Extracts from Fairfax Shareholders Letter: https://s1.q4cdn.com/293822657/files/doc_financials/annual_reports/2018/Website-Fairfax-India-2018-Shareholders-Letter.pdf
Fairchem Speciality (Fairchem)
In March 2017, the previously announced merger of Fairchem Speciality and Privi Organics (Privi) was completed,
resulting in Fairfax India owning 48.8% of Fairchem. Fairfax India had earlier separately owned controlling interests
in both these companies.
Based on IFRS, for the year ended December 31, 2018 the consolidated Fairchem entity grew revenue by 37% to
$194 million and net income by 71% to $10 million. Shareholdersâ equity grew 13% to $74 million, generating an
ROE of 13%.
While the two businesses have been merged into one corporate entity, they each continue to be managed
independently by their founders and existing management teams. We describe below the performance of the two
businesses:
Fairchem (formerly Adi Finechem): Fairchem, led by Nahoosh Jariwala, is an oleochemicals company.
Oleochemicals are, broadly, chemicals that are derived from plant or animal fat, which can be used for making both
edible and non-edible products. In recent years the production of oleochemicals has been moving from the U.S. and
Europe to Asian countries because of the local availability of key raw materials.
Fairchem occupies a unique niche in this large global playing field. It has developed an in-house technology that uses
machinery manufactured by leading European companies to convert waste generated during the production of soya,
sunflower, corn and cotton oils into valuable chemicals. These chemicals include acids that go into non-edible
products like soaps, detergents, personal care products and paints, and other products that are used in the
manufacture of health foods and vitamin E. The companyâs customers include major multinational companies
including BASF, Archer Daniels Midland, Cargill, Arkema and Asian Paints. Fairchem operates out of a single plant in
Ahmedabad, the largest city in Gujarat, the home state of Prime Minister Modi: the plant has one of the largest
processing capacities for natural soft oil-based fatty acids in India. Over the last ten years Fairchemâs sales have grown
on average 24% per year, net earnings have grown on average 33% per year, and the average annual ROE was
around 19%.
Based on IFRS, for the year ended December 31, 2018 Fairchem revenue grew by 4% to $37 million, net earnings grew
by 65% to $3 million, and shareholdersâ equity grew 22% to $14 million, generating an ROE of 24%.
In 2018, Fairchem implemented changes in its plant that further debottlenecked its operation and optimized the
production process. These changes have resulted in increasing installed capacity from 45,000 to 72,000 metric tons
per annum (MTPA) of raw material that can be processed. In 2018 Fairchem processed 39,000 MTPA implying a
capacity utilization to year end capacity of 54%. This provides considerable room to grow since the plant can operate
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at up to 90% of installed capacity. Fairchem has also initiated two capital expenditure projects: both will be financed
by a mix of term borrowings and internal accruals and are expected to enter production in 2020:
⢠a plant to manufacture sterols and higher concentration tochopherols; and
⢠a plant to manufacture bio-diesel using three by-products of its manufacturing process: palmitic acid,
monomer acid and residue.
It has been a year of significant achievement for Fairchem.
Privi: Founded in 1992, Privi, led by Mahesh Babani and D. B. Rao, is one of Indiaâs leading manufacturers of
aroma chemicals. Privi started manufacturing aroma chemicals with only two products, which it gradually expanded
to a range of over 50 products today, with a capacity of over 27,500 tonnes per annum. Its products are used as
fragrance additives in perfumes, soaps, shampoos and packaged food. Privi enjoys a dominant position and
economies of scale in its product categories. Privi also develops and produces custom-made aroma chemicals to
specific requirements of its customers. Privi sources most of its raw materials from pulp and paper companies globally
and competes primarily with pure play and niche suppliers such as IFF, DRT and Renessenz.
One of Priviâs significant strengths is its established research and development capabilities in aroma chemicals, with
a staff of 81 people comprised of PhDs in chemistry, chemical engineers and instrumentation engineers. The research
specialists continuously strive to develop new products and processes. Importantly, one of the R&D labs is
completely focused on developing, through biotechnology, green products and green technologies in technical
collaboration with the University Institute of Chemical Technology, Mumbai.
Privi has made significant investments in manufacturing facilities that convert a waste product in pulp and paper
manufacturing, crude sulphated turpentine (CST), into aroma chemicals. CST, a more cost-effective raw material
than the more traditional plant-based gum turpentine oil (GTO), is procured through annual contracts, while GTO
has to be purchased on volatile spot markets.
Based on IFRS, for the year ended December 31, 2018 Privi revenue grew 48% to $157 million, net earnings grew 59%
to $6 million, and shareholdersâ equity grew 11% to $60 million, generating an ROE of 10%.
This is quite a remarkable result when you consider that on April 26, 2018 there was a major fire at Priviâs main
production facility. While it is fortunate that there were no injuries as a result of the fire, the fire completely gutted
critical production units that impacted all production, all of the raw material and finished goods warehouses and the
administrative offices. The entire plant including the production units that were not affected by the fire had to be
temporarily shut down. However, Privi was able to open the facility and start operating the plants not affected by the
fire in a record time of 29 days. Using third party production facilities in combination with its own production units
unaffected by the fire, Privi was able to start supplying all of its products by June 2018.
Around the same time there were fires in two other plants that produce products similar to Priviâs, resulting in an acute shortage of certain aroma chemicals and consequently in much higher prices and margins.
