Fairchem Speciality Limited (FSL), a Fairfax company, is an exclusive formation of specialty chemicals company from the merger of Adi Finechem Ltd (manufacturer of oleochemicals and nutraceuticals) and Privi Organics India Ltd (manufacturer of Aroma chemicals). The combined entity caters to various industries ranging from printing inks, paints, adhesives & paper coatings, flavors & fragrance, pharmaceuticals, and FMCG. FSL possesses manufacturing capacity of 45000 MTPA of Adi and 22000 MTPA of Privi located in Western India with more than 65 products in its basket. FSL's exquisite business model of processing finished goods from waste products serves as a platform for organic as well as inorganic growth in the area of specialty chemicals. Going forward, global market for oleochemicals / nutraceuticals / aroma chemicals is projected to grow at 6% / 7% / 7% CAGR over FY17-20E. Given FSL's dominant presence in all three segments coupled with company's capex plan to the tune of INR 2600 mn over FY17-FY20E, we believe the...

Unique Business Structure and better product mix provides edge to the AFL AFL is has unique product portfolio of Dimer acid, Linoleic acids and natural vitamin E. These fatty acids are widely used in mainly industries like paints, inks, textiles, lubricants etc. AFL has a low cost of manufacturing and their quality is also at par or better in many cases with Chinese and European suppliers. This provides edge to the company over other competitors. AFL makes this product by using relatively cheaper raw material which is a by-product of refinery (Acid Oil) whereas world at large makes them from virgin Vegetable oils or Tall Oils. These products are widely used in the paints, inks, lubricant industry. These agents are served as primary...

Following weak demand/upgradation at its plant which impacted production and led to lower realisation, volume/revenue of tocopherol division declined 50%/77%, respectively, in 1QFY16 for Adi Finechem (AFL). Operating margin declined 1,113bps to 9.3%, 478bps below our estimate of 14.1% on account of a lot of unforeseen situations which may not occur from 3QFY16. Price of tocopherol bottomed out in 4QFY15 and did not decline further in 1QFY16. AFL has appointed an US-based consultant, who is ex-head of BASF's tocopherol division, to acquire new clients. While a new client is expected to start buying tocopherol in the next 15 days, thereby improving volume, one-off expenses won't be present from 3QFY16 and...

With a 30.3% decline in blended realisation, Adi Finechem's (AFL) net revenue for 4QFY15 fell 16.6% to Rs370mn, 13.2% below our estimate. Price of tocopherol, which accounts for 35% of revenue, declined by ~30% in FY15. With a high base, downturn in tocopherol and weak demand, operating margin declined 1,074bps to 14.7%, below our estimate of 16.2%. As a result, net profit fell 52.9% to Rs30mn, below our estimate of Rs37mn. Despite weak demand, AFL reduced receivable days from 50 in FY14 to 37 in FY15. With the decline in realisation and delay in expansion, we have cut our FY16E/FY17E PAT by 40.1%/18.6% respectively. Downturn in tocopherol started in...

Adi Finechem (AFL) 3QFY14 reported a healthy 41.3%/185.3% growth in revenue/EBITDA, respectively, because of 39% capacity expansion, 733bps higher gross margin and depreciation of the Indian rupee against the US dollar. As the 80% expansion in capacity will go on stream in March 2015, volume growth will remain muted till that time. In addition, demand from paint and ink industries, which are the main consumers of oleochemicals, was weak as demand during the Diwali festival was very weak. With low demand and absence of gains from a weak rupee, operating margin declined from 24.4% to 15.8% in 3QFY15, 326bps below our estimate although up from 14.2% QoQ. Following...