Fairchem Speciality - Previously "Adi Finechem"

(Prashant Vaishampayan) #61

Rohit, thanks for this. heard the call but was unable to decide if these margins are sustainable. have decided to wait for a couple of quarters before proceeding further.

(Vishnu Ch) #62

CONFERENCE CALL - from Capital Markets

Adi Finechem

Capacity expansion to be complete by March 2016

Adi Finechem held a conference call to discuss the results for the quarter ended December 2015 and way forward. Senior Management of the company addressed the call
Highlights of the Concall

Total income from operations rose 5.9% on a YoY basis in Q2FY’16 to Rs 39.5 crore while EBITDA increased 21.4% to Rs 7.2 crore. Bottomline of the company decreased 25% to Rs 3.7 crore.
On a QoQ basis Total income from operations rose 20.4% while EBITDA jumped 94.6% while bottomline boosted growth of 184.6%.
EBITDA margin of the company was 18.2% in Q3FY’16 compared to 15.9% in Q3FY’15 and 11.3% in 24FY’16
PAT margin of the company was 9.4% in Q3FY’16 compared to 8% in Q3FY’15 and 4% in Q3FY’15
Tocopherol raw material prices remain stable during the quarter. However slight improvements was seen in end product prices. Going ahead the company sees no major variations in raw material as well as end product prices.
The company expects to maintain current EBITDA and PAT margins in the coming quarters, inspite of market conditions not being very favourable.
Overall expansion from 25,000 tonne to 45,000 tonne is complete except one Dimerizer to be installed which is expected to be complete by March 2016.
Current expansion has been planned based on demand conditions for next 5-6 years.
Post expansion capacity would be 45000 tonne per annum in terms of throughput of raw materials-12000 tonne would be of Deodorizer Distillate and 24000 tonne would be of acid oil. The company is still considering the technology for 12000 tonne of capacity to be utilized.
Post expansion the company would be utlising only 7000-8000 tonne of Deodorizer Distillate capacity while for acid oil it would be doing 20000 tonne of capacity by Q1FY’16.
Around 50-55% of company’s revenue comes from top 10 clients.
The company has spent 33-34 crores for expansion of plant and it further plans to invest 7-10 crores for updating the plant in next 6-9 months.
The company is looking for a Greenfield expansion for value addition of Toco 50-70-90. The company has bought the land is looking into various technologies options for upgrading toco concentrate. Total investment expected is around Rs 40-50 crore.
The company has appointed global advisor for Greenfield expansion and also it is looking for acquisition as well.

(Mahesh Shah) #63

Already before in this thread, @jk321, @rohitbalakrish_, @piy_sharma, @varadharajanr, @am648, @sharemarketgen_ and others have done some excellent work on this company. Some inputs from my end :

Adi Finechem Ltd. seems to be interestingly poised at current juncture as most of the internal risk factors seem to have diminished in disguise whereas external risks have manifested prominently in current FY16. This is the reason why we attempted a historical study of past 20 years, since company’s inception (in current form) from FY96, in order to assess properly how much damaging effect can current dull period have on the company as also to gauge the capability of the company to face current dull period and come out of it.

We have made a historical study of each of the key product of the company in terms of volumes, realisations, etc. and have also assessed pricing power available with the company by plotting a 19 years’ raw material pricing trend v/s blended realisation trend. Without discussing any further, let’s straightaway get to the data points :

First some important basics :

Important Historical Facts everyone should know regarding Adi Finechem Ltd. :

– Company started meaningful commercial operations only in FY97.

– From FY97 till FY01 it was predominantly a single product, single client company – product being Mixed Tocopherol and client being Henkel Corp. Entire production of the company (of Tocopherol) was purchased by Henkel under a binding contract.

– Till FY01, even the Raw Material required to manufacture/extract tocopherol was majorly arranged by Henkel Corp.

– In FY01 (Dec’2000), such contract with Henkel ended post which starting FY02, company ventured on its own to export its product.

– In FY02, company started extracting/manufacturing other products like ‘Sterols’ for export market and ‘Dimer Acid’ & ‘Other Fatty Acids’ for domestic market.

– From FY02 onwards, company also had to arrange for Raw Materials on its own as there was not much support from Henkel on that front too which was otherwise there till FY01.

– It was only from FY05 that firm relationships for continuous supply of Raw Materials was established by the company.

– Hence, from FY02 onwards, company had two products for export markets viz., Mixed Tocopherol & Sterols, both majorly catering to nutraceutical segment. Although tocopherol is company’s key export product, but on close observation it seems that Sterols’ contribution has a major positive effect on company’s margins (discussed later in detail with statistics).

– For domestic market, company manufactures Dimer Acid, Linoleic/Oleic Acid and Other Fatty Acids catering to Paint, Ink, Adhesive, Soap and Fuel segments.

– Nutraceutical segment contributed 25 % to FY15 revenues whereas Paint, Ink & Adhesive segment contributed 53 % and Soap & Fuel segment contributed 22 % to FY15 revenues.

Having known the basics above, let’s turn our attention to detailed analysis of each of the product/segment of the company :

Nutraceutical Segment :

Value Contribution of Nutaceutical Segment as well as Tocopherol & Sterol Separately :

As can be seen from above :

– From predominantly catering to nutraceutical segment at inception in FY97 (68 % contribution), from FY02 onwards, company derisked its business model by bringing down such contribution to the range of 20-25 %.

– Company weathered the transition phase of ending of exclusive production offtake contract with Henkel in FY01 very well by introducing two new products, one for the export segment (Sterol) and another for domestic segment (Dimer Acid) in FY02.

– This is the reason why despite a 68 % fall in tocopherol sales volume over the period FY01-FY04 coupled with 45 % fall in tocopherol sales realisation over the same period, still company was able to sustain 15 % + EBITDA margins ignoring one odd blip in FY02.

– Although company’s margins are very much dependent on Nutraceutical segment because of superior realisation commanded by its products and tocopherol is company’s key product in that segment, but, on closer observation, it seems increase in sterol sales contribution brings far superior margins to the company than only tocopherol.

– This is the reason why without significant rise in sales realisation of tocopherol over FY03-FY06 period (remained in the range of 80k-100k per MT), as also muted sales volume growth of tocopherol over the same period (just 15 % over a 4 year period), we see company’s EBITDA margins expanding to 16-18- 20-21 % coupled with rising sterol contribution at 8-14-20 %. Again, in FY14 we note that sterols contributed 8 % to revenues and EBITDA margins shot up to ~22 %, but this time it was aided by record high realisation achieved by tocopherol too (598k per MT). However, in more recent Q3FY16, as per management commentary, sterols contributed more than 80 % of nutraceutical segment sales and we see EBITDA margins again shooting upto 18.07 % despite muted tocopherol sales realisation.

Now, let’s analyse each product trend of the company in slight detail as follows :

Tocopherol :

As can be seen from above :

– Post ending of exclusive production offtake contract with Henkel in FY01, Tocopherol has contributed in the range of only 6-10 % to company’s sales in volume terms. However, because of superior realisation it commands, it has contributed in the range of 15-25 % in value terms to company’s sales post FY01 (except FY07 & FY08 when it contributed 9 % & 11 % respectively).

– To assess importance of each of the product to the company and to analyse its contribution’s effect in future, what we have done is calculated an ‘indicative Gross Margin’ by straightaway deducting RM cost per ton from the realisation per ton of the product. Stress needs to be given on the word 'indicative’ as its not the true gross margin. True gross margin can only be calculated once the perfect yield of the product from the RM is known which is varying and not given. For ex., Tocopherol yield will hardly be 10-15 % of the RM used so to produce one ton of tocopherol, a company might need 10 ton of RM. However, if we carry out similar ‘indicative gross margin’ exercise across all of the company’s products, we can assess each one’s importance as well as effect on margins of each one’s contribution.

– We can see from the above data that despite RM price fluctuations across last 20 years (RM price fluctuations discussed in detail later on), Tocopherol has commanded an indicative gross margin of on an average 80 %.

Let us also see the trend of price realisation per ton (% rise/fall YoY each year) as well as YoY Volume growth/degrowth trend of Tocopherol over last 18 years :

– Price realisation per ton achieved by the company for Tocopherol has fallen YoY in only 6 years out of last 18 years.

– FY12 to FY14 was the best period for Tocopherol realisation wherein each year company registered more than 50 % YoY increase in realisation.

– FY02 & FY15 were the worst year wherein realisation fell more than 50 % YoY.

– Volume trend is quite fluctuating for tocopherol either because of the fluctuating yield or as part of conscious strategy adopted by the company to take advantage of the good period and curtail down production in the bad period.

– It is worthwhile to note here that volumes of tocopherol produced by the company in FY01, under firm offtake contract with Henkel, were surpassed only after 10 long years – only in FY11. FY15 saw the highest volume of tocopherol produced by the company in last 18 years.

Dimer Acid :

As can be seen from above :

– Company started producing Dimer Acid only in FY02.

– Dimer Acid has contributed on an average 10-11 % in volume terms to company’s sales. In value terms, the contribution varies from 15-30 % mainly because of varying realisation of tocopherol (Dimer Acid realisation has been quite stable relative to tocopherol).

– Indicative gross margin commanded by Dimer Acid are the second highest after Tocopherol – in the range of 60-70 %.

Let us also see the trend of price realisation per ton (% rise/fall YoY each year) as well as YoY Volume growth/degrowth trend of Dimer Acid post start of its commercial production :

– As compared to Tocopherol, price realisation trend for Dimer Acid is quite stable over last 13 years.

– Volume trend has also exhibited similar relative stability with each capacity increase benefiting Dimer Acid more (in terms of volume production). Over last 13 years, Dimer Acid volumes have increased by more than 8 times to reach record high production in FY15.

Linoleic/Oleic Acid :

As can be seen from above :

– Linoleic/Oleic Acid volume contribution has fallen from a high of 36 % in FY01 to just 8 % in FY15. Although in actual terms volume has risen from 1342 MT of FY01 to 1858 MT in FY15 but other products have occupied more space in volume rise than this product over these many years.

– Its value contribution to the sales has also fallen from a high of 32 % in FY02 to just 9 % in FY15 mainly because of rising contribution from other products.

– From a pathetic gross margin till FY01, the product exhibited respectable margin in the range of 55-60 % from FY02 till FY10 post which GM % touched a low of 32 % before rebounding to ~40 % in FY15. It seems this product carries a very long lag period between RM rise and actual price realisation rise.

Let us also see the trend of price realisation per ton (% rise/fall YoY each year) as well as YoY Volume growth/degrowth trend of Linoleic/Oleic Acid over last 18 years :

– YoY rise/fall in Price Realisation of Linoleic/Oleic Acid is again relatively stable as compared to Tocopherol but is not as stable as Dimer Acid. It is worthwhile to note here that if we calculate in absolute terms the price realisation commanded by the product in FY98 and now in FY15, then realisation for Tocopherol has risen by 46.79 % in FY15 over FY98 whereas that of Linoleic/Oleic Acid has risen by 91.66 % over the same period. If we calculate in a similar way for Dimer Acid post its start of production in FY02, then, Dimer Acid’s price realisation has increased by 44.15 % in FY15 over FY02 whereas in the same period Linoleic/Oleic Acid’s price realisation has increased by 97.14 %.

– Volume trend is also quite fluctuating for this product as company seems to have sacrificed this product for rise in production of other products. For ex., if we see major negative YoY volume fiscals for this product viz., FY02, FY05 and FY09 –

in FY02 company started production of Dimer Acid and Other Fatty Acids,

in FY05, tocopherol’s volume grew by 40 %, Dimer Acid’s volume grew by 16 % and O.Fatty.Acids’ volume grew by 68 %, and

in FY09, Dimer Acid’s volume grew by 76 % and tocopherol’s volume grew by 32 %.

Hence, whenever company ramps up production of other products, production of this product seems to suffer.

(Mahesh Shah) #64

Tocopherol+Dimer Acid+Linoleic Acid Business v/s Other Business :

It is interesting to keep on one side these above discussed three products combine viz., Tocopherol+Dimer Acid+Linoleic Acid and on other side put entire other business (Other Products) of Adi Finechem Ltd. and check different trends :

First we will present Toco+Dimer+Linoleic combined data :

Now, we will check Other Business (Other Products) combined data :

– From above, it is very much evident that the superior profitability registered by Adi is because of three products – Tocopherol, Dimer Acid & Linoleic Acid.

Sterols also play crucial part in aiding company’s profitability but since separate volume figures of sterols is not available (except for FY14), we have combined Sterols into ‘Other Products’. Without Sterols, picture for ‘Other Products’ will look even more pathetic.

– As we can see from above, 70 % of the volume produced by the company earns a negative gross margin. The positive gross margins that we are seeing from FY03 till FY08 for ‘Other Products’ is because of significant contribution from ‘Sterols’ otherwise those 6 fiscals would have also turned out a negative indicative gross margin.

– Toco+Dimer+Linoleic combine have exhibited a consistently stable indicative gross margin in the range of 65-70 % over last 19 years. This is despite significant rise/fluctuation witnessed in RM costs over these many years – for ex., in FY03 when RM prices went up by 41 % and then consistent significant price rise witnessed by RM from FY07 till FY13 when RM prices went up by a whooping 214.28 % in absolute terms.

– Key thing to note here is the Volume Contribution of three key products of the company viz., Toco+Dimer+Linoleic. They together contribute only 25 % to company’s volumes atpresent and we have seen in the past that on a normalised basis post FY01, they have the potential to bring 40 % of the total volumes produced by the company – this we are talking when the capacity utilisation of the company was almost 98-100 %. So, it means either the expanded capacity has not stabilised yet or company is consciously going slow on ramping up the production of these products, probably waiting for price realisations to pickup.

Blended Business Picture :

After analysing separately the trends of 3 key products of the company as well as other products combine, it is important to also note the blended trend, i.e. of all the products combine as these products are afterall extracted from the same raw material in different proportions.

As can be seen from above :

– Barring FY01 & FY02, which were transition years of ending of exclusive production offtake contract with Henkel, Sales volume has shown consistent healthy positive growth YoY each year over last 19 years except one year viz., FY07. Except three years, its on an average ~20 % YoY positive growth in sales volumes each year which is commendable.

– If we see blended price realisation trend of all the products of the company combine, then, we note that company has witnessed negative YoY sales realisation in only six years out of 19 long years. Also, there has been no back-to-back YoY negative realisation years i.e., company has so far not witnessed a YoY negative sales realisation consistently for two years and if we see negative YoY sales realisation in FY16e (which most probably we will surely witness as for 9MFY16 its already negative -(7.95) % as compared to FY15), FY15 and FY16 will be the first fiscals witnessing back-to-back negative sales realisations.

– Blended True Gross Margins (not indicative) have come down from a high range of 50-55 % to lower range of 30-35 %. GM % touched a back-to-back historical lows of 30.88 % and 29.01 % in FY12 and FY13 respectively before rebounding to 38 % in FY14 and again going back to 34.32 % in FY15. This has to be looked at in the backdrop of significant YoY increase in actual raw material prices witnessed each year consistently from FY07 to FY13. Although we have discussed RM price fluctuations in detail in next section, still, to cite here an example, RM prices went up by 18.97 % YoY in FY11 then again by 39.76 % YoY in FY12 and then again by 14.48 % YoY in FY13. In FY14 & FY15 we saw a correction in RM prices which went down by 7.82 % and 12.63 % YoY respectively. However, because of 17.57 % drop in sales realisation in FY15 we saw GM % contracting in FY15.

Despite gradual and consistent fall in gross margins, company more or less maintained its EBITDA margins at around 15 % by tight control of other operational expenses thereby taking full advantage of rising scale.

As can be seen from above :

Power costs which were hovering around 15-20 % of sales range, company brought them down to 7-9 % range ;

Other Expenses which were hovering around 11-13 % of sales range, company brought them down to 5-6 % range ;

Employee costs which were hovering around 6-7 % range, company brought them down to 4-5 % range.

Like this way, company saved around 700-800 basis points in Power, around 600 basis points in Other Expenses and around 200 basis points in Employee costs. This is the reason why despite gross margins declining by around 1500 basis points over these many years, company was able to sustain its EBITDA margins.

Now, since we have talked so much about gross margins, we need to now focus on one crucial aspect related to it which is Raw Material Prices.

RM Prices, its effect on Gross Margins, Establishing its relation to Oil Prices :

Let’s first have a look at actual raw material price increase/decrease % YoY witnessed by the company each year over last 19 years. Alongside we will check the actual blended sales realisation increase/decrease % YoY witnessed by the company in the same year as also combine effect of both RM and Realisation on gross margin in terms of absolute percentage points increase/decrease YoY. For example, if a company enjoys complete pass through power then with say every 10 % rise in RM prices, realisations will also increase by 10 % and therefore effect on GM % will be zero. Similarly for a company who doesn’t enjoy a pricing power, a 10 % increase in RM prices will have a muted effect (say 2-5 % effect) on increase in realisations and therefore its GM will ultimately suffer.

Some things are clear from above :

– Although RM prices as also Sales Realisations have fluctuated wildly over last 19 years, one thing seems pretty clear that company doesn’t enjoy much pricing power for its products.

– Fall in RM prices have seen almost identical fall in realisations – if not immediate then over a period of time it seems to follow inline. Similarly, rise in RM prices have seen commensurate increase in Realisations – however, here effect is more muted i.e., extent of Realisation increase has not kept pace with extent of rise in RM prices over a longer period.

– However, this doesn’t mean that there is significant disparity in RM price increase and realisations achieved, it seems just the time period we use to calculate offers a different picture – for ex., if we count here entire 18 years’ CAGR for RM price increase as well as Blended Realisation increase, RM prices show a CAGR of 4.33 % v/s 2.91 % CAGR of Realisation ; however, if we draw the results by deducting just one year i.e., a 17 years’ CAGR from FY97-FY14 then it shows a RM price CAGR of 5.42 % v/s Realisation CAGR of 4.26 %. Similarly, a 10 Years’ CAGR from FY97-FY07 shows up RM price CAGR of 0.16 % v/s Blended Realisation CAGR of -(0.10) %. But, one thing is clear that in any case, realisations have always remained lower than RM price increase.

– Another interesting observation is that its actually Dimer Acid and Linoleic Acid because of whom realisation seems to be muted. Lets observe 18 years’ CAGR of each product’s realisation separately as also 13 years’ CAGR – the time from which Dimer Acid got introduced in the product portfolio :

As can be seen from above :

– ‘Tocopherol’ and ‘Other Products’ seem to have kept pace with RM price trend whereas Dimer Acid has exhibited an extremely muted 13 years’ CAGR in realisation at 2.85 % v/s RM price 13 years’ CAGR of 9.24 %.

– Similarly, Linoleic Acid realisation has exhibited a 13 Years’ & 18 Years’ CAGR of 5.36 % & 3.84 % respectively as against RM price 13 Years’ & 18 Years’ CAGR of 9.24 % and 4.33 % respectively.

RM Price relation to Oil Prices :

Since we know that company’s RM are byproducts generated by processing of vegetable oils, particularly Soya, Sunflower, Cottonseed and Corn Oils, we made an attempt to compare each of the said oil’s YoY price fluctuation with actual RM price increase/decrease witnessed by the company.

In above data :

– It is meaningless to look at pre-FY02 data as during that time majority of RM was arranged by Henkel for the company.

– From FY05 onwards, RM prices seem to be more correlated to YoY price fluctuations of Soya Oil than any other oil. It is worthwhile to note here that it was only in FY05 that firm relationships for supply of RM was established by the company.

– For Tocopherol and Sterols, company must be using only Soya & Sunflower Oils’ byproduct.

(Mahesh Shah) #65

Now its time to turn our attention to key financial parameters of the company and assess them over a 20 year period as its afterall the financials that drive valuations and nothing else.

Some key things notable from above :

Overall Cash Generation, Debt Addition, Equity Funding & Gross Block Addition :

Over a 20 year period,

– company generated cumulatively INR 88.57 cr. from operations (FY96-FY15 CFO),

– company’s debt increased from 8.46 cr. in FY96 to 28.75 cr. in FY15 ; so, in absolute terms debt addition of 20.29 cr. over a 20 year period.

– company’s gross block increased from just 1.03 cr. in FY96 to 87.86 cr. in FY15 ; a gross block addition of 86.83 cr. over a 20 year period. Majority of the GB addition happened in last four years – 51.40 cr. addition in last four years.

– Company diluted equity for raising funds only two times in last 20 years’ – in FY97 it raised 1.5 cr. by issuing 0.15 cr. shares at par and in FY02 it raised 1 cr. by issuing 0.10 cr. shares at par.

EBITDA to Cash Conversion & Actual EBITDA of 19 Years’ :

19 Years’ Average EBITDA to Cash Generation (CFO/EBITDA) % for the company works out to be 56.90 %. Out of 19 years, in only three years company has turned out a negative CFO of which two were the initial years (FT97, FY98) when company started commercial operations and one was the year in which Henkel contract got ended (FY02).

19 Years’ Average EBITDA margin for the company works out to be 14.66 %. In only 6 years out of 19 years, company has majorly deviated on downside from this average EBITDA margin.

In 4 out of 19 years company has registered 20 % + EBITDA margins ;

in another 4 years it has exhibited 18 % + EBITDA margin ;

in another 5 years it has exhibited 14 % + EBITDA margins,

so, in entirety, we see in 13 years out of 19 years, company operating comfortably above 15 % EBITDA margin.

Average Capacity Utilisation & 100 % Utilisation of Expanded Capacities Trend :

19 Years’ average capacity utilisation for the company works out to be 85.78 % ; this is despite a 10 times increase in capacities over a 19 year period.

– It is worthwhile to note here the trend of all major capacity increases enacted by the company post FY02 – one in FY05, then in FY10, then in FY12 and then in FY14.

In FY05 company increased capacity by 20 % and immediately 100 % utilisation was achieved consistently till FY10 when next capacity increase was made.

In FY10, company increased capacities by 67 % and immediately in the following year, FY11, 100 % utilisation was achieved.

In FY12 company again increased capacities by 80 % and immediately in the following year, FY13, 92.7 % capacity utilisation was achieved whereas 100 % utilisation (in terms of capacities of FY12 at 18000 MT, and actual RM processed) was achieved in FY14 (not visible because in FY14 again capacity was increased to 24000 MT).

In FY14 again capacity was increased by 33 % and immediately in the following year i.e. in FY15, we see 98.8 % utilisation achieved (not visible as again in FY15 capacity increased to 30,000 MT).

FY16 might be the first year after 16 long years when we will see less than 60 % utilisation over the expanded capacity of 45,000 MT. Also, FY16 might be the first year where we will see actual installed capacities of the previous year not getting to 90 % utilisation (in terms of actual RM processed likely to be less than 27,000 MT in FY16).

(Rohit Balakrishnan) #66

@Mahesh Hi Mahesh, Thanks for the copious data. Can we take one more step to put everything in perspective? From your above data, what looks to me is that Adi Finechem has become an efficient operator in a business which is not really great. Their fortunes as a business is still linked to Tocopherol prcies, however as you pointed out in your data, things are not as gloomy as RM prices also correct so they are able to get some margin protection.

What’s your understanding?

When I was analysing the business I was unable to understand the underlying drivers for Tocopherol and Oleochemicals market. I wasn’t sure what’s the global supply demand data. Company says that they are one of the few producers of Tocopherol, but if you do some googling, you find that the oversupply is because Chinese players. So I believe in order to really make some good money here is only through figuring out Tocopherol cycle. The management in the recent con-call has however mentioned that they are looking to get into newer products, but hows of it are still unknown.

Would appreciate your views on this.

(Mahesh Shah) #67

Rather than posting only conclusion/derivation, have instead chose to put here above stated 20 Years’ varied data points analysing a company from different angles, so that VP members can use them to arrive at their own analysis and derivation. One person’s thinking can be limited and its the collective thinking of all of us which makes us arrive at right conclusion. What I have understood from my analysis is stated below and its only my personal understanding I have used to invest in the company and no one should rely on this. I will be delighted if more members use these data points and put their own analysis on VP so we all can learn from each other’s strengths and correct each other’s weaknesses.

My Understanding :

When this thread was initiated in VP in July 2014 by Jatin Kalra, the heading was a question “A good business or business having a good time ??”. If we analyse company since inception, i.e. if we analyse past 20 years since the company has existed in current form, business doesn’t seem to be bad atall. But, the question is whether its a good business or its the good management of an ok business. Answer lies in two things :

Maintaining the same line of business and carving out success from it,

Technological Advantage.

Maintaining the same line of business and carving out success from it :

I like those companies who don’t change their line of business despite many ups and downs faced and infact utilise downs to bring out best in themselves. Adi Finechem perfectly fits this criteria. Since FY96, company has focussed on using byproducts of vegetable oil processing to produce niche products – first it was tocopherol then sterols then dimer acid and slowly it seems to be moving up the value chain. Over these many years, it has also focussed on profitability which is evident from sustenance of EBITDA margins despite all odds. It weathered ending of exclusive production offtake contract, it weathered the difficult RM procurement stage, it weathered sudden severe RM price increases too.
And in these many downs was the business or product offerings good enough to let this happen ?? – If we analyse closely past 20 years’ data points then it seems business/products is not bad but is not good either. This I am saying because, if we check the actual sales realisations registered by the company then they seem to be less than RM price increases that company had to suffer. Just check the realisations’ trend against RM price increase trend from FY07 to FY15 as given before by me and one will find how company was able to turn even a bad period into an extremely good one between FY11 to FY15.

As I said before, its not a bad business atall. All through last 20 years one thing is consistent and that is demand of company’s products. Now is it because management was able to foresee before time that which product will be in demand and so was able to timely introduce such product(s) that is for one to conclude based on varied data points provided.

Technological Advantage :

This is the crucial aspect working in favour of the company. Adi Finechem surely seems to have technological edge which, if firm contracts are established with global manufacturers, could do wonders to the company in tocopherol business. Already before in this thread as also many IC reports it is discussed by many how company is able to manage varied quality of raw materials procured from different sources and use them to produce niche products. However, another important thing which no one seems to have looked is the tocopherol yield it is able to generate out of RM used. Just see the trend below :

We have the 15 years’ data out of 19 years from FY97 to FY11 and the average tocopherol yield company is able to generate is 22.48 % – lowest being 18.20 % and highest being 32.51 %. This is exceptional and with current 12,000 MT of RM processing capacity (DoD), one can just calculate the revenue and profitability only tocopherol business can generate in good realisation period if firm contracts with MNCs are established.

Having said all these, the apt heading today for this thread should again be a question – “ Is it a good business facing a bad time ??

Company is surely going through a bad time with :

– gross margins touching ~32 % in 9MFY16 over already low figure of ~34 % in FY15 and

– EBITDA margins going below the 19 years’ average and touching 12.41 % in 9MFY16,

– blended realisation seems to have dropped by 7.95 % as against RM cost drop by 5.75 % in 9MFY16,

– tocopherol realisations have already touched 150k in FY16 which is well 34 % below FY15 realisation and is at 5 years’ low,

Key Question is – is this bad time sustainable ??

If one goes by history then probably not – we need to ask some questions to ourselves :

Will the realisations keep falling and touch 20 years’ lows – blended realisations have already touched 5 year lows in 9MFY16 ??

Will alongwith falling realisations, RM prices continue to keep rising and touch multiyear highs – Soya & Sunflower oils made 20 year highs in FY13 itself ??

Will the demand for company’s products fall severely from now on which have otherwise not fallen over these many years ??

Will company not be able to move up the value chain in oleochemicals itself forget here the nutraceuticals ??

Will company not be able to introduce any new products as it has done in the past ??

To answer only the last question, company was already working on a new product in biofuel segment for which technology and production process were already finalised and samples were ready but the project was shelved as crude went below 50 USD. Now, this is the beauty of this management ; it is not overly dependent on any one segment/product – if tocopherol doesn’t perform, it produces sterols, dimer acid and vice versa and weathers the bad phase and maintains profitability over medium term. Its core area is producing different products from byproducts of vegetable oil processing and it seems to be playing well within this core area.

So, when we look at this company we need to look at a normalised scenario (as we should have done in FY14 also when tocopherol realisation touched multiyear highs). Question is what is the normalised scenario for this company. For this, I made a simple calculation based on the variables already known –

Normal Scenario Calculation :

First let’s have a look at a very conservative normalised scenario assuming the lowest realisations of each product –

– Company has expanded to 12,000 DoD capacity and based on tocopherol yield achieved by the company in the past at 19-30 % (average 22.48 %), we can expect 2300-3600 MT tocopherol production at full capacity utilisation. Hence, to assume a normalised scenario, we will take steady-state 2700 MT p.a. tocopherol production within two years from the company.

– Tocopherol 20 years’ average realisation achieved by the company is 169k per MT whereas post ending of exclusive production offtake contract with Henkel, since FY02, 14 years’ average tocopherol realisation comes to 172k. So, on a steady-state basis we will assume 170k per MT realisation and so based on this, within two years on a normalised basis tocopherol alone should contribute 46 cr. p.a. to company’s revenues.

– Company produced 2550 MT of Dimer Acid in FY15, with expanded capacity, company should be able to produce 3800-4500 MT p.a. of Dimer Acid. So, on a steady-state basis we assume 4000 MT p.a. of dimer acid production from the company within two years.

– Dimer Acid 14 years’ average price realisation achieved by the company is 88k per MT. However, FY15’s realisation is 111k per MT and from the data points given before we know that dimer acid’s realisation are pretty stable and have never fallen more than 14.58 % YoY. Also, in FY10 when dimer realisation fell by highest 14.58 % YoY to touch 82k, it didn’t go below then five years’ average of 77k. So, we will assume normalised dimer realisation of 100k per MT which is below FY15’s 111k as also five year’s average of 108k. Hence, steady-state contribution from dimer acid based on this realisation within two years on a normalised basis should be 40 cr. p.a. to company’s revenues.

– Company produced 1858 MT Linoleic Acid in FY15 and with expanded capacity it will be able to produce 2800-3400 MT p.a. of Linoleic Acid. So, on a steady-state basis we assume 3000 MT p.a. of Linoleic production within two years from the company.

– Linoleic Acid 19 years’ average price realisation achieved by the company is 51k per MT. However, FY15’s realisation is 69k per MT and from the data points given before we know that Linoleic acid’s realisation are also pretty stable so, we will assume normalised Linoleic realisation of 60k per MT which is below FY15’s 69k as also five year’s average of 65k. Hence, steady-state contribution from Linoleic acid based on this realisation within two years on a normalised basis should be 18 cr. p.a. to company’s revenues.

These above-mentioned three products have contributed average ~ 55 % in value terms to the company’s sales and so keeping the same ratio, normalised steady-state topline should be INR 189 cr. p.a. with average 14.6 % EBITDA margin (again a 19 years’ average) or an EBITDA of 27.5 cr.

Now, an optimistic normalised scenario based on the good period we witnessed before –

We will assume the same production quantities of three products as we have assumed in conservative normalised scenario but only realisations will change – we will assume tocopherol realisation at 5 years’ average of 300k per MT, we will assume dimer acid realisation at same 111k of FY15 and Linoleic realisation at 69k of FY15.

With these realisations, we get a topline from these three products at 145 cr. and applying the same ratio 55:45 as before we get a blended topline at 263 cr. with an 17 % EBITDA margin (5 years’ average) or 44.7 cr. EBITDA.

These production quantities assume ~80 % capacity utilisation of expanded capacity which is below 19 years’ average capacity utilisation of 85.78 % at which company has worked.

Fairfax Coming in diminishes most of the Internal Risk Factors :

Before discussing this aspect, I need to admit one thing that Adi Finechem came on my radar two times before and each time I turned it down after some initial analysis as I had doubts on three aspects – Scalability, Funding & Continuous Efficient & Ethical Running of the company. So, is Fairfax entry so important that all these three concerns are addressed ?? I feel yes because even before, there was no doubt that management had nice operation and good business to run with history surely on its side, but having niche business/products is a different thing and to scale it beyond a particular point is a different thing. Now, with Fairfax coming in as a majority shareholder, management can’t be complacent and can’t afford a failure as otherwise management itself runs a risk of ousting. There will be quarterly reviews of the management and at each stage, success/failure of a particular vision will be assessed. Resources/contacts will be aplenty and funding will also not be a problem. Inefficiency and loose corporate governance also will not be tolerated as above all Fairfax’s goal will be to earn superior IRR from its investment.

Attached is Fairfax India’s first Annual Report for members’ reference. It is worthwhile to note here that Adi Finechem’s MD Mr. Nahoosh Jariwala will be representing his company on April 14, 2016 at Toronto alongside Mr. Nirmal Jain of IIFL and Mr. Sanjay Kaul of NCML in front of audience which will include, amongst others, repesentatives of renowned institutions like Fidelity, Franklin, Blackrock, TD Asset Management, Vanguard, etc.

We also need to note here one another interesting thing that Adi Finechem today is a sort of unique company where majority of the shareholding is having its cost price near to CMP. Fairfax’s 45 % shareholding price is INR 212 per share, Malabar’s 4.26 % average holding price is INR 255 per share and SBI’s 3.41 %'s average holding price is INR 210 per share ; so effectively, 52 % of the shareholding’s average cost price is just 20 % below CMP. Although this doesn’t mean anything, but, it could help in commanding of scarcity premium in good times as these holders might not part with their holdings at a lower rate unless there is some significant negative development with regards to the company.

To sum-up, Adi Fine Chem Ltd. at current stage seems to be :

A good business…going through a bad time…run by a good and dynamic management…supported by a strong strategic investor…who, alongwith management, are having aggressive future organic as well as inorganic plans.

Key Monitorables :

Product Contribution Trends,

Product Realisation Trends,

RM Price Trends,

Capacity Utilisation Trends,

Greenfield Expansion plans,

New Product Introductions,

Acquisition Profile & Structure of the deal,

Funding Route – proportion of Equity dilution, debt, low-cost debt support from Fairfax.

Discl. - Invested in Adi Finechem Ltd… Company forms 15 % + of family portfolio. Bought in last 30 days.

Note – This is not a Buy/Sell/Hold recommendation of any kind and is only part of a general discussion. Here, only statistical facts and figures are presented and this should in no way be interpreted as recommendation of any sort. Statistical Facts and Figures are meant to be used as further study of a segment/niche business and not otherwise.

(Mahesh Shah) #68


This is the same impression I got when as an initial exercise I referred this entire thread on VP and this is the reason I attempted a historical study of the company to check how the company evolved from the beginning and is this inference indeed true ??

– it was true till FY01 when it was largely a single product single client company and its entire existence depended on only tocopherol ;

– company would have extincted post FY01 when exclusive tocopherol production offtake contract ended in FY01 as also simultaneously realisation vertically fell from 158k to just 68k in FY02 and remained at 80k and 87k in following two years; and its not that Toco volumes or RM prices helped either…

if we count absolute Toco volume difference between FY01 to FY04 then volumes fell by 68.73 % (falling each year post FY01 till FY04)…

similarly, if we count absolute price difference between FY01 RM/Toco_Price/Realisation and FY04 RM/Toco_Price/Realisation then overall RM prices went down by just 34.17 % as compared to Toco.realisations going down by 44.93 % (even if we take specific DoD price difference – the RM which is used for Toco, then it also went down by just 34.98 %).

Now, falling realisations coupled with significant fall in sales volumes for the only product on which you are dependent on is a lethal combination to have and what we actually see is – absolute company’s blended revenues falling from 21.63 cr. levels in FY01 to just 19.50 cr. in FY04 whereas overall blended GM % actually expanding from 48.49 % in FY01 to 50.20 % in FY04 (Toco indicative GM % declined from 81.19 % of FY01 to 77.52 % in FY04).

This is not to say that Tocopherol is not an important product for the company…it is…but, from the impression which I get from majority that Toco is the only important product deciding the future of Adi seems incorrect to me and the true inference seems that ‘Tocopherol is one of the important products for the company’ – its the combination of four products viz., Toco, Sterols, Dimer & Linoleic which seems to be extremely important at current juncture till we see any new product introduction.

Key is majority is only studying the company by looking at the good realisation period of Toco – FY09-FY15 and ignoring the bad period and its post stabilisation period completely (I am including FY15 also even after the vertical fall in Toco realisation we saw in that year as still on that realisation it was up by ~150 % over FY08 level). Even in the bad (and stabilisation) realisation period of Toco, company increased its revenues by 44.10 % – we have counted from the best realisation period (FY00-FY01 till FY08)…while at the same time maintaining blended true GM % at 47.09 % v/s FY01’s 48.49 % and FY00’s 44.09 %…this is when Toco’s indicative GM % fell from 80.50 % (FY00 = 81.19 %) to 72.23 % in FY08.

One can argue that the blended revenue base was smaller at 20-30 cr. in that period so this could have happened – for this, I looked at absolute Tocopherol sales figure in last best period (FY00-FY01) and current period (FY14-FY15)…In FY00-FY01, tocopherol sales value figure was 14.38 cr. and 15.17 cr. respectively whereas currently in FY14-FY15 Toco sales value figure is 42.83 cr. and 37.74 cr. respectively…so, a 1.8x rise in toco sales value between then best period and current period…now, as opposed to this, blended revenue of the company was 21.43 cr. and 21.63 cr. in FY00 and FY01 respectively and current blended revenue is 151.82 cr. and 150.61 cr. in FY14 and FY15 respectively — so, 7x rise in blended revenue value figure…

Again the argument could be that margins are surely dependent on Toco as afterall its indicative GM % has been at 81.19 % in FY01 – the then best period and currently its also at 81.72 % whereas we have seen true GM % falling from 48.49 % of FY01 to 34.32 % in FY15…there is no doubt that Toco plays a crucial part in margins – but only a crucial part and not the entire part as because of its falling contribution as also rising contribution of other products, again its a combine effect and not a singular effect…If we just cite here current FY15 data then, 25 % of company’s sales value which Toco contributes carries an indicative GM % of 80 % but another 27 % of the company’s sales value which Dimer+Linoleic contributes carries an indicative GM % of 55 %…so, on part blended basis 52 % of the sales value (Toco+Dimer+Linoleic) carries an indicative GM % of 67.92 % …and on all remaining sales revenue, company seems to be moving up the value chain with its indicative GM % although in negative but is improving

These GM% are with 0 % contribution from sterols which from the history we know has a positive effect on margins (FY02-FY06 – rising contribution fiscals of sterol, we saw true GM % improving from 48.49 % to 54.26 %). Since you have studied the company, you must be aware that DoD carries Tocopherol & Sterols in different proportions and since company has produced sterols in the past, it can very well do in future also — as it has done in Q3FY16. Why so far since FY07, company has refrained from focussing on sterols too in addition to Toco that I am unable to understand – is it because of quality of RM or Toco’s best period or not-so-great hold on sterol production process or something else that we can’t say but the fact that again in FY16 we see sterol sales clears one thing that product is not out of the system yet.

Regarding underlying drivers, Natural Toco definitely enjoys an edge over Synthetic as far as its ultimate benefit to end-application is concerned, and producing natural Toco is not an easy production process to master especially at the yield company is generating…as far as Dimer is concerned, chinese competition definitely could be an issue and seems to be the major reason why its realisation is relatively muted as compared to others…but again its an import substitute and company currently seems to be enjoying only ~25 % of the marketshare – it being the only producer…

To sum-up,

– if company continues with the trend of improving margins of 70 % of the volume produced (which effectively means it is able to move up the value chain),

– its 18-20 % of the volumes produced keeps on exhibiting a stable realisation (I am talking of Dimer & Linoleic),

– its able to continue with its makeshift style of introducing/adjusting volumes of new/old products,

– company’s dependence on Toco, both for sales and margins, seems to be not a concern with it only turning out 6-7 % of volumes (3-5 % in best realisation years),

Company failing on all above counts together seems to be a rare possibility looking at the history (especially capacity/sales/demand trend).

and if on this –

– it can move up the value chain simultaneously for oleo and nutraceuticals,

– and with Fairfax support can forge long-term relationships with key nutra-clients and turn out a winning acquisition in speciality chemical space,

it could turn out an icing on the cake for long term investors. At present moment with corrected valuations I see it in the second stage of wealth creation cycle.


Discl. - Invested in Adi Finechem Ltd… Company forms 15 % + of family portfolio. Bought in last 30 days.

Note – This is not a Buy/Sell/Hold recommendation of any kind and is only part of a general discussion. Here, only statistical facts and figures are presented and this should in no way be interpreted as recommendation of any sort. Statistical Facts and Figures are meant to be used as further study of a segment/niche business and not otherwise.

(Mahesh Shah) #69


Just to add one thing to above reply, I insist that members like you go through the entire 20 Years’ study on the company and have a look at each parameter in detail (if you want I can mail pdf for ease of reading), as I have seen you doing some excellent work on many companies and you have the potential to provide value add to the study.


(Rohit Balakrishnan) #70

Sure Mahesh. I would love to look at it in more detail. Let me come back to you after going through the old reports and then we can have a more fruitful discussion.

My email is [email protected] - Thanks

(Mahesh Shah) #71

Link to Fairfax India Holdings Corporation 2015 Annual Report :

Link to parent Fairfax Financial Holdings Ltd. 2015 Annual Report :

(Sreekanth) #72

@Mahesh Once again in awe of your analysis :slight_smile:

The company claims to have monopoly kind of situation in Tocopherol supply. How big is the market share of Adi? (as far as i know Wilmar group is the largest manufacturer of this product). Secondly how deep is the integration of Adi with the end customers (I mean are they just another contract based manufacturer or are there any specific product R&D’s also involved?)


Disclosures: No holdings

(Mahesh Shah) #73


– ADI finechem seems to be the largest and most efficient ‘Natural Mixed Tocopherol’ manufacturer in India, if not the only manufacturer. Industry interaction throws up only one other name and that is Hyderabad based Biopharma Lab which is in the similar field…Maharashtra based Matrix Fine is also one new small player which has started commercial operations only in FY15.

Now, here two notable things are,— first with regards to Biopharma Lab,— it was after 4-5 long years of research and technological/process tweaking that the company was able to manufacture Tocopherol from DoD and after starting manufacturing of the product from FY11, company, within 4 fiscals reached a revenue of 14.7 cr. in FY15 from just 1 cr. of FY10.

Secondly, both, Biopharma as well as Matrix are small players relative to ADI in tocopherol space…Biopharma’s maximum revenue from toco could be only 12.5 cr. in FY15 and Matrix’s 1 cr. v/s ADI’s FY15 revenue from toco at 37 cr.

If any of the hyderabad based VP members has any source in Hyderabad based tobacco group Bommidala via which if he can interact with Biopharma management then we can extract a great deal of insights of tocopherol space and ADI’s positioning in it.

– Rgdg. ADI marketshare in tocopherol space, it seems to be less than 2 % as at FY15 (ADI’s 1600 odd MT v/s market of 83k MT). Also, as per management, they are catering to human space only and are planning to have clients in animal space too in future…so, it is worth noting here that 40 % of the tocopherol market comprises of animal space and it effectively means that they are actually catering to only 60 % of the market atpresent.

– your query rgdg. how critical is ADI for its global tocopherol customers ; one can’t say but ADI will surely not be as critical as PIIND is or Syngene is to its clients…cost effectiveness might be the major advantage ADI might be offering till now to its clients and regarding improving product purity and quality, it might start post FY16…even on certification front, I see only Kosher certification with ADI and as per management they have and are investing further 7-10 cr. till 1HFY17 for upgradation of standards, so we might see any meaningful certification like ISO for its production facilities only post FY18…

However, another important thing notable here with regards to your query is thinking in reverse direction – “how important is any tocopherol client to ADI atpresent”…In my reply 2 days ago to @rohitbalakrish_ , I cited historical value figures of tocopherol…now, here, we will look at volume figures of tocopherol…

In FY01, only one client Henkel (Cognis-now under BASF) had the potential to source 959 MT of tocopherol per year from ADI…today, ADI is working with 4 clients in tocopherol space out of which one is BASF (which acquired Cognis-division of Henkel) ; these four players control more than 50 % of the market…

In these 15 years from FY01 till today, natural mixed tocopherol market itself has risen manifold and if in FY01, one client had the capacity to generate volumes of 959 MT p.a. then in FY17, will not 4 clients combine have the capacity to generate atleast 2700 MT volumes p.a. (675 MT per client) which we have assumed in normalised scenario calculation in the study ?? If we take the 5 years’ average – the duration for which exclusive offtake contract with Henkel remained (FY97-FY01), then, that 5 years’ average comes to 620 MT p.a. from only one client Henkel and this we are talking of between FY97 to FY01 – 19 years before.

What actually ADI has done post FY01 is it has foccussed on non-toco business very well and expanded it tremendously…this is the reason why even with expansion in capacities by 6x (from 5000 to 30000 MT) post FY01 till FY15, we see only 1.7x increase in tocopherol production and that too only in FY15 as in both previous years (FY14, FY13), the best realisation years of tocopherol, company actually curtailed tocopherol production to operate at lower than even FY01 level…

What I infer from this is company seems to be in advantageous position currently. Severe Toco price drop at right time has come as a blessing in disguise for the company as if this drop would have come post its greenfield expansion, company could have been in a real trouble…Today, company can choose its expansion, and if the greenfield project is in toco space (which most probably it will be), its incremental volumes will be beneficial to the shareholders as logically even I don’t see toco realisations going much below 150k…biggest threat is synthetic alternative and that will remain but the reason for more production moving to synthetic vitamin e was the high price of natural and with natural toco prices already correcting to reasonable level, natural vitamin e production should pickup thats what I assume and understand from market dynamics…

Feel free to get back in case of any further query.


Discl. - Invested in ADI Finechem. Forms 15 %+ of family portfolio. Bought in last 30 days and even today.

(Sreekanth) #74

@Mahesh Thanks for the valuable inputs…

Apart from the points that you have mentioned above, the following points do not fit into the growth story:

  1. To my understanding of the products (Toco, Lineolic and Daimler) these are **mainly derived from cash crops ie Soya, Rapeseed cottonseed and sunflower **

If we refer to the above charts, i can infer that Supply trends for the RM has been pretty much sluggish. Could that be one of the reasons why company has been able to report good realizations? My sense is that realizations could have also been supported through blending of synthetic and natural acids…

  1. On the Raw material sourcing front does the company have any advantageous position? Most of the players usually engage in contract based farming to ensure steady source of supply (If Adi purchases the same through intermediaries then it re-inforces my belief that it would be another low-cost manufacturer…) Secondly Soybean and cottonseed production has been affected in the recent past; how does the company tackle the situation of low production?

  2. I was just doing a rough scuttle over the internet and found many manufacturers claiming to be the largest supplier of toco…ur views on the same?

On a personal note, it would be helpful to know your investment thesis for Adi. Basically i want to understand the company’s MOATs that would benefit it in the longer run.



Thanks a ton for educating us on this Company. The Oleo chemicals form 74% of sales as on 31-3-2015. The user industries for Oleo Chemicals are as personal care, soaps, detergents, lubricants, plastics, rubbers, coatings, paper,food & beverages,paints, inks and pharmaceuticals. Oleo chemicals of the Company are similar to petrochemicals derived from petroleum products.

Hence, certain uses industries like paints, lubricants, etc will be indifferent to the fact that their RM is from natural or petrochemical source. I think that major part of this 74% can be sales to these user industries which are indifferent unlike personal care products.

It can be difficult for the company to match the selling prices of oleo chemicals derived from petroleum as crude prices are soft and expected to be soft in the coming years. Since we dont have data to arrive at a conclusion but the under performance of the company ( see the dip in profits as compared to same sales) may indicate this.

The situation can change if they increase the share of nutraceutical segment.

(Mahesh Shah) #76


I think you have not gone into the detail regarding the company which is the reason why you seem to be taking the wrong data points. Even I should have included extreme basics regarding the company in study itself but thought that thread as well as IC reports provided enough data on that so omitted it completely. Anyway will do it now…

– You need to track respective Indian oil demand data and therefore amount of crude oil processed in India to meet that demand. First, refer following indicative flow diagram :

When a crude oil is processed, it generates certain byproducts and company uses such byproducts – DoD and AO as raw materials. Hence, the supply of RM is directly proportional to oil processed in India. Company has the capability to process byproducts of four oils – Soya, Sunflower, Cottonseed & Corn. Out of these four oils, its only Soya & Sunflower byproduct - DoD - can be used to extract tocopherol.

So, effectively, if we want, we need to track amount of these four oils processed in India to track the availability of RM. Since domestic production can’t meet demand, so, majority of Soya and Sunflower oils are imported. These oils can be imported in two forms – crude and refined – more than 80 % of Indian imports are in crude form which are further processed here so as to generate the same said byproducts.

– Now, DoD is generated at just average 0.25 % (0.10-0.40 %) by weight of crude oil whereas AO is generated at just average 1.25 % (1-2 %) by weight of crude oil. Hence, when 1000 MT of a crude oil is processed, it generates ~2.5 MT of DoD and ~12.5 MT of AO. These products are like scrap material for refiners having no value.

> Now, imagine if you get 70 % of the value for your scrap material will you be not inclined to sell it ?? This is what is happening with oil refiners and this is what the value company seems to be paying consistently for its raw material.

– Now, let’s focus on data – we will first take FY11 data as separate DoD & AO RM consumption data for the company is available only till then :

As can be seen from above, :
total DoD availability in India was ~9306 MT in FY11 ---- out of which company consumed 4005 MT or 43 %,

total AO availability in India was ~61,657 MT in FY11 ---- out of which company consumed 6556 MT or 11 %.

Now, we will look at the situation in latest FY15 :

total DoD availability in India was ~14,495 MT in FY15 ---- company expects ~7000 MT DoD processing in FY17 – at 48 % of the FY15 availability and seems to have expanded to 12,000 MT – at 83 % of FY15 availability.

total AO availability in India was ~88,534 MT in FY15 ---- company expects ~20,000 MT AO processing in FY17 – at 23 % of the FY15 availability.

– Now, we also need to understand the production a bit. First, refer below an indicative RM content :

Company processes these RMs, extracts varied products out of it by multi-processes and sells them in the market.

– We will have a basic look at an indicative Tocopherol production process from DoD since there seems to be a lot of confusion in investor community with that regards :

Company so far seems to be doing only the basic extraction and wants to move up the value chain via greenfield project.

Now, after clearing the extreme basics, I will come to your queries –

(1) Company surely seems to be enjoying a very advantageous position wit regards to RM sourcing.

– It directly buys from Oil refineries.

– It makes cash payments to them.

– Your point on Contract farming is immaterial here as you yourself must have understood from the basics cleared above.

– It will be the actual demand/processing that will affect the supply and nothing else. Alternatively, company also seems to be sometimes sourcing RM from Bangladesh.

(2) First do clear a misconception that majority seems to have regarding the company’s product – ‘Mixed Tocopherol Concentrate’ that the company sells by itself is not ‘Natural Vitamin E’ that all widely refer– it requires to be processed further to be used into the final application. To add, company seems to be selling only less than 30 % purity (majority 15-25 %) ‘Mixed Tocopherol Concentrate’. Crude Mixed Tocopherol Concentrate contains all the fractions of tocopherol – alpha, beta, gamma and delta – they are further processed, distilled, and the required fraction (mostly alpha) is intensified and then used in final application.

The players that you have mentioned – merck, as I explained above seems to be Vitamin E manufacturer…other two links seem to point to only one company and that is Perfect Industries Pvt. Ltd. (shamrock seems its division only as also perfect biotech)…whereas the capacity in the presentation in your link seems to offer a good picture of its Tocopherol capacity of 450 MT of 50 % Toco and 1200 MT of 20 % Toco ; its website (perfect industries) doesn’t seem to list Toco as a product it offers nor its Annual Report mentions it as its manufactured product…also in many shipment data that I have tracked for export of toco from India, the company doesn’t seem to be coming up…To add further, looking at its financials it more seems to be a takeover candidate with 102 cr. debt on books with a revenue of 114 cr. and loss of 50 + cr. in FY15.

Already before in this thread, at the end of my study, I have explained in brief the understanding I have used to invest in this company…but, since basics were not cleared so will elaborate slightly here–

– Evenif I forget here the claims made by the management that they are the only manufacturer in India of Tocopherol & Dimer Acid and that they purchase 90 % of the DoD generated and 60 % of the AO generated in India (as claimed in recent IIFL note on the company), even my own contra-analysis makes me believe that company is surely a dominant manufacturer of said products (in India) and purchases more than half of the DoD generated. I have a habit that I never use management and brokerage reports’ statistics and always do every calculation on my own by extracting varied data points from varied sources. On most of the counts management doesn’t seem to be just boasting and thats for sure — for ex.,

if I track historical shipments, I can find even in FY03-04 company was exporting toco and sterols…

if I check billing amounts of recent shipments they seem to correlate with 170k realisation…

if I make a rough calculation of DoD generated in India (as cited before in this reply), company seems to be a dominant buyer and no company stands a chance to compete in near future…

— Now, when I have a company who is

a dominant player in its space

with high entry barriers (only technology acquiring, setting up the plant, mastering the production process, establishing cost effective supply arrangements with RM suppliers, procuring required quantities of RM when you have an established player who already sources 50 % of the produce by paying cash – all these itself will take many years if not a decade),

has not even scratched the top of the surface in terms of market potential (most popular Toco concentrates are of 50 & 70 % varieties as opposed to less than 30 % currently sold by the company ++ there is no long term supply arrangements with any of the MNCs)

is willing to move up the value chain,

key products have an expanding market (toco already talked – regarding dimer acid, global dimer acid market is projected to grow at a CAGR of 6.2 % by 2021 – Indian market should also be similar as its end-user industries like Adhesives, Paints & Coatings are likely to sustain growth),

supported by a strong strategic investor like Fairfax.

What I need to worry as a long term investor ?? Long term existence and sustainability of the company is ensured, growth drivers inplace, execution likely to gradually move to professional-style from current sme-style – only I need to sit and wait for the things to materialise – yes, if nothing happens in coming six months I need to worry but thats the risk that always remains with any investment.

Since so much we have already talked, let me explain the logic behind why I feel company’s toco business has good potential even when it is just providing tocos with basic purity –

India is the fourth largest consumer of Soybean oil (after China, USA & Brazil) and third largest consumer of Sunflower Oil (after EU & Russia)…so, it is but natural that it is fourth largest producer of toco RMs…any big world manufacturer of natural Vitamin E or for that matter any MNC who needs in large proportion Natural Tocopherols (for human, animal or food preservative use), will always have a good sourcing presence in India in addition to China (China being largest consumer of Soybean oil)…
Now, to have a sourcing presence in India, ADI might be the readymade best alternative since

– it already has two decades of operating experience in the space and

– already is the largest buyer of the RM,

– has established long-standing relationships with RM suppliers since a decade as also

– possesses expertise to handle varied quality of RM to produce consistent quality Toco concentrates –

it is a surprising thing that this company has so far not used this strong platform to launch itself aggressively in international space.

If a company can’t use such a strong platform to atleast now go aggressively or, in other words, if Fairfax can’t let this company realise its true potential then it will be a surprise and will indeed be very disappointing.

don’t misinterpret my above explanation asif there is no risk – risks are always there in any investments and are there in this company also – external – like what if natural toco market looses its lustre completely for many times to come, what if dimer acid demand dwindles because of some alternative product, what if all RM suppliers shift to some other buyer who offers them better terms ; internal – what if management looses focus and is not able to move up the value chain, what if company ventures into completely unrelated area and fails completely, etc. This is in addition to current pathetic IR and non-availability of majority of even basic accurate data from company side which if not improved might hamper significant valuation rerating of the company. However, all these are evolutionary periods we have seen with many transforming companies.


Discl. - Invested.

(Sreekanth) #77


Thanks Mahesh that sums it up lucidly… (Apologize if there was any misinterpretation on my part)


(Mahesh Shah) #78

Nothing to apologize @srnarayan … we all are here to learn from each other…it took me 4 long months to understand the business and product offerings of the company (and even today there are, and must be many things which are confusing and I am unaware of)… it was only post Fairfax entry that I attempted a detailed analysis of the company and prior to that both the times when I made an initial analysis even I was confused and therefore turned it down…even in these 4 months and even today, when I talk with many financial circle guys, most of them seem to be not fully aware of the product details, especially Tocopherol, and its market varieties and why such varied varieties are there and which variety of product company is offering…even management or its IR has not attempted to make financial community knowledgeable regarding all these…its actually good on your part that you atleast attempted to understand the company and VP is only for that – where we can interact with each other and make use of each other’s knowledge.


(Harish Assudani) #79

excellent work,thanks

(Mahesh Shah) #80

Attaching ADI Finechem case-study presented in a book published by Gujarat Pollution Control Board (GPCB) during Vibrant Gujarat 2013. Some key things notable are :

(1) It was actually Gujarat Government (GPCB) who requested ADI Finechem to expand its production capacity so that they can tackle menace of byproducts generated by Vegetable Oil Refineries. Note the following para in first image :

“because of environmental concerns, disposal of waste product streams generated during the refining process was a major headache. So GPCB suggested ADI Finechem to expand it’s production capacity so that maximum utilisation of such waste product streams could be undertaken without having any adverse effect on environment.”

This fact is important as it signifies ADI Finechem’s dominance as a major (if not only) Veg. Oil byproducts’ processor in Gujarat as well as major buyer of the same,

(2) Second key notable thing is following para in image2
"ADI Finechem has modified its manufacturing process in such a fashion whereby after each process, material is not cooled but the heated material is directly taken to next processing equipment and finally the heated finished products produced are used to heat the incoming material. This is achieved by utilising shell & tube, corrugated pipe to pipe and/ or spiral heat exchangers, which has resulted in reduction of not only heating energy i.e. lignite, but also reduction in cooling energy i.e. water.

ADI Finechem has also invested in next generation vacuum systems, which substantially utilises less quantity of steam to achieve desired vacuum. ADI Finechem procured latest separation packings from world renowned structure packing manufacturer SULZER, which requires less temperature to achieve desired degree of separation coupled with substantially higher production."

This above fact signifies company’s focus on using the latest technology/processes with a singular aim of reduction in production costs while at the same time maintaining finished product quality.

(3) Capacity was increased from 8000 MT to 24000 MT on GPCB’s request/behest. In image3, key notable is “Utility Consumption Saving per MT of Production in terms of Cost” table.

Production cost per MT (for Utility – Lignite, Power, Water) was brought down from INR 9072 per MT to INR 3124 per MT… which in a way means that the cost for Utility when capacity was 8000 MT was INR 7.25 cr. which went up to just INR 7.49 cr. when the capacity got enhanced by 3 times to 24,000 MT.

This fact solves the puzzle for substantial reduction in power costs (with respect to sales), from a very authentic source like Gujarat Government (GPCB)