Where it all began

Fine Organic Industries (NSE: FINEORG) manufactures and sells oleo chemical-based additives that are used in a variety of end-user industries like food products, paints, animal feed, cosmetics, etc. The company has 470+ products and sells to more than 850 customers across more than 75 countries. This mid cap company was listed in July 2018, and its price has jumped up by ~7x since then.   

How the company caught Windmill Capital’s eye

Increasing environmental awareness has been driving up the demand for sustainable products. The oleo chemicals manufactured by Fine Organics are bio-based and biodegradable. Hence, the demand for the same has been consistently increasing. The company’s additives have managed to effectively replace hazardous chemicals in a wide range of industries.  

Our research team has been tracking the company since its listing. During FY2019, the company raised 92 Crores in debt to expand its manufacturing capacity on the back of increasing demand in the additive industry. This piqued our interest in the stock, and we started digging in to improve our understanding of the company’s business model.

In March ’20, when Covid struck, we were concerned about its impact on the operations of the company. However, the management’s commentary suggested that production was not impacted, and the company did not anticipate major disruption to its business. The company’s strong cash position (a whopping 206 crores in FY20), high liquidity and a Return of Equity of 29% (vs the industry average of 21%), both on an absolute and relative basis, increased our confidence in the company.

Why is it a part of the Special Chemicals smallcase?

• As a result of the positive outlook, we added the stock to our Speciality Chemicals smallcase at a price of ~INR 1,916/share. Since its addition, the stock has delivered compounded returns of 52.4%! It is currently trading at ~INR 5,584/share

• Between FY20 and FY22, revenues grew by 1.8 times to 1,909 Crores & profits by 1.6 times to 259 Crores

• In the first half of FY23, sales have already touched 1,700 Cr while profits have increased to 362 Cr signaling another year of good fundamental growth

How is Fine Organics performing now?

Over the last two years, the company has successfully managed to maintain its margins by passing on raw material price hikes to end customers by renegotiating contracts. In specific instances where such renegotiation was not possible it did not declare force majeure and serviced the clients by taking a margin hit. According to the management, this decision has further strengthened the company’s relationship with its clients. 

Company’s leadership in oleochemical-based additives in the domestic and global markets, a loyal customer base, and management’s confidence about healthy export demand outlook despite weak global economic situation helped us decide to continue to retain the company in the Specialty Chemicals smallcase, in spite of high valuation.

The company has been witnessing volume growth in the export market and improved price realization. With supply chain challenges easing gradually, freight costs and air cargo shipments have reduced, and this is expected to further aid margins. The company is also looking to buy a land parcel in Gujarat for further expansion of its manufacturing capacity.

Due to these factors, the recent price correction is not a cause for concern and in fact has improved the valuation profile of the company.

Windmill Capital is a SEBI Registered (SEBI Registration No. INH200007645) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best of our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent an investment advice or a recommendation or a solicitation to buy any securities.