The specialty chemicals space has gained popularity with investors in the past few years. With China closing chemical plants as part of its efforts in pollution control, focus shifted to India as a global supplier of specialty chemicals. Sensing the opportunity, several players expanded their capacities and ventured into newer products.

A slew of specialty chemical companies have also recently listed on Indian stock exchanges. We look at one such company, specialising in a niche segment of additives which commands a position among top global suppliers.

Fine Organic Industries (Fine Organics) has been in existence for the past five decades but got listed on Indian stock exchanges in 2018. The company is a leading producer of additives for foods, polymers, cosmetics, coatings etc. It specialises in oleochemical based additives, meaning those derived from plant-based oils as opposed to chemicals derived from crude oil. Fine Organics is one of the top six manufacturers of oleochemicals in the world, operating in a niche space. Additives are used in small quantities, about 0.5% to 2% by weight of the final product but the additive provides certain extremely critical functionalities to the product.

Quick Takes

• In a challenging FY21, the company’s revenues grew YoY to Rs 1,150.3 crore but net profits fell to Rs 163.5 crore due to rising raw material prices

• The company will commission projects that got delayed in FY21 due to the pandemic, which are expected to boost its revenues in FY22

• Its stock returns are among the highest within the specialty chemicals industry, with a 4X return till date since listing in 2018

• Manufacturing and extraction of additives from base oleochemicals is a complex process and Fine Organics’ proprietary technology gives it an edge over its peers

Switch to oleochemicals to boost Fine Organics’ business

Internationally the trend is shifting towards using oleochemicals additives instead of potentially harmful petrochemical additives in cosmetic and food industries. This trend is the catalyst for the company’s growth over the past few years.

Fine Organics generates about 70% of its revenues from plastic and food additives, and the remainder from other additives in cosmetics, coatings, lubricants, etc. The company expanded its product portfolio and entered new segments like feed nutrition and additives in bakery and confectionery. 

Fine Organics is conducting R&D for new products derived from fatty amines, polyglycerols, guerbet alcohols, new organic antiblock additives, and other additives to make plastics biodegradable. Manufacturing and extraction of additives from base oleochemicals is a complex process and Fine Organics is one of the few players worldwide having the proprietary technology to manufacture these specialty additives.

Quarterly revenues rise, but profits were flat in FY21

Revenues increased in the last three quarters of FY21, but the net profits were flat. This is attributed to two factors. One, reduced demand from segments like polymers where additives were not required as many customers shifted to manufacturing Covid-19 related protective equipment. The other factor being higher raw material prices.

Raw material prices for vegetable oils such as sunflower, groundnut and cotton seed oils were at their highest levels in Q4FY21. The company renegotiated terms with some customers enabling it to pass on the rise in costs.

A matter of concern is the decline in operating and net profit margins as well as EBITDA margins in FY21, despite the increase in revenues. Even though FY21 was a difficult year due to factors like the pandemic, rising raw material costs, and lower demand, revenue growth came at the cost of margins. The challenge before Fine Organics lies in improving its margins in FY22. The results over H1FY22 will give a clearer picture on whether the company can improve these metrics.

Completion of stalled capacity expansion to boost revenues

Fine Organics started expanding its capacity from 2018 onwards, with a plan to double its production capacity. The company increased its capacity by 32,000 MTPA (million tonnes per annum) in Ambernath for plastic, rubber and cosmetic additives which got commissioned in Q2FY20. The first phase of its 10,000 MTPA capacity addition dedicated to food additives at Patalganga was commissioned in November 2020. Some projects are delayed due to the pandemic and lockdowns, and the company is working towards commissioning these in FY22. On completion, these will contribute to the topline over the next few years. 

The commissioning of the second phase of 10,000 MTPA plant at Patalganga, is expected to commence operations in Q3FY22. One more facility that will be commissioned in FY23 is the joint venture with Adocotec in Leipzig, Germany for specialty food emulsifiers and other food additives.

The company earmarked a capital expenditure of about Rs 150 crore for Ambernath unit and about Rs 60 crore for Patalganga unit over next three years. The management expects the capacity utilisation of these facilities to rise gradually, and all plants to reach optimum utilisation levels over the next three years. Due to the uncertainty over the last year with the first and second wave of the pandemic, the completion of these projects will be closely tracked by investors.

High ROCE helps Fine Organics’ stock shine

One fundamental metric where Fine Organics scores much higher than the industry average is its ROCE of 31.5%. 

A higher ratio indicates efficiency in cash utilisation and redeployment of profits. Alkyl Amines is the only other specialty chemical player that scores much higher on this metric than Fine Organics, while it is almost equal to that of the market leader Pidilite Industries.

Fine Organics is one of the top performing stocks in the specialty chemicals space delivering more than 55.5% CAGR  returns over the past three years. Its strengths include proprietary technology for complex processes, high entry barriers to the business and high return ratios.

However, at this juncture, Fine Organics has a lot of factors that need immediate attention to sustain its growth momentum. Going forward, a sustainable mechanism to deal with volatility of vegetable oil prices will determine the company’s operational efficiency. Another risk factor is the fluctuation of the dollar as finished products are exported, and some raw materials like palm oil are imported. A silver lining is that the company has sufficient cash reserves to take care of its short and long term liabilities. 

The increased focus on R&D and product diversification can help to maintain the company’s leadership in this niche space. Commissioning of delayed projects in projected time, managing raw material as well as foreign exchange variation costs and improving profitability ratios will define how FY22 pans out.