Fairchem Organics- A high growth niche chemical play with strong promoter pedigree

Fairchem Organics operates in the specialty oleo chemicals segment where it manufactures niche products with diverse industry applications for the last two decades.Fairfax India Holdings, backed by the billionaire Prem Watsa, is the major promoter of Fairchem and they hold 53 percent stake

 Fairchem Organics

Business Brief

Fairchem Organics(FOL) operates in the specialty/oleo chemicals segment where it manufactures niche products with diverse industry applications for the last two decades. FOL’s product portfolio includes Mixed Tocopherol Concentrate, Dimer Acid and Linoleic Acid which have diversified industry applications and tends to bring greater stability to its revenue. Export contribution to net sales has remained at around 10%-15% over the past three years

Fairchem was formerly known as Adi Finechem Limited. During FY16, Fairfax India through its wholly owned subsidiary acquired controlling equity stake in FSL from existing promoters.In 2019 the NCLT approved a scheme of demerger of FSL(Fairchem Specialty) with a record date of August 24, 2020. As part of this scheme, the erstwhile Oleo chemicals & Nutraceuticals businesses of FSL have been hitherto transferred to FOL (Fairchem Organics).

Investment Rationale-

•      Capex likely to help Double Revenue over the next 3 years

The company undergoes a major capex every few years only once the plant utilisation reaches optimum levels. Fairchem’s last major capex was done from FY14 to FY16 when it enhanced the capacity from 18,000 MTPA to 45,000 MTPA. In FY21 the company began its next phase of capacity expansion and had increased the capacity to 72,000 MTPA as on 31st March 2021. Furthermore, it plans to increase the capacity to 90,000 MTPA by end of H1-FY22 and to 1,20,000 MTPA by end of FY22. They have invested 100 crores through internal accruals. The capacity expansion has the potential to more than double the company’s revenues in the coming years. Majority of the capacity expansion has been undertaken primarily through internal accruals.

Strong Promoter Group

Fairfax India Holdings, backed by the billionaire Prem Watsa, is the major promoter of Fairchem and they hold 52% percent stake in the co through their investment arm FIH mauriius.

Strong Relationship with MNC clients

Fairchem has been manufacturing for 25 years, mainly operating in B2B segment. Customers include Asian Paints, Huber (erstwhile Micro Inks), Arkema, BASF, ADM, and Cargill. For example- Asian Paints has been their client for 17+ years. Furthermore, it has a diversified client base with top 10 customers contributing around 66% of its total income during FY21 respectively.

Most of its Indian customers by and large remain fixed unless someone exits from its business or someone puts up a new plant to make products which can use our product. So over a period of time, they have been able to fix the prices of products by relating them to appropriate benchmarks which are in public domain.

Strong Technology and Barriers to Entry

Over the past several years, they have perfected the technology to convert inconsistent raw material quality into consistent quality output. Whereas other oleochemicals manufacturers use vegetable oils, Fairchem uses by-products of vegetable oil—this gives them a distinct price advantage. They use imported equipment such as Short Part Distillation from UIC Germany, and Fractionation from Sulzer Switzerland.

It’s a leading player in India for most of its products it manufactures and its efficient manufacturing process (focus on green chemistry) and lower cost of material helps it to remain competitive.

Business Segments

1.)   Oleo Chemicals- (97 % of Revenues)

Oleo Chemicals are chemicals derived from Plant and Animal Fats. Fairchem is a leading producer of Fatty Acids from natural oils and fats derived from vegetable oils. They are preferred since they are produced from biological fats or oils i.e. natural sources. Fatty Acids, methyl esters and fatty alcohols are major oleo chemicals manufactured in India. The Company is mainly in the business of Fatty Acids which is one of the largest segments in Oleo Chemicals. It has over the years developed and mastered the process of manufacturing its entire product range from waste/by product streams of natural vegetable oils by utilizing state of the art equipment’s of acceptable local and international quality .


Products-

Dimer Acid- prepared from unsaturated fatty acids obtained from vegetable oil. It is a light yellow or yellow viscous transparent liquid. It is non-toxic. Fairchem is the only company to manufacture this product in India and . Dimer Acid is used for making two kinds of polyamides i.e. Non-reactive and reactive. Non-reactive polyamides are used by manufacturers of printing inks, adhesives, paper coatings etc. The demand for Reactive polyamide resins application will be driven by increasing surface coatings & adhesives demand in marine and construction.

The company supplies this product as an import substitute for sale to consumers in Surface Coating and Printing Ink industry on import parity with added advantage of just-in-time delivery and better quality. As result Fairchem has been preferred supplier for most of its clients and believes it would gradually substitute large part of its client requirement, which are met through import at present. 
It makes this product by using relatively cheaper raw material which is a by-product of vegetable oils whereas world at large makes them from virgin Vegetable oils or Tall Oils.

Dimer acid market is expecting a growth of 4 % CAGR from 2020- 2027 to reach a value of $2.1 billion. Fairchem maintains leadership in this product in India and as Chinese suppliers are the main competitors for the Company.

•      Linoleic Acid / Soya Fatty Acid:

Linoleic Acid is designed specially to produce fast drying protective coating having lighter color. The end use of both - Linoleic Acid and Soya Fatty Acid - is same i.e. for making Alkyd Resins which in turn is used in making paints. (Dimer Acid is a value added product of the Company which is derived as one of the streams by further processing Linoleic Acid ) The Linoleic Acid Market is forecasted to grow at a rate of 4.0% CAGR during the period of 2021-2026.

Nutraceuticals- 3% of Revenues

Fairchem currently produces (Natural) Mixed Tocopherol Concentrate /Natural vitamin E which it primarily exports to global MNCs and are having usage in FMCG and food additives.In Nutraceuticals, the company produces Tocopherol, which is used in natural Vitamin E. This product of the company is intermediate and therefore does not command high price.

Financials-

Peers & Valuation

•      Fine Organic is one of the largest manufacturer of oleochemicals in India. Fine Organic is into food additives and Galaxy is into household products. Their products cater to a different market compared to Fairchem

Based on rough financial (Source- Ashika Broking) Fairchem could achieve a PAT figure of 90 crores by FY24 and is trading on 17 times its FY24 earnings. In addition, the company is likely to maintain its EBITDA margin range of 17% and generate healthy ROCE and ROE of 30% with almost no leverage.

Risks

Raw Material Volatility and Availability- Key raw materials are Acid Oil and Fatty Acid and they purchase major portion of raw materials directly from the vegetable oil refineries. As they are waste / by products of these refineries and are by-products of soya and sunflower oils generated during their refining process. The prices of both these oils have historically remained volatile. Major raw material requirement is procured domestically. Hence, the profitability of Fairchem is susceptible to volatile agro based raw material prices and forex rates.

Furthermore, in Q3FY22, the company witnessed margin pressure with EBITDA margins declining to 14% due to increase in raw material costs and power costs and the company could not pass on all of these costs in order to maintain long term relationships with its key customers.

Competition from low cost Chinese products The industry size for Dimer acid and Linoleic acid is relatively small compared to the overall size of chemical industry which limits the growth of the company. Further, Fairchem faces stiff competition from low cost products from China, especially Dimer acid. However, it has been able to gain significant market share in Dimer acid in India with its apt marketing strategy.

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Comments

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  Aadi Jain

  5 April, 2022, 11:40 pm
  Great work! Covered most of the important aspects of the company and industry dynamics.
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  Naval Goel

  6 April, 2022, 3:55 pm
  Great work.. indepth article.
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