Seems like Fairfax is again heavily buying into speciality chemicals segment:
Could you scuttlebutt the above chemicals and its financials?
Probably would enable us to understand the rationale for their investments and also understand this sector better…
Regards
Sreekanth
When I was studying ADI, I already had a brief look at Sanmar group when initial news of Fairfax entry came before two months…w.r.t. ADI, of my interest was a small Sanmar group company -Sanmar Speciality Chemicals which is into organic chemicals and phytochemicals…the way ADI extracts tocopherol and sterol from dod, SSCl has one of its businesses of extracting colchicine from gloriosa superba seeds – India is one of the major producer of the said RM, and colchicine forms hardly 1-2 % of the RM. However, key products of the company seems AE Phenol, Veratrate, Mebamine and TBSA that find application in Pharma and Agrochemical space with key clients being Lonza, Saltigo, Syngenta, Takeda and Recordati…client concentration from these five customers seem to be more than 80 %…
This was the info I extracted before when rumours of Fairfax entry into Sanmar was there, but since now Fairfax has already invested in this group, will surely attempt a further digging into latest financials of the company next week…
Logical move should be to divest this company into ADI since for Sanmar group this is a non-core area and hardly contributes less than 5 % to group revenues whereas for ADI it could be a good fit…group debt reduction could also be attempted with such divestment. These are just assumptions and let’s see what happens finally.
Rgds.
Wilmar has presence in China with 2 mtpa capacity spread across 18 plants. They have presence in India through Wilmar Adani which distributes Oleochemicals in India apart from manufacturing. There seem to be a capacity overhang in Asia now which I think driving down the prices. Unless the demand increases in future in polymers which the end users have to decide. They need to increase the proportion of oleochemicals as against petroleum products this capacity overhang will stay.
Hello Mahesh,
Peerless analysis of per-unit economics. 
Excellent illustration for all newbie investors to learn and practice from.
Honestly, i too was initially excited by Fairfax interest. But your excellent analysis gives one to ponder.
Below are my bugbears about the stock story:
I do not see why the management had to continue to invest in “Other” products at a negative gross margin, esp. when they contribute more than 50% by value contribution. As u highlighted, company could have gone abroad and marketed themselves for Tocopherols.
Or, alternatively they could have done further value addition by increasing the purity of the Concentrate. While they had the excellent foresight to move into the Sterols/Dimer and Other fatty acids, the continuation of “Other Products” leaves me with a mixed reaction.
Natural Tocopherols are primarily going to be in demand from developed world nations given their stringent quality and movement towards more organic foods. As i had mentioned in Camlin thread as well, negative interest rates are a source of worry. But unlike Camlin, Adi Finechem does not have the global leadership in market share to remain resilient to the eventual RM/Tocopherol fluctuations in the uncertain future. (Bit of macro, which i am loath to use. It is a risk which cannot be predicted with fair certainty) Better to err on side of caution.
Lastly, Camlin’s mgmt has been ahead of the curve and are now strongly placed across the value chain.
I maybe completely wrong with my assessment, and happy to know your opinions.
Regards.
One more risk which is possible. Any Govt order to divert more veg oils to biodiesel can push up the veg oil prices. The present pattern which I observed more than 50% is going to biodiesel and about 20% is going to oleochemicals. This is on golbal production of vegetable oils.
Hi Vishnu,
Regarding your points,
(1) I think you haven’t gone into the company in detail w.r.t. RM and production processes…will explain you in brief here and then come to your inference…
you see it’s not like a simple inorganic chemistry where two or more RMs are mixed in definite proportions and via a chemical reaction or other route you get a definite quantity of finished product…Here, in ADI’s case, products are extracted/manufactured from natural source where proportions of likely finished products are not fixed as well as the said finished products only form 10-50 % of the RM. What you need to do is extract maximum yield from RM which by itself is not of a standard quality. Although theoretically this can be written down in few sentences but practically its a complicated business to be in and to carve out success in such complicated business terrain is itself a commendable thing…let me explain you in slight detail below :
– As you know, company uses AO and DoD as RM – AO and DoD are byproducts of vegetable crude oil refining process (in our case Soy, Sunflower, Cottonseed & Corn). AO & DoD’s compositions and characteristics depend on a number of factors like :
type of oil processed,
mode of refining (chemical/physical),
operating conditions applied during refining process, etc.
Now, in a country like India you know the operating conditions used as well as tweaking of production methods adopted to maximize profits (forget here the dominant share of unorganised segment). Based on this you can imagine the varied qualities of RM procured by the company — company uses such varied qualities of RM to produce standard quality finished products.
Now, in this RM you have tocopherol, sterols, fatty acids, tri-, di-, mono- acylglycerols, etc. in different proportions. Have already touched upon before in this thread regarding content of tocopherol & sterol in DoD (total max. 30 % combine) ; in AO too the content of Fatty Acids is average 60-70 % and out of these Fatty Acids you have
Oleic,
Linoleic,
Palmitic,
Stearic and other Acids in varied proportions
out of these only Oleic and Linoleic Acids can be used to produce Dimer Acids and that too via a dimerisation process.
So, in effect refer following indicative AO contents :
From above, it is pretty much clear that out of AO used, its only maximum average 35-40 % by weight of AO that can be used to produce Dimer Acid. (avg. 60-70 % FFA out of which average 65 % Linoleic/Oleic Acid which is RM for Dimer Acid)
We have already discussed before in this thread, out of DoD used, its only max. average 20-30 % that we can extract tocopherol/sterol.
So, now I will come to your inference — as you must have referred before, we know that its Toco, Sterol, DImer, Linoleic/oleic that are high margin products for the company — so for producing these high margin products it produces on an average 60 % of the ‘Other Products’ from AO and 70 % of the ‘Other Products’ from DoD
----what company does of these ‘Other Products’ ??
It sells them by making them most appropriate for their end application — these ‘Other Products’ carry a negative indicative gross margin that you refer;
Hence, your inference that “management has continued to invest in ‘Other Products’ which carry negative GM” is actually a misinterpretation as it is actually because of concentration on high margin products that you are seeing increased production of ‘Other Products’ as well. Also, I want to draw your attention to the word ‘indicative’ as it’s not the True’ GM and never substitute the correct blended picture with a rough exercise that we do to assess a company from varied angles. Its only meant to assess the (approximation of) importance of each product to the company’s margins.
When we assess a company’s strategy, we need to look at in entirety rather than looking at separate pieces as if a company wants to continue with the high margin products,the so-called ‘Other Products’ come embedded with that because of the nature of the business. What we need to note is the way company ventured into one high realisation oleo derivative - Dimer Acid-- manufactured from so-called ‘Other Products’ of that time, can it venture into other derivatives from today’s ‘Other Products’…
Oleochemical is a vast field and ADI has just scratched the surface of it – it is present in basic oleo and only one specialised derivative i.e. Dimer — You must have studied the evolution of the company – still to tell in brief – it started as a single product company focussing only on Toco and it is this expertise of producing toco from Soya DoD that company extended to venture into Oleochemicals (Toco can also be termed as Oleochemical)…Now, to venture into Oleochemical field by itself is not such a great thing but its the route applied that is unique – majority of Oleochemical players used Palm oil byproducts but company used Soya, Sunflower, Corn & Cottonseed oil byproducts — with this it made perfect use of two things
– first, it already required Soy & Sunflower Oil byproducts for Toco so it was just an extension
— and
second – its location Gujarat which is one of the largest refiners of Soya & Cottonseed oil.
There are many specialised derivatives like Dimer Acid which include Pelargonic Acid, Azelaic Acid, Isostearic Acid, methyl ether sulfonate, etc. but with the current nature of RM used and ‘Other Products’ profile, in which derivatives it could venture into that is unclear – but all that is sometime away as current capacity expansion only seems to expand current products – Toco, Sterols, Dimer & Lineo…and this is the reason why I believe "Toco & Crude Oil price drop seems a blessing in disguise for this company "…coupled with this price drop as also Fairfax inputs, greenfield project can be planned in such a way to extract maximum long term returns for the shareholders — RM can be tweaked to use Palm byproducts, technology can be acquired so as to make maximum use of expanded capacities (in terms of extracting derivatives from basic olechemicals), etc. — inorganic route will be key to watch out for — if its in totally unrelated field which is in broad field of chemicals but is not in anyway related to oleochemical it might not add that much value but if its in oleochemical field or for that matter any field which aims at replacing petroleum-based products with innovation then it might catapult the company into next orbit…
Why I am inclined towards this company is because its current expanded capacity is atpresent rated in its bad times and entire real expansion in terms of greenfield project as well as inorganic move is still unknown…I made a constant currency realisation study for Toco – company’s key export product – and just see the chart below :
Toco USD realisations have already touched 8 year lows in FY16 and if I count a bad-period average – i.e. a 10 year average from FY02-FY11 and exclude FY12-FY14 the best period for Toco realisation, then also current FY16 realisation is just 17 % above such FY02-FY11 bad-period average (FY16 realisation assumed at INR 1,72,000 per MT with INR/USD average FY16 rate of INR 65.36).
Before going into addressing your second point, for your info of assessing scope of oleochemicals, attaching below two references, one from Wilmar’s 2015 presentation and another from 2013 study of Tata Strategic Management Group –
(2) On your second inference, since I have not studied Camlin Fine too closely so it will be improper for me to comment on that, but, as far as ADI is concerned, its not the global leadership but the Indian leadership that is compelling and its the global leaders’ compulsion to keep India as one of its source that makes this company the most desired choice – will explain you below :
you must have noted in my replies before in this thread – DoD is the basic raw material required to produce Tocopherol & Sterols — and DoD is generated in the refining process of crude vegetable oil – Soybean & Sunflower —DoD is generated on an average 0.25 % of the weight of crude oil – i.e. to produce 1 MT of DoD, ~400 MT of crude oil required to be processed/refined — Now, on this basic info, just refer following data –
Here -
– Data is considered only from FY05 – the time from which firm relationships with RM suppliers were established by the company,
– Although company must be using Soya as well as Sunflower DoD, still, since Gujarat is major hub for Soya oil, only that oil is considered – also, to compensate for Sunflower DoD generation, we have assumed full production as well as full import oil figure as being processed whereas in realty, only maximum ~80 % of the oil might be processed and therefore generate DoD – hence, in that way total DoD generated figure shown might be inflated and actual figure might be lower.
– Since, from FY12, company’s separate RM – DoD used – figure is not available, so we have assumed highest 30 % yield of tocopherol for FY12, FY13 & FY15 and average 22.48 % yield in FY14 since in that year sterol was also produced – and on these assumptions we have arrived at DoD used figure for the company for that 4 years. Hence, in that way, DoD used by the company figures shown for the said four years might have been deflated and actual figure might be higher.
Now, as you can see from above calculation, company has been purchasing/using on an average 39 % of the DoD generated in India. For this RM, it is paying on an average 70 % of such RM’s actual cost i.e. if 1 MT of Oil costs 50,000 INR, 0.25 % of it is DoD i.e. cost for 0.25 % (or 0.0025 MT) DoD to refiner can be assumed at INR 125 – company is consistently paying INR 88 for this (from the trend known till FY11).
So, when you have an established company who already is purchasing 40 % of the RM produced in a country like India – and India is 4th largest producer of the said RM in the world – there is only minor chance that any other company can come and just threaten its position — evenif any such competition comes, company might be very well positioned to tackle it as it can easily raise the purchase price of its RM to 100 % from 70 % and no rationale competition will be able to pay higher than that –
Yes – tomorrow if Wilmar comes in India to produce tocopherol then ADI could face some formidable competition as Adani Wilmar is supplying 30 % of its RM requirement – but, remember its only 30 % and other 70 % of RM is still procured from other refiners — also, Wilmar still has only Basic Oleo facility in India and so far it has even not ventured into Oleo Derivatives here forget toco.
In addition to above, managing different quality of RM (which is actually treated as scrap by refiners) is not easy in a country like India where hardly few refiners use completely hygenic refining environment and have a truely professional set-up — It is such varied quality of RM company uses to produce export-quality Toco & Sterols and other finished products and it is not easy to replicate such capability.
Lastly, key implied notable thing is that company has already spent and is likely to further spend 7-10 cr. by 1HFY17 to upgrade its DoD processing (Toco-manufacturing) facilities to match world standards. Now, as you know, Toco contributed highest ~40 cr. to company’s revenues and no rationale company spends 25-30 % of the revenue on upgradation unless it wants to penetrate deep into the market — Also, if you have studied niche contract manufacturers in detail before then you must be aware that such spendings are normally a precursor to long-term MNC-contracts as they are basic necessity to clear client audits which are usually done many times before outsourcing a major manufacturing contract.
Rgds.
Discl. - Invested in ADI Finechem.
Hello @Mahesh,
Thanks for taking the time to give a detailed reply at the cost of repetition.
I plead guilty on both counts of misinterpretation.
In light of the above clarification, let me restate my understanding.
Given the opportunity size of the oleo-chemical space (as u had mentioned that surface has been barely scratched, which i agree with), the technological process advantage (IP), and being the biggest consumer of the AO and DoD raw materials(supplier power), it does have the hallmarks of a great business.
But, i perceive we are early in the lifecycle.
One additional point: Absence of R&D spend in AR is intriguing for a Specialty Chemical company, which typically tries to do process innovation if not product. Though there is no hard and fast rule to it, i would have liked to know what kind of R&D was done in the past. Like, if they had tried to introduce a new product, say Methyl Ester (based on the infographic u had posted).
Pardon me in case of any wrong impression, but i like to have a concentrated portfolio and it was a choice between Adi and Camlin. Felt Camlin was ahead in terms of business life-cycle.
Do have an initial look at Camlin at ur leisure. Think it would be worth ur time.
Besides it was ur initial posts on Adi which led me to Camlin.
Regards.
I had attempted a detailed study of Camlin Fine in the past before few years but dropped the study in between as exactly at that time management announced a stock split from 10 to 2 paid up…if my memory serves me correct then at that time it’s share price was 100 odd and there seemed no rationale for stock split at that rate…as you must be aware I also follow a concentrated portfolio approach and so management quality is critical and frankly speaking I don’t like managements who closely follow technicality of stock markets and drive their share price into considerably low value without any reason (in the name of liquidity) which is usually operators’ delight…this was the reason I never attempted a second look at this company but yes as per your posts in respective thread as also recent Philip Capital coverage of this company, surely there might be something and I will surely attempt a relook…
On your point “we are quite early in the lifecycle” – I completely agree with and not only that but one additional point we need to note that it is still more of a sme style management which is attempting to break into big league in coming three years. I have no hesitation in admitting that if it was not Fairfax, I would have not invested in this company but also I need to admit that with the nature of business and the history of its evolution and its current positioning in India, I would have missed a great opportunity if I would have not gone into detail of this company.
Regarding your R&D point, even this point bothered me as the way company maintained EBitda margins despite all odds as well as the approximate yield it generated out of RM, this wasn’t possible without R&D and the search for the answer to this point led me to Gujarat Government book case study which I have posted before in this thread which cleared this puzzle in two ways :
– it was actually use of efficient and innovative equipments and technology that provided an edge to this company,
– company had acquired a great expertise of procuring varied qualities of RM and processing them by years of practical experience.
Post reading this case study from an authentic source I was relieved and it raised my conviction level further. It seemed management, especially, Mr. Jariwala, preferred to be low-key as far as its business expertise and technology is concerned which seemed good to me.
Lastly, in some situations this Hindi quote is apt “Hum hi hum hai to Kya hum hai, Tum hi Tum Ho to Kya Tum Ho”…so, it might be that at current stage both the companies might deserve a place in one’s portfolio but something might suit your investment style and something might suit my investment style.
Discl. - invested in Adi finechem…no holding in Camlin fine.
Rgds.
Hi Mahesh,
I think Godrej Industries also into the same field of oleo chemicals and surfactants. Have you made any comparison with them? I am asking it because I did not see GI increasing its capacity aggressively but they are very big group and can be a good competitor if comes.
Regards
Arvind
Board to consider Dividend
Adi Finechem Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on April 29, 2016, inter alia, to consider and adopt the Audited Financial Results for the year and quarter ended March 31, 2016, (b) consider recommendation of dividend on Equity Shares of the Company, © any other business with the permission of the Chair.
Further in accordance with the applicable clauses of Insider Trading Regulations, the “Trading Window” for dealing in equity shares shall remain closed of the Company for Directors /Designated persons of the Company from April 22, 2016 to April 30, 2016 (both days inclusive).a
Results have been declared today and looks great.
Fairfax India to Acquire Substantial Stake in Privi Organics Limited and Adi Finechem Limited and Privi Organics Limited Announce Proposed Scheme of Arrangement Which Will Result in the Creation of Fairchem Speciality Limited - See more at: http://www.fairfaxindia.ca/news/press-releases/press-release-details/2016/Fairfax-India-to-Acquire-Substantial-Stake-in-Privi-Organics-Limited/default.aspx#sthash.7FpN0NEo.dpuf
Prima facie, Privi seems to have got a very good deal from Fairfax…valuation seems to have been at ~12-13x FY16 EV/EBitda and ~25-26x FY16 P/E – a valuation not usually paid in PIPE deals for companies operating at steadystate ebitda margins of 11-13 %.
The deal seems to be more the result of agreement signed between Privi’s promoters and Std. Chtd. PE in 2011 wherein by 2016 they had to either provide exit to them via IPO or buyback their stake at predetermined IRR. The ‘IRR’ factor seems to have worked very well for Privi in clinching this deal from Fairfax.
There seems to be no synergy between Adi’s existing business and Privi’s business and both might operate as separate divisions of newly formed entity Fairchem. In today’s announcement (in last notes) it is said that Privi’s aroma chemical business will be transferred to Adi’s subsidiary whereas other businesses will remain with Privi…this is surprising as Privi is only into aroma chemicals ; so what is meant by this needs better understanding…Privi is majorly into bulk aroma chemicals with dihydromycrenol and amber fleur contributing ~47 % of sales.
Rgds.
Discl. - Negligible holding.
When guys recommend strongly a stock ( 15% of the PF) and write detailed notes about the stock, I think they also have a moral responsibility to intimate this Forum when they reduce their holdings like Aman did in case of KSCL. This will protect the retail investors who may not be savvy enough to exit in time.
This forum is not meant for recommendation and is only meant for sharing our analysis on a stock so that other knowledgeable members can also do their analysis over and above the member posting the analysis and point out the loose ends. If analysis posted here is taken as a recommendation then the whole purpose of this forum will get lost.
Whereas it is better if a person who initiates or carries forward a discussion on a stock updates regarding his exit too as soon as he does but because of varied preoccupation, he/she might not be able to do so. Also, the intention of the posting member should not be to make reading members his followers wherein on his entry everyone enters a stock and on his exit everyone exits a stock.
Since I have a concentrated pf strategy, so my holding % in a stock seems to be taken in wrong regard. However, that is mentioned because of recent disclosure issues. However, henceforward, will only disclose whether I am invested in a stock or not invested as I don’t want to influence anyone out of any of my statement, posting, analysis or disclosure.
In any of my posting in this thread or for that matter any other thread, have not recommended any stock/company — you can check my postings ---- its only factual statistics that I provide and varied data points, factual pointers that I provide for further research. If anyone is taking this as recommendation then that is wrong – is completely wrong.
Rgds.
Thank you Mahesh point well taken. I am generally dislike stocks hitting upper circuit with no changes in fundamentals and fall 50% the next day. I know how it is done and this benefits certain pockets. Since this is a public forum I dont get into details.
Anyway, your point well taken and it is understood that what you have done is well within the forum guidelines.
Based on the chemicals produced by Privi and Adi finechem, one cannot find any synergy in them.
**PAT at 4.1 Cr Vs 0.6 Cr **
**EBITDA At 7.7 Cr Vs 3 Cr **
EBITDA Margin At 17% Vs 7.9%
http://www.adifinechem.com/RESULT300616.pdf
The Company has incorporated a new company by the name of ADI AROMATIC LIMITED as its wholly owned subsidiary company on July 08, 2016
The Company has proposed to change its name from Adi Finechem Limited to FAIRCHEM SPECIALITY LIMITED
@Mahesh @crazymama Have attempted to compute the pre/post merger multiples for Adi/FairChem. Would appreciate it if you could kindly have a look at the attached excel and validate, it appears that we are paying ~1x Ev/Sales and 8x EV/Ebitda for the combined entity. Is my understanding correct? Many thanks. Fairchem merger analysis 03112016.xlsx (12.0 KB)
