• The company’s Q3FY20 performance was impacted by:
one week’s shutdown
during Diwali;
reducing utilisation rate of existing plant to 80-85% (from peak of
90-95%) as the new plant commenced production;
higher fixed overheads for
new plant; and
higher employee cost (due to Diwali bonus).
• If the China situation persists, sales of the company may be impacted as Asia
(including China) accounts for ~20% of its total exports, which contribute ~55% to
revenue. However, there will be no impact on raw material as the company is not
securing its raw material from China.
• Palm oil prices have risen because of ban on Malaysia. The company is procuring
its raw material from Indonesia. Further, the company is secured for long-term
contracts and the new contracts will be based on increased prices.
• FOIL( Fine Organics Limited) expects 10-15% volume CAGR at sustainable rate with food emulsifiers, polymer additives, coatings and feed nutrition additives, etc., driving growth.
Further, the company is targeting 30-35% gross margin. Anything over and above
can be led by exchange fluctuations, raw material favourable moment, etc.
• The company commenced production at its 32,000MT Ambernath facility (50% of
existing capacity) in August 2019, which is likely to address capacity constraint
issue. Management expects this plant to reach optimum utilisation in the next
four years.
• FOIL has commenced construction of 10,000tonnes capacity at Patalganga,
Maharashtra. The capacity is likely to be commissioned by Q4FY21 and will help
FOIL cater to food additives demand from exports and domestic markets.
• Evaluating German JV as it’s a good opportunity. However, the company is looking
at re-working on project size since the current project plan has cost overruns.
Mutual Funds have been net buyers of Fine Organic in Feb 2020. Total holding has gone up from 43,74,200 shares to 44,12,996 shares. MFs who increased their stake have been L&T emerging businesses fund, Union small cap fund and IDBI small cap fund. Quality companies are never ignored during market corrections.
We have added Fine Organic Industries to our portfolio. Fine Organic is the largest manufacturer of oleochemical-based niche additives in India. It is among the five largest global players in polymer additives and among leading global players in specialty food emulsifiers. Fine Organic’s product portfolio comprises of over 400 products including food additives, polymer additives, emollients for cosmetics, additives for rubber & elastomers, etc. Although the volume of additive used in end products is low, these are very critical in imparting the requisite properties to the products which gives Fine’s products ready buyers. Further, Fine’s in-house developed technology, processes and solution-based approach to customers has led to long standing relationships with most clients and also created strong entry barriers for competitors. The shift from synthetic chemicals-based additives to oleo-chemicals based additives is also a growth generator for the company. Fine’s management has been conscious about increasing the composition of value-add products in its mix of portfolio ad has been prudent in capital allocation. While Fine Organic’s revenues have grown at 11% CAGR over the last 7 years, its earnings have grown at a 34% CAGR during this period and the average pre-tax ROCE has been 38%.
Given the steady increase in prices of raw materials (Palm, Soy bean oils etc), it is definitely going to have an impact on margins. But I’m wondering how big of an impact is it will be going forward? Their ARs mention that they have long term agreements with their suppliers- does anyone have any idea how long these contracts are usually for?
Also, the following information is given in AR regarding raw material price risk:
“The Company is exposed to commodity price risk for its business operations. Currently, the Company does not engage in any direct commodity hedging activities. However, the Company has internal systems through which price risk for our raw materials derived from commodities is monitored and controlled to the possible extent.”
Can someone throw some light on how do they reduce the raw material price risk and what are these internal systems?
I believe the management can easily pass the increase to customers as they operate in a strictly R&D area and their products find usage in critical & low volumes.
I went through numerous presentations but couldn’t find any references of their products being used in detergents and other cleaning end products. What I mean is why not foray into this segment as well. Has management guided anything for the same. Couldn’t find any such info in last two concalls.
Views invited form early investors.
Fine Organics produces various specialty green additives for Food, Feed Nutrition, Polymers, Coatings and Emollients for Cosmetics. These are niche green products with an increasing demand post COVID. Hence company is in the sweet spot.
Mentioned in the Macellus’ article shared above. As you rightly mentioned, looks like it’s all dependent on their contractual period with customers.
The Company did face some margin headwinds in FY21 and 9MFY21 EBITDA margins stood at 18.6%, down 450bps YoY. This has been primarily because of the rising prices for the raw materials which are used by the company (various derivatives of edible oil). The price has been on account of multiple reasons such as: (1) shortage in global supply of edible oils owing to disruption from Covid-19, (2) levy by the Government of India of a new ‘Agricultural Cess’ of 17.5% on import of edible oils; and (3) removal of edible oils from essential commodities list resulting in hoarding of the same in anticipation of price increase. On the other hand, the Company had already concluded contracts with some of its large customers earlier (before raw material prices started rising) which restricted the pass-through of the raw material cost inflation. However, going forward, the contracts with customers are being renewed taking into consideration the higher raw material prices
Can the Company pass on the impact rise in Raw material. The rise is on account of two reasons : Global increase in commodity price and tax on import of edible oils.
My main concern is the latter one as this can make the company less competitive as compared to its global peers.
While the market behemoths like Aarti Industries, Vinati Organics, Tata Chemicals have shown a de-growth either in their revenues or profits, Fine Organics has been able to increase its revenues, as well as profits despite the staggering increase in the prices of raw materials (edible oils).
As per few reports, it seems that the prices of Edible oil will eventually come down, and since this whole factor of “exponential rise in prices of Edible oil” is prevalent, the company will manage to pass on some part of it to its customers.
Yet another weekly update on the Edible Oil Prices
Fine Organic might give out good profits this quarter as the company might be able to pass on the steep increase in prices as it is known to everyone. This acts as a plus to the already confirmed orders!
