as it was able to supply when competitors got impacted thereby increasing wallet share.
Why invest in Fine Organic?
Cost leadership: Strong focus on operational efficiency, which has enabled the Company to achieve cost leadership in the production of oleochemicals. The Company's manufacturing facilities are designed to optimize production efficiency and minimize waste, which helps to keep costs low.
Diverse product portfolio: Company offers a wide range of oleo chemical-based products, including food additives, polymer additives, and specialty chemicals. This diverse product portfolio has helped the Company to expand its customer base and reduce its dependence on any single industry or product.
Strong R&D capabilities: Dedicated R&D center that focuses on developing new and innovative oleochemical-based products.
Strong customer relationships: Fine Organic has established strong relationships with some of the largest manufacturers in each of its target industries. This has helped the Company secure long-term contracts and maintain a stable revenue stream.
Sustainable and eco-friendly production: Company's manufacturing facilities are designed to minimize waste and reduce energy consumption, and many of its products are derived from renewable sources, such as vegetable oils. This has helped the Company to differentiate itself from its competitors and appeals to customers who are looking for sustainable and eco-friendly solutions.
2. Key Historical Financials
Company revenue and profit have been growing 29% and 45% on a CAGR basis respectively in the last 5 years
Revenue increased 61% in FY23 after showing strong growth in FY22 – the positive impact of supply chain disruption which is reversed in the recent quarters
EBITDA margin increased to 27% due to operating leverage
Revenue de-grown by 27% in Q1FY24
Cash flow conversion (CFO/EBITDA) improved to 59% in FY23
ROE and ROCE were at 49% and 65% respectively in FY23 – it may not be sustainable
3. What is my view on company valuation?
The Company trades at P/E (TTM) multiple of 26x vs a 5-year median of ~40x and a chemical industry median of 23x. Share price peaked in September 2022 on the back of strong Q2FY23 financials and has fallen 30% since then. The valuation multiple looks cheap however the business is reverting to normal levels and hence profit number could fall for a few quarters.
On an overall basis, Company looks quite exciting. Long-term investors should wait until there is clarity on a normal business level (revenue and profitability).
4. What are the risks to the investment analysis?
Risks to the analysis are:
Exposure to volatility in the exchange rate and price of key raw materials – vegetable oil
Competition from global players with significantly higher R&D spending
Highly regulated industry so Company is vulnerable to changes in regulations
About the Author
I have over 18 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.