Company Name – Fineotex Chemical Limited (FCL) Current Share Price – INR 332 (Sep 14, 2023) Market Cap – INR 3,672 cr |
1. What is interesting about the stock?
In today's fast-paced business environment, continuous innovation and diversification into new product offerings stand as the most potent protective moat any company can establish. Fineotex Chemical Ltd. (FCL), founded in 1979 by Surendra Kumar Tibrewala, serves as a shining exemplar of this approach within India's burgeoning specialty chemical sector. Once recognized primarily as a niche textile chemical producer, FCL has undertaken a successful transformation over the recent years, diversifying its portfolio to include cleaning, hygiene, oil and gas, and FMCG chemicals.
Presently, FCL boasts an impressive repertoire of over 470 products and collaborates with more than 110 dealers, both in Indian and international markets. The Company's products find their way to over 70 countries, with a combined production capacity of 104,000 metric tons per annum distributed across its three plants situated in Mahape (Maharashtra, India), Ambernath (Maharashtra, India), and Selangor (Malaysia). Notably, a significant 78% of FCL's revenue is derived from the domestic market, where it caters to esteemed clients such as Raymond, Welspun India, Vardhaman Textiles, and the Nahar Group. FCL offers a diverse range of products categorized by textile manufacturing processes. These include pre-treatment chemicals like Finozyme ALFA CONC. / ALFA 50 and Finocon WK CONC., dyeing solutions like Diquest S and Finocon FBOL, printing chemicals for various methods, and finishing agents such as Finosol EM and Finoguard SI. Additionally, FCL provides enzymes like FINOZYME PML for textile bio-polishing. As of Q1 FY24, Textile chemicals contributed 60% of the total revenues.
In 2019, FCL entered the FMCG chemicals sector with a focus on home care, cleaning, and hygiene chemistry. Today, they serve over 50 customers, including industry leaders like Unilever and Patanjali. FCL places a strong emphasis on sustainable chemicals, aligning with the growing global demand for eco-friendly solutions. This is particularly relevant in the FMCG sector, where giants like P&G and Unilever prioritize sustainability. Within this segment, FCL operates through two distinct models: supplying specialty chemicals as additives for products like detergents, floor cleaners, and dishwashing solutions to FMCG companies (B2B sales) and producing their own line of handwashes and floor cleaners for institutions such as hotels and hospitals. Some of the key products of FCL in this segment are shown below.
FCL's business strategy places significant emphasis on inorganic growth and collaborations to enhance its technical expertise. In 2011, FCL acquired BioTex, a Malaysian super-specialty textile chemical firm boasting a unique portfolio of over 50 products specializing in premium specialty finishing textile chemicals, including water and oil repellents and antimicrobials. The Company has formed strategic collaborations with EuroDye, HealthGuard, and Sasmira to bolster its product range and expand its presence in the market.
Understanding the Textile Chemical Value chain
Textile chemicals are vital for fabric and yarn preparation, processing, and finishing, controlling parameters like stability, strength, waterproofing, and colourfastness. Pre-treatment chemicals, the highest volume category at 30%, enhance yarn strength and abrasion resistance. Dyes make up 29% but face competition from eco-friendly options. Other textile chemicals include finishing agents (19%), de-sizing agents (8%), and more.
The Indian textile specialty chemical industry is highly fragmented, comprising 500+ large and small players and 800+ blenders/resellers. This fragmentation is due to the unorganized and price-sensitive textile market, coupled with lax environmental norms for smaller players and government concessions. However, with increasing sales of branded products and garment exports, the industry is gradually moving towards a more organized structure. Moreover, to export to global markets, companies are expected to meet stringent environmental parameters like TDS, BOD, and COD to ensure ESG compliance.
Indian Textile chemicals market is expected to grow at 10-11% CAGR from 2023-28 whereas the $27B global textile market is expected to grow at 4-5% CAGR in the same period. The Indian textile chemical market is poised for growth due to rising global and domestic demands for high-quality textile products, an increase in textile production, favorable governmental policies, and a surge in international brands sourcing garments from India. FCL competes with global players like Archroma, Clariant, and Huntsman in this segment.
Cleaning and Hygiene Chemicals Sector
The Indian Home Care market is presently valued at INR 35,000 Crores and is to grow at 9-10% CAGR over the next five years. Although the per capita annual detergent consumption in India stands at 2.7-3 Kg, which remains lower compared to developed countries, this is expected to change. The country is witnessing a shift towards the use of higher-quality and premium home care products, driven by factors such as rapid urbanization, the prevalence of nuclear family structures, and an increase in disposable income. This trend is further accentuated by a heightened focus on health and hygiene following the pandemic, along with a growing demand for premium and environmentally friendly products.
Fabric care, making up 68% of the total consumption, is the most significant category, followed by dish soap as the second largest, and surface care, encompassing household cleaners and antimicrobial products, as the third largest. FCL competes with global players like Dow Chemicals, BASF, and DuPont in this segment.
Key Investment Thesis
FCL operates in an industry with high barriers to entry and high customer switching costs.
The complete range of textile chemicals constitutes only 3% of the overall production costs for textile manufacturers. Customers prioritize timely delivery and performance over the cost of these chemicals. Moreover, there is a substantial risk associated with changing these chemicals, as they can potentially damage the fabric, thus ensuring customer stickiness. This situation results in significant switching costs for manufacturers, acting as a deterrent for new entrants into the market. Thus, FCL has strong multi-year relationships with major clients like Chenab, JCT, Aurodyne, Aurotextile, Mavi Spinning, Raymond, and Baswada. These premium clientele not only bring stability but also act as magnets for additional business opportunities.
Innovative Solution-based chemistry to create supply-side dominance.
Fineotex aims to enhance customer loyalty by creating customized value-added products that reduce power and water consumption and lower effluent treatment costs. The growing demand for chemical treatment in textiles, particularly antimicrobial products, has contributed to their improved EBITDA margins. Unlike competitors like DOW and BASF, who import products to India and struggle to adapt to local water and cleaning sector needs, FCL excels in providing tailored solutions and addressing technical challenges locally, setting them apart from global giants. Additionally, FCL is continually innovating with products like HealthGuard BK and HealthGuard AMIC, suitable for export markets.
Rapidly expanding into newer business verticals
FCL has ventured into speciality chemicals for oil & gas drilling and is in discussions with major players in this field. The Company has secured significant orders from a prominent Indian entity in this sector. FCL's technical partnership with BioTex led to the development of a distinctive product, "Mosquito Lifecycle Controller" AQUASTRIKE VCF, opening doors to a niche market segment. The Ambernath plant is fungible, and capable of producing items for both the textile chemical and cleaning and hygiene sectors, providing strategic flexibility for FCL.
2. Key Historical Financials
With a 3Y Sales CAGR of 38% and Profit CAGR of 64%, FCL has an impressive financial track record. The Company’s EBITDA margins have improved steadily from 17 range to 23% in the last 4 years. This is particularly impressive as the entire chemical sector suffered a cyclical downturn over the last couple of years with an increase in raw material prices. This demonstrates that the company has good pricing power in its segment.
FCL's entry into cleaning and hygiene chemicals has positively impacted its Working Capital (WC) cycle, countering the longer WC cycles in textiles. This shift is reflected in the rise of ROCE from 14% in FY20 to an impressive 37% in FY23. Looking ahead, the company anticipates that FMCG chemicals will account for 50% of total sales while sustaining EBITDA margins within the 21-23% range.
FCL has upheld a strong Balance Sheet, consistently maintaining a net debt-free status over recent years. The company has substantially expanded its production capacity, growing from 43,000 MT p.a. in FY20 to 104,000 MT p.a. in FY23. This expansion has been funded through internal accruals, and at present, FCL operates at 60%-65% utilization, leaving ample room for revenue growth.
The Company has experienced fluctuating Cash Flows in the past due to the cyclical nature of the textile industry, characterized by a lengthy gestation period of 6-8 months, contributing to the variability in CFO. However, the strategic expansion into FMCG chemicals is anticipated to enhance Cash Flows in the coming periods.
3. What is my view on Company valuation?
FCL trades at a TTM PE of 39x which is much higher than its 5-year median PE of 22x. Over the course of this period, the company has transformed its business and the market has rewarded it with a higher PE than its median PE.
Management has set a revenue target of INR 600 cr for FY24 with the aim of maintaining current EBITDA margins. Subsequently, the company anticipates an earnings growth rate of 20-25% in the medium term. Prospective investors are advised to consider waiting for the TTM PE to drop below 25x to secure a reasonable margin of safety in their investments.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Like any other specialty chemical company, FCL is also exposed to the fluctuations of the key raw materials for its products. The major raw materials used for production are soda ash, caustic, acetic acid, and vinyl acetate. Any adverse price movement in these chemicals might impact the margins of FCL in the near term.
FCL's business is closely tied to the textile industry, which experiences cyclical patterns. Economic downturns or shifts in consumer demand for textiles can impact FCL's revenues and profitability.
About the Author
I am an MBA grad from the Indian Institute of Management, Bangalore, and currently working as a corporate finance specialist in a technology-based startup. I have cleared all 3 levels of CFA, US. I am an avid reader of businesses and like to analyze emerging trends in various sectors and macroeconomy.
Disclosure
I have had no stock, option, or similar derivative position in any of the companies mentioned for 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.