fairchem speciality ltd isin… · 2016 to 2019e, respectively. sector speciality chemicals bse...

Document code: FOTL_211120172_2 Copyright © 2016 Firstobject Technologies Ltd. All rights reserved

FAIRCHEM SPECIALITY LTDResult Update (PARENT BASIS): Q2 FY18

CMP: 410.10 NOV 21st, 2017

Overweight ISIN:INE959A01019

Index DetailsSYNOPSIS

Fairchem Speciality Ltd (Formerly known as ADI

Finechem Ltd) is a speciality oleochemical

manufacturing company situated near the city of

Ahmedabad in the western region of India.

Revenue for the quarter increased by 22.63% at Rs.

573.95 mn as against Rs. 468.03 mn, when

compared with the prior year period.

During Q2 FY18, EBIDTA is Rs. 102.78 mn as

against Rs. 38.91 mn in the corresponding period of

the previous year.

During Q2 FY18, Profit before tax increased to Rs.

77.33 mn from Rs. 14.56 mn in Q2 FY17.

During Q2 FY18, net profit rose by 539.38% and

stood at Rs. 59.57 mn against Rs. 9.32 mn in the

corresponding quarter ending of previous year.

EPS of the company stood at Rs. 1.58 a share

during the quarter, as against Rs. 0.68 per share

over previous year period.

Net Sales and Operating Profit of the company

expected to grow at a CAGR of 20% and 18% over

2016 to 2019E, respectively.

Sector Speciality ChemicalsBSE Code 530117Face Value 10.0052wk. High / Low (Rs.) 595.00/380.00Volume (2wk. Avg.) 987Market Cap (Rs. in mn.) 15423.78

Annual Estimated Results(A*: Actual / E*: Estimated)Years (Rs. in mn) FY17A FY18E FY19ENet Sales 1855.68 2226.81 2605.37EBITDA 230.47 323.85 373.45Net Profit 84.60 150.32 175.79EPS 2.25 4.00 4.67P/E 182.31 102.61 87.74

Shareholding Pattern (%)

As on Sep 2017 As on June 2017

Promoter 75.00 75.00

Public 25.00 25.00

Others -- --

1 Year Comparative Graph

FAIRCHEM SPECIALITY LTD S&P BSE SENSEX

PEER GROUPS CMP MARKET CAP EPS(TTM) P/E (X)(TTM) P/BV(X) DIVIDEND

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)Fairchem Speciality Ltd 410.10 15423.78 3.47 118.02 21.95 10.00Ultramarine & Pigments Ltd 275.00 8030.00 13.59 20.24 5.47 200.00Premier Explosives Ltd 406.05 4319.20 14.44 28.12 3.11 30.00Aksharchem (India) Ltd 691.70 5673.70 51.11 13.53 4.21 35.00


QUARTERLY HIGHLIGHTS (PARENT BASIS)

Results updates- Q2 FY18,

(Rs. in millions) Sep-17 Sep-16 % Change

Revenue 573.95 468.03 22.63%

Net Profit 59.57 9.32 539.38%

EPS 1.58 0.68 134.50%

EBIDTA 102.78 38.91 164.15%

The company’s net profit rose by 539.38% and stood at Rs. 59.57 million as against Rs. 9.32 million in the corresponding

quarter ending of previous year. Revenue for the quarter increased by 22.63% at Rs. 573.95 million from Rs. 468.03

million, when compared with the prior year period. Reported earnings per share of the company stood at Rs. 1.58 a share

during the quarter, as against Rs. 0.68 per share over previous year period. Profit before interest, depreciation and tax is

Rs. 102.78 million as against Rs. 38.91 million in the corresponding period of the previous year.

Break up of Expenditure

Break up ofExpenditure

Value in Rs. Million

Q2 FY18 Q2 FY17 %Change

Cost of MaterialsConsumed 377.48 308.03 23%

Excise Duty 0.00 45.61 --

Employee BenefitExpenses 32.64 29.06 12%

Power & Fuel 40.15 17.68 127%

Depreciation &Amortization 11.64 14.16 -18%

Other Expenditure 36.59 32.54 12%


COMPANY PROFILE

Fairchem Speciality Ltd (Formerly known as ADI Finechem Ltd) is a speciality oleochemical manufacturing company

situated near the city of Ahmedabad in the western region of India. The company utilises state of the art technology with

critical equipments acquired from Germany and Switzerland. By-product fractions of natural oils and fats generated

during refining of Sunflower and Soyabean oils are company's rawmaterials.

The fine chemical products portfolio has applications in manufacturing of resins for Paints, Inks adhesives etc. Company

also manufactures specialised products for neutraceutical industry. The hallmark has been consistent supply of products of

superior quality in India, USA and Japan.


FINANCIAL HIGHLIGHT (PARENT BASIS) (A*- Actual, E* -Estimations & Rs. In Millions)Balance Sheet as of March 31, 2016 -2019E

FY16A FY17A FY18E FY19E

SOURCES OF FUNDSShareholder's Funds

Share Capital 137.94 390.63 376.10 376.10

Reserves and Surplus 494.61 326.53 476.85 652.64

1. Sub Total - Net worth 632.55 717.15 852.94 1028.74

Non Current Liabilities

Long term Borrowings 115.23 188.70 211.34 228.25

Deferred Tax Liability 77.23 96.85 111.38 122.51

Long Term Provisions 3.22 6.58 10.20 12.04

2. Sub Total - Non Current Liabilities 195.68 292.13 332.92 362.80Current Liabilities

Short term Borrowings 169.98 315.27 236.45 200.98Trade Payables 28.16 56.82 73.87 84.95

Other Current Liabilities 76.21 153.66 187.47 215.59Short Term Provisions 42.13 2.78 6.95 8.68

3. Sub Total - Current Liabilities 316.48 528.53 504.74 510.21Total Liabilities (1+2+3) 1144.71 1537.81 1690.60 1901.75APPLICATION OF FUNDSNon-Current AssetsFixed Assets

Tangible Assets 734.09 935.09 963.14 1011.30Capital Work in Progress 52.64 32.07 59.33 74.16a) Sub Total Fixed Assets 786.73 967.16 1022.47 1085.45b) Non Current Investments 0.00 0.10 0.11 0.12c) Long Term Loans & Advances 14.18 21.99 0.00 0.00d) Other Non – Current Assets 0.90 0.98 26.54 33.18

1. Sub Total - Non Current Assets 801.81 990.22 1049.12 1118.75Current Assets

Inventories 134.16 231.52 150.49 173.06Trade Receivables 172.27 253.94 429.83 527.71Cash and Bank Balances 1.51 4.73 2.13 2.66

Short-terms loans & advances 25.44 37.56 1.88 2.40Other Current Assets 9.52 19.85 57.16 77.17

2. Sub Total - Current Assets 342.90 547.59 641.48 783.00Total Assets (1+2) 1144.71 1537.81 1690.60 1901.75


Annual Profit & Loss Statement for the period of 2016 to 2019E

Value(Rs.in.mn) FY16A FY17A FY18E FY19E

Description 12m 12m 12m 12mNet Sales 1517.21 1855.68 2226.81 2605.37

Other Income 8.20 0.93 45.50 47.78

Total Income 1525.41 1856.61 2272.31 2653.15

Expenditure -1290.72 -1626.14 -1948.46 -2279.70

Operating Profit 234.69 230.47 323.85 373.45Interest -39.21 -48.02 -58.59 -67.37

Gross profit 195.48 182.45 265.26 306.07

Depreciation -29.94 -42.21 -48.54 -54.37

Profit Before Tax 165.54 140.24 216.72 251.71

Tax -59.54 -55.64 -66.40 -75.91

Net Profit 105.99 84.60 150.32 175.79

Equity capital 137.94 376.10 376.10 376.10

Reserves 494.61 326.53 476.85 652.64

Face value 10.00 10.00 10.00 10.00

EPS 7.68 2.25 4.00 4.67

Quarterly Profit & Loss Statement for the period of 31st Mar, 2017 to 31st Dec, 2017E

Value(Rs.in.mn) 31-Mar-17 30-Jun-17 30-Sep-17 31-Dec-17E

Description 3m 3m 3m 3mNet sales 543.32 668.39 573.95 528.03

Other income -0.14 0.05 25.38 16.50

Total Income 543.19 668.44 599.33 544.53

Expenditure -495.89 -585.70 -496.55 -457.28

Operating profit 47.30 82.74 102.78 87.25

Interest -16.71 -14.56 -13.81 -15.88

Gross profit 30.59 68.18 88.97 71.37

Depreciation -10.33 -11.46 -11.64 -12.57

Profit Before Tax 20.26 56.72 77.33 58.80

Tax -13.91 -19.69 -17.76 -15.44

Net Profit 6.35 37.04 59.57 43.37

Equity capital 137.94 376.10 376.10 376.10

Face value 10.00 10.00 10.00 10.00

EPS 0.46 0.98 1.58 1.15


Ratio Analysis

Particulars FY16A FY17A FY18E FY19E

EPS (Rs.) 7.68 2.25 4.00 4.67EBITDA Margin (%) 15.47% 12.42% 14.54% 14.33%PBT Margin (%) 10.91% 7.56% 9.73% 9.66%PAT Margin (%) 6.99% 4.56% 6.75% 6.75%P/E Ratio (x) 53.37 182.31 102.61 87.74ROE (%) 16.76% 12.04% 17.62% 17.09%ROCE (%) 28.83% 22.60% 28.63% 29.34%Debt Equity Ratio 0.45 0.72 0.52 0.42EV/EBITDA (x) 25.31 69.09 49.00 42.44Book Value (Rs.) 45.86 18.68 22.68 27.35P/BV 8.94 21.95 18.08 14.99

Charts


OUTLOOK AND CONCLUSION

At the current market price of Rs. 410.10, the stock P/E ratio is at 102.61 x FY18E and 87.74 x FY19E respectively.

Earning per share (EPS) of the company for the earnings for FY18E and FY19E is seen at Rs. 4.00 and Rs. 4.67

respectively.

Net Sales and PAT of the company expected to grow at a CAGR of 20% and 18% over 2016 to 2019E, respectively.

On the basis of EV/EBITDA, the stock trades at 49.00 x for FY18E and 42.44 x for FY19E.

Price to Book Value of the stock is expected to be at 18.08 x and 14.99 x for FY18E and FY19E respectively.

Hence, we say that, we are Overweight in this particular scrip for Medium to Long term investment.

INDUSTRY OVERVIEW

OLEO CHEMICALS AND NUTRACEUTICALS:

Oelo Chemicals:

Oleo Chemicals are the flavour of the day since they are produced from natural sources. The demand for biodegradable

chemicals is fuelling oleo chemicals market. 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. Dimer Acid, Linoleic Acid / Soya Fatty Acid, other Distilled Fatty Acids are the main products of the

Company. Dimer Acid is used for making two kinds of polyamides i.e. Non-reactive and reactive. Non-reactive Dimer

Acid is used by manufacturers of printing inks, adhesives, paper coatings etc.. Rising solvent demand from industries such

as printing inks, adhesives and paper coatings may drive global dimer acid market size for non-reactive polyamide resins.

The demand for Reactive polyamide resins application will be driven by increasing surface coatings & adhesives demand

in marine and construction.


Nutraceuticals:

The word Nutraceutical is derived from two words viz. `Nutrition’ and `Pharmaceutical’. When used in food, it provides

health and nutrition benefits in addition to basic nutrition value present in food items. The consumers are now more health

conscious and better informed about such nutritional products. The Company is mainly in the business of (natural)

Tocopherols and Sterols and they are exclusively exported. Tocopherols have anti-oxidant properties. Tocopherols after

they are further concentrated by customers are then used in (a) Pet Food, (b) food as it prevents rancidity. Tocopherols

when converted into Natural Vitamin E finds the application in Pharmaceutical, cosmetic etc.. Sterols after they are

further concentrated finds its use in making of Cortico Steroids and as food additive.

Strengths and Opportunities:

The major strength in Oleo Chemical business is Company’s ability to process by-products having no technical

specifications and make higher grade fatty acids and nutraceuticals intermediate finished products meeting stringent

quality standards.

Outlook:

The outlook of Oleo Chemicals business appears to be promising. The Company is continuously working on process

optimization and exploring the latest technology whereby it is able to achieve reduction in per unit processing cost. This is

one area where the Company benefits without any corresponding loss to either its customer or supplier of raw material

and so this benefit is permanent.

AROMA CHEMICALS:

Based on the research by Leffing well & Associates, the global F & F market was US $24.10 billion in 2015 and has

moved up to US$24.45 billion in the year 2016. The top 11 Fragrance and Flavor houses hold about 78 % of Market

Share. Perfumer & Flavourist cites a 2014 study by Global Industry Analysts which says the industry will “reach about

US $45.6 BILLION dollars in 2020,”(Which is Ambitious) a mere 6 years’ time and it is celebrity fragrances that are

really expected to drive the overall surge to a $45.6 billion dollar a year business.

Fragrances and Flavors Industry in India:

India with a population of 1.21 billion is a young country with almost 65 % population below the age of 30 years. It has

been a traditional country so far but at the same time, India is now bracing up to changes rapidly in almost every

socioeconomic arena. By the year 2020, the average age of an Indian is projected to be 28 years. Supported by favourable

government policies for industry and a demand by young consuming class with growing disposable incomes, India offers

significant investment opportunities in the flavour and fragrance sector.

Current and Future Business Scenario:

Soaps and Fabric wash together represents over 50% of market share; they are the two largest categories in the Indian

Fragrance market followed closely by deodorants which is the next fastest growing segment with CAGR of approx 33%.

Indian fragrance industry has a promising future with the Indian FMCG market expecting a consistent growth for next 5


years. The same is coupled with the rise in disposable income; the per capita consumption of various personal care

products is expected to grow significantly. For comparison, the estimated per capita consumption of skin products in India

is USD 0.8 whereas in China and Indonesia it is USD 8.0 and USD 4.3 respectively. Similarly for shampoo the estimated

per capita consumption in India is USD 0.6 whereas in China and Indonesia it is USD 2.3 and 2.1 respectively thus

indicating tremendous potential of growth.

Growth Drivers for Flavour and Fragrance industry in India:

Demand from youth with increasing preference towards premium Fragrance and Flavour Products will boost the market.

The flavour and fragrance market in India will continue to grow at a considerable rate in the coming years with increase in

disposable income of consumers, busier lifestyles, and higher preference towards personal wellness. It has been estimated

that the market is expected to cross USD 1.4 billion by FY’ 2020 as per the study done by IIFL. The industry is predicted

to witness consolidation with bigger players tying up with smaller players while the smaller players will be seen

consolidating among themselves. High demand of personal grooming products, rapid growth of food additives market will

drive the growth of this industry in the future.

Furthermore, hot and humid climatic conditions, high influence of the foreign trends have been important factors in

persuading flavour and fragrance preferences of the consumers across India. Urban population has been most influenced

by the foreign culture due to faster information travel for getting in sync with the current fashion trends. Increases in the

demand of fine fragrances have clearly shown the preference of Indian population towards personal wellness and

grooming products.

Market research by specialized research companies will allow the industry players to increase their growth potential and

enter new segments at early stage to have the first mover advantage. Newer segments such as fruit drinks, instant foods,

healthy canned foods and flavoured milk are gaining popularity. Early entry into such segments can help the companies to

gain customer trust and help in brand building. However, the industry is anticipated to face challenges in the form of

fluctuations in the prices of raw materials and complex preferences of highly diversified customers.

Opportunities:

The top ten companies have had a substantial presence and business in India for many years now. Other international F&F

houses in the last ten years or so have also setup shop and are active in the Indian market. Similar to the international

market, there is almost equal distribution of the total Indian F&F market between flavors and fragrances. International

houses account for about 70% of the organized Indian market while large Indian companies cater to the rest of the market.

Some Indian FMCG companies who use fragrances and flavors in their products also make their own fragrance blends by

purchasing individual aroma chemicals and mixing them.

Strategies in India by international F&F companies:

Manufacturers are continuously expected to invest progressively in R&D to make new developments and meet the rapidly

changing needs of flavour and fragrance industries. Technological improvement is another critical factor for the success of

a company. New technologies that improve the application with new product development are the key factors to maintain


a competitive edge over the other market participants as the competition is high. Indian manufacturers need to focus on

the pricing of their products and innovation to remain a step ahead of market trends. They are expected to formulate more

non-traditional, non seasonals that are also compatible with the Indian palate.

Companies today are currently strategizing ways to strengthen their presence and are focusing their sales expansion plans

to cater to increasing demand from tier II and tier III cities that eventually drive growth. As an example in the fragrance

market, companies are launching a range of affordable deodorants, perfumes, and colognes for consumers willing to

spending on fragrances to stay well groomed. In short, companies are taking all efforts to fulfill consumer demand.

Future Outlook:

The demand in Latin America & particularly in Asia countries continues to be very buoyant. Company sees its growth

coming from key accounts in emerging and developing countries and its ability to provide a basket of products will enable

the company to get a better market share which in turn enables a much larger growth than the average industry growth.

Company is continuously trying to make inroads in to the developing and emerging markets by seeking more and more

customers that will help propel the growth path set by it. In fact, Company is now selling to all the top fragrance houses

and all the leading FMCG.


Disclosure Section

The information and opinions in Firstcall Research was prepared by our analysts and it does not constitute an offer orsolicitation for the purchase or sale of any financial instrument including any companies scrips or this is not an officialconfirmation of any transaction. The information contained herein is from publicly available secondary sources and dataor other secondary sources believed to be reliable but we do not represent that it is accurate or complete and it should notbe relied on as such. Firstcall Research or any of its affiliates shall not be in any way responsible for any loss or damagethat may arise to any person from any inadvertent error in the information contained in this report. Firstcall Research and/or its affiliates and/or employees will not be liable for the recipients’ investment decision based on this document.

Analyst Certification

The following analysts hereby state that their views about the companies and sectors are on best effort basis to the best oftheir knowledge. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Theanalyst qualifications, sectors covered and their exposure if any are tabulated hereunder:

Name of the Analyst Qualifications SectorsCovered

Exposure/Interest tocompany/sector UnderCoverage in the CurrentReport

Dr.C.V.S.L. KameswariM.Sc, PGDCA,M.B.A,Ph.D (Finance)

Pharma &Diversified No Interest/ Exposure

U. Janaki Rao M.B.A CapitalGoods No Interest/ Exposure

B. Anil Kumar M.B.A Auto, IT &FMCG No Interest/ Exposure

M. Vijay M.B.A Diversified No Interest/ ExposureV. Harini Priya M.B.A Diversified No Interest/ ExposureMD. Naveed M.B.A Diversified No Interest/ ExposureA. Bhikshapathi M.B.A Diversified No Interest/ Exposure

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Overweight (O): The stock's total return is expected to exceed the average total return of the analyst's industry (orindustry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Equal-weight (E): The stock's total return is expected to be in line with the average total return of the analyst's industry(or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.

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fairchem speciality ltd isin… · 2016 to 2019e, respectively. sector speciality chemicals bse...

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