ankit.k@smartsyncservices.com

  +91 99789 88562

  

Home / Fairchem Organics

Fairchem Organics

Print Friendly, PDF & EmailGet PDF

Fairchem Organics Ltd. (Fairchem) is engaged in the business of manufacturing of Oleo Chemicals and Nutraceuticals, for the last 25 years. The company’s key oleo chemical products include Dimer Acid, Linoleic Acid, Palmitic Acid, and Monomer Acid, and nutraceutical products include Mixed Tocopherols and Sterol concentrate. Fairchem is one of the only manufacturers of Linoleic Acid and Dimer Acid in India, which are the major part of the overall revenues and have a large addressable market size in India.Its customers include marquee names like Asian Paints, Huber, Arkema, Kensing, ADM, Cargill etc.

Detailed Results:

  1. The company had a poor quarter with revenue and profits decreasing by 35% and 95% on a YoY basis respectively.
  2. EBITDA margins dropped to 3.51% Vs 13.5% YoY for the quarter.
  3. There was a lack of demand mainly from the Paint industry where the fall in volume was more than 35 %. This was the main reason for the fall in quarterly revenue & substantially eroded the margin in absolute terms. 
  4. There was an average fall of about 10 % on per unit realization vis-à vis the previous quarter while the raw material cost continued to fluctuate and tended to remain higher putting additional pressure on the margin.

Investor Conference Call Highlights 

  1. The Sales volume for this quarter in terms of metric tons was around 9,700 tons vis-à-vis around 14,800 tons in the previous quarter.
  2. 8,700 tons was the raw material process quantity for the October-December quarter and 16,700 was the process quantity for the previous quarter that is July-September.
  3.  The management explains that since it supplies to the decorative paint segment, it reported major volume degrowth Vs paint cos which saw flat volumes due to higher contribution from the automotive paints segment as well.
  4. Another reason for volume degrowth could be the use of old inventory by paint cos leading to fewer purchases from the company.
  5. The company expects a better recovery in numbers in Q4 but it is still not getting that visibility from the paint companies for the long term.
  6. The company is making a new product addition targeting the Epoxy industry to reduce dependence on the Paints industry.
  7. The company expects its export plans to fructify in Q1 of FY24.
  8. The company’s sample has been under analysis for the last 1 year for the decorative paints segment of Birlas & JSW paints.
  9. The combined contribution of its two main Fatty acids in terms of values was close to 70-75% of total revenues while Asian paints contribute 40% of total revenues.
  10. The management states that the new capacity of dimer acids of Hyderabad-based 3F Manufacturing will replace imports (which contribute 35% of total volumes in India) Vs the company’s share.
  11. The management when asked about how the Russia-Ukraine war is affecting its biz stated that “Between Ukraine and Russia, they are the world’s largest manufacturers of sunflower oil. So, that is the reason it is affecting, the overall commodity has become a little bit volatile because of that. So, once, we haven’t seen this type of volatility in the last 25 years of our existence.”
  12. The raw material prices have been very volatile wherein the prices reached 2X pre-covid rate high & have currently hovered around 1.3X pre-covid rates.
  13. The company’s selling price is decided on a monthly basis.
  14. The share of Tocopherol is 5% of total sales. 
  15. The company is delaying the Tocopherol project to focus on the new chemicals.
  16. The company in the past has been continuously delaying the Tocopherol project owing to methanol-related restrictions in Gujarat state coupled with Corona & lack of focus on that biz due to niche market size.
  17. Dimer is a low volume-high price product Vs Lineolic acid.
  18. Dimer Acid value for 9 months was Rs. 130 crores and Linoleic Acid value for the 9 months was Rs. 234 crores.

Analyst’s View

Fairchem organics is the leading producer of fatty acid derivatives commanding market leadership in India. The company has been witnessing a horror Fy23 where it has witnessed high double-digit revenue & PAT degrowth. The revenue degrowth is primarily due to the low growth of the decorative paints industry coupled with wild fluctuation in inputs ailing its margins. It remains to be seen how management will recover from the demand side shock coupled with uncertain input prices due to War. However, given its strong market positioning & past track record coupled with its management pedigree, it remains an interesting small-cap stock to keep track of.