April 14, 2021 Initiating Coverage

FINE ORGANIC INDUSTRIES LTD | Chemicals - Speciality

...... FOIL

FOIL is India’s largest oleochemical-based additives manufacturer with presence in domestic as

Rating Buy
well as international market. It is also among the top six players globally in the oleochemicals
Current Market Price (₹) 2,497
industry. FOIL manufactures green additives derived from vegetable oils which are used in
industries such as food & beverages, plastics/polymers, cosmetics, pharmaceutical, rubber, 1 Year Price Target (₹) 3,232
paints and coatings etc. Oleochemicals currently is at a nascent stage in the chemical industry, Potential upside (%) 29
however, with evolving problems of pollution & global warming, oleochemical-based additives
will substitute most of the petrochemical based additives. FOIL as a company is built around strong
R&D capability, specialized knowledge and indigenously developed proprietary technology which Stock Data
makes it a market leader in the oleochemical industry. This industry has high entry barriers such FV (₹) : 5
as higher R&D cost, stringent regulations, long gestation period for product approval making this
Market Cap Full (₹ bn) : 77
an oligopolistic industry with select few players globally. With growing awareness about the use
52-Week High / Low (₹) : 1,825 / 3,260
of green additives, the demand for oleochemical-based additives is set to surge going forward.
2-Year High / Low (₹) : 1,287 / 3,260
FOIL being the largest player in India will be at the forefront of this surge. Over the last seven
years, the company has been able to report a net profit CAGR of ~34% along with double digit 1 Year Avg. Dly Traded Volume 46,700

growth in revenues. However during FY20-21, the company has faced certain headwinds such as BSE Code / NSE Symbol : 541557 / FINEORG

Covid-19 and rise in raw material costs, however, we believe that oleochemicals is a multi-year Bloomberg : FINEORG:IN
growth story with FOIL being a key player. We expect the company to grow its Revenue/EBIDTA/
PAT at CAGR of 15%/16%/19% respectively during FY20-26E. We Initiate Coverage on FOIL with a
BUY recommendation and a DCF based target price of ₹3,232. Shareholding Pattern (%)

Dec-20 Sep-20 Jun-20 Mar-20

Olechemical Industry to play an important role in India’s Chemical Growth story
Oleochemical-based additives are at a nascent stage and are expected to grow significantly Promoter 75.00 75.00 75.00 75.00

over the years led by increasing shift from petrochemical based additives. Green additives are FPIs 6.38 5.75 5.76 5.31

100% safe to use as it is derived from plants as compared to other chemicals that are derived MFs 13.21 13.81 13.89 14.65
from petrochemicals. Leading industry players have also started adopting more of the green AIF 0.93 1.05 1.10 1.18
additives in the manufacture of end products. The oleochemical-based additives are used in Others 4.48 4.39 4.25 3.86
several industries such as food & beverages, feed nutrition, plastics/polymers, cosmetics, Source: BSE
pharmaceutical, personal care, paints, rubbers, etc. The global oleochemicals market is valued
at US$22 billion in 2020 and is expected to reach US$ 31.9 billion by 2025 growing at CAGR of
~7.7%. The growth in this sector is mainly derived from the growth in the end use industries Price Performance (%)
majorly being foods, plastics, cosmetics & pharmaceuticals, rubber and coating industries. (%) 1M 3M 6M 1YR

Specialized Business Model with High Entry Barriers Fine Organics 5.7% -1.4% -1.2% 22.7%

FOIL is operating in the industry which has multiple entry barriers protecting the existing Nifty 50 -3.5% -0.4% 21.5% 61.3%
players from competition and fragmentation. Oleochemical derived green additives are used * To date / current date : April 13, 2021

in a very small quantity in the final product, however, any defect in the additives will result in a
disproportionately large amount of finished products being defective. Therefore, these products
Fine Organics vs Nifty 50
generally have a long gestation period for product approval. Another entry barrier is the strict
regulation that the additives manufacturers need to adhere to, as these additives have a direct 300
Fine Organic Nifty 50
impact on human life as well as the environment. The additives industry is governed by strict 250
regulations across the world due to human health and environmental concerns. Due to these
200
high entry barriers, it is difficult for new entrants to compete with the existing players having
decades of experience, products, and established clientele and R&D capabilities. FOIL is India’s 150

largest manufacturer of these green additives and globally it is among top six players. There are 100
no major companies in India apart from FOIL.
50

0
Apr-19 Oct-19 Apr-20 Oct-20 Apr-21

Meet Jain | [email protected]

+91 22 6635 1220
LKP Research
 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Investment Rationale
Olechemical Industry to play an important role in India’s Chemical Growth story
Oleochemicals are chemicals derived from natural oils and fats of plant origins. Oleochemicals can
be categorised into basic oleochemicals such as fatty acids, fatty methyl esters, fatty alcohols, fatty
amines and glycerol, and their downstream derivatives obtained from further chemical modifications
of these basic oleochemicals (where FOIL has a market leadership). These oleochemicals exhibit
special properties such as excellent emolliency, surface activity, emulsifying properties, as well as
beneficial biological properties.

Oleochemicals-based additives value chain

Applications
Palm & Palm kernel oils
Plastic
Basic Oleo Chemicals

Amines
Soyabean oil
Fatty Acids
Vegitable Oil

Additives Food
Mustard oil
Derivatives Amides
Fatty Alcohols Additives Cosmetic
Sunflower oil Esters
Glycerin Additives Pharma
Castor oil Sulphates
Methyl esters Additives Paints &
Coconut oil Alkoxylates
Ink Additives
Rice ran oil
Rubber Additives

Textiles Additives

Oleochemicals-based additives are gaining traction owing to the fact that they are bio-degradable,
safe to use and can substitute harmful additives used in the end products. In recent times, the
awareness about the use of safe products both in terms of health and environment in on a peak
leading to shift in use of safer products. Green chemicals are 100% safe to use as it is derived from
plants as compared to other chemicals that are derived from petrochemicals. Leading industry
players have also started adopting more of the green additives in the manufacture of end products.
For example, Companies such as Unilever, P&G, L’Oreal, among others have modified their mission
statement to incorporate plant based additives in their product and simultaneously balancing/
eliminating the use of hazardous chemicals in their products over the years. The oleochemical-based
additives are used in several industries such as food & beverages, feed nutrition, plastics/polymers,
cosmetics, pharmaceutical, personal care, paints, rubbers, etc.

Parameter Oleochemical based additives Petrochemical based additives

Type Natural Synthetic

Raw material sources Vegetable oil derivatives Crude oil derivatives

Sustainability Yes, as raw materials are from sustainable sources No, as raw materials are derivatives of fossil

Biodegradable Yes No

Environment Friendly, as raw materials are vegetable sources May cause pollution as raw materials are derivatives fossil fuels

The global oleochemicals market is valued at US$22 billion in 2020 and is expected to reach US$
31.9 billion by 2025 growing at CAGR of ~7.7%. The growth in this sector is mainly derived from
the growth in the end use industries majorly being the food, plastics, cosmetics & pharmaceuticals,
rubber and coating industries.

LKP Research 2
 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

End Use Type/Use Indian Market Global Market

Anti-fungal agents/preservatives, Expected to reach US$ 144.8 million by 2023 Expected to reach US$ 2,495.1 million by 2023
Food Additive
Emulsifiers, Specialty additives at a CAGR of 7.36% during 2018-2023 at a CAGR of 5.4% during 2018-2023

Expected at approx. 25,000 tonnes per Valued at approx. US$ 43.82 billion in 2018 and
Slip Additives, Anti-fogging, anti-static,
Plastic/Polymer Additives annum in 2019 and is expected to reach is expected to reach around US$ 61.25 billion
lubricants, anti-scratch, processing aids
around 30,000 tonnes per annum by 2023 by 2025, at a CAGR of 4.9%

Enable manufacturing, achieve long term Valued at nearly US$ 11.16 billion in 2017,
Cosmetic & Pharma Valued at US$ 507.8 billion in 2018 and is
physical stability, inhibit germination, is anticipated to grow at a CAGR of 5.91%
(CosPha) expected to reach US$ 758.4 billion by 2025.
increase chemical stability etc. by 2025

Added to improve compounding & Expected to grow at a CAGR of 6%-7% during

Rubber/TPE Additives
processing of rubber. 2017-22E

Used as anti-settling agents, emulsifiers,

Coatings and other Expected to grow at a CAGR of 8%-10%
thickening, anti-sagging agents, wetting &
Specialty Additives during 2017-22E
dispersing agents etc.

LKP Research 3
 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Opportunities in the End use industry will drive the overall Oleochemical Industry

Plastic/Polymer Cosmetic & Pharma Coatings and other

Food Additive Rubber/TPE Additives
Additives (CosPha) Specialty Additives

• Changing lifestyle, • The growing • Products containing • The growing use • The growing
shifting pattern, e-commerce is multiple benefits of rubber across e-commerce
rising disposable propelling packaging in a single product automotive, business, increasing
incomes and rising industry coupled with such as those with chemical, medical applications,
penetration of RTC/ anti-ageing properties, and other industries technological
the increased demand
RTE convenience moisturizing care and advancements pose as
from the retail
foods, processed sunscreen protection future growth drivers
industry • The growing
and packaged food are gaining popularity for the industry
population with
products among in the skin care
working class • Replacement the increasing
cosmetics industry • Increasing demand
of conventional purchasing power of
the consumers will for plastics
• Surging demand for products widely across industries
• The Indian consumers boost demand for
malt drinks used in construction, like packaging,
are becoming more automobiles, this, in
infrastructure and automobiles, durables
aware about their turn, will increase the
automobile industry etc. will demand for
• The increasing physical appearance rubber demand
with plastic products inks and coatings
demand for premium and ready to invest in
ice creams, frozen grooming process. This additives in India
• Shifting customer • Increasing demand
desserts and other has created a demand
preferences to plastic for rubber additives
dairy products for more herbal, • Packaging sales
products owing to in non-tyre
organic and natural are expected to
their low price, better applications is one of
• Rise in health cosmetic products show growth as
functionality and the primary growth
awareness and drivers. Non-tyre both increased
increased durability consumption and
quality consciousness • The cosmetic category applications include
of consumers in is also gaining adhesives, asphalt, demand for consumer
developed nations • Stringent regulations popularity from goods drives the need
foam and carpet
demands for healthy regarding depletion millennial due to for more sophisticated
backing, damping
packaged foods and recyclability of adoption of western packaging with the
components,
conventional materials culture and lifestyle growing disposable
conveyor belt,
such as metal and and increasing number income
footwear and ball
wood are anticipated of beauty salons bladders, seals,
to drive the demand
O-rings, gasket, gum,
for plastic from
• With growing hoses, and medical
construction industries
affluence, Indians are and pharmaceutical
in insulation, pipes,
able to spend more on devices
cables, floorings,
hygiene and personal
windows and storage
care products.
tanks
Increasing demand
for wide range of
• Shift in consumer cosmetic and health
preference toward care products and
ecofriendly plastic as well as hygiene is
products and expected to grow this
increasing use in segment
food packaging &
compostable bags
• Factors like use of
applications in
novel technology and
emerging markets
ingredients, increased
such as APAC and Rest
life expectancy and
of the World
a growing number
of working women
will create a new
avenue for product
development in the
coming years

LKP Research 4
 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Changing Dynamics of Global Chemical Industry

Apart from the growth in end use industry, the sector as a whole is benefited from the change
in global business dynamics with shift in global supply chain and diversification of manufacturing
facilities from single location like China to other countries. The major reasons for the shift are
global trade tensions and a potential diversification in global manufacturing from China, tightening
environmental regulations in China, rising labor costs in China and the Impact of the Covid-19
pandemic. Post the 2008 recession, a majority of chemical company shifted to China which helped
them grow their market share from 24.1% in 2009 to 40.6% in 2019. The main factor in the growth of
China’s chemical industry was their low cost labour, relaxed environmental norms and government
subsidies. However, in the last few years, the same factors have led to the shift away from China to
other countries like India, Vietnam and Mexico.
Major Reason for the shift in opportunity from China to India
Global Trade Tensions led to decline in US imports from China: The US-China trade tensions has
impacted the global value chain with rising tariffs by US government on goods imported from
China. The Kearney analysis showcases the seasonally adjusted share of US imports from China as a
percentage of total US imports from 14 low-cost Asian countries. In 2013, the year in which Kearney
baselines its analysis, China held 69% of the share. As of Q4 2019, its share was down to 56%—a
decrease of almost 900 bps between 2018 and 2019. During 2018-19, the shift in manufacturing
facility out of China to other low cost Asian countries began benefiting India.
Tightening Environmental Regulations In China: With increasing focus on sustainability amid rising
pollution & global warming, the Chinese government in 2015, has implemented stricter environment
protection norms. This led to temporary shutdown of around 40% of the chemical manufacturing
capacity in China along with over 80,000 manufacturing units charged and fined for breaching
emission limits. Also, the Chinese government mandated the construction of compulsory effluent
treatment plants and imposed a green tax on the chemicals industry to combat pollution. These
measures have resulted in an overall increase in the cost of production, due to capital expenses
incurred towards effluent treatment as well as, a rise in cost of compliance.
Labour Cost On The Rise In China: The labour cost in China has increased at a CAGR of around 19-
20% during 2005-2015 as compared to only 4-5% in India. The major benefit which China had was
lower labour cost which is gradually fading away to other Asian countries like India. Manufacturing
cost in India is 1/3rd of that in China giving a significant competitive advantage.

Manufacturing Labor Costs Comparison 2020 ($/Hour)

49
44

27 28

7
2

India China Japan Singapore Germany USA

Source: EIU, Invest India, Kearney

Covid-19 Pandemic Impact: The ongoing Covid-19 pandemic has disrupted the global supply chain
with erratic lockdown across geographies. This pandemic has led to shortage of critical raw materials
for specialty chemicals, significant price increase in certain specialty chemicals and intermediates
used in everyday products, multinational chemicals companies being unable to source supplies and
declaring force majeure on unfulfilled orders. All these events have led to MNCs actively looking at
alternative manufacturing destinations such as India to diversify away their risks.

LKP Research 5
 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Favorable Policies and environment for Chemical Companies in India

The Indian government has increased its focus on developing a Chemical hub in India with launch of
‘Atmanirbhar Bharat’. Also, the government has announced several policies to increase the production
of chemicals in India which includes 100% FDI allowed under the automatic route in the Chemical
industry for a vast majority of chemicals, four petrochemical and chemical investment zones (PCPIR)
are under development, and policy is being formulated for six plastic parks, skill development has
been a major focus with the establishment of CIPET & CoEs for chemical industry and Production
linked incentives (PLI) are being actively evaluated for the sector. There are several policies
announced by respective states as well to promote chemical production. For e.g. Maharashtra state
offers additional incentives for industrial investments like exemption from electricity duty, waiver of
stamp duty, power tariff subsidy, expansion and diversification incentives for new units.

Overview of Infrastructure Available in Maharashtra

Parameter

• AITL - ₹3200 per Sq.m (State will not increase the land lease rate beyond 5% per
annum for the next 10 years)
Land Rates (Per Sq M.) Average land rate • MIDC - ₹110 per sq. m. per anum (State will not increase the land lease rate
beyond 5% per anum for the next 10 years); ₹2,200 per Sq.m (Upfront payment
for long-term lease for 95 years)

• AITL - ₹41 per year (Service, fire, drainage, environmental protection, ICT
Annual Maintenance Charges charges)
Average
(Per Sq. M)
• MIDC - ₹22 per sq. m. per year

• AITL - 100% Stamp Duty Exemption

Stamp Duty Rates(% terms) • MIDC - 100% exemption for MSMEs & LSIs for acquiring land and term loan;
100% exemption for Special LSI & Mega/ Ultra Mega projects

Freehold or Not. In case of Land

Leasehold Land for 95 years
Lease Policy (No. of years)

Average Rate of Electricity (Rs./KWH) ₹6.71 - Rs. 7.21 per unit

Average Water Rates (Rs./1000 Liters) ₹18 – 25 per 1,000 liters

Utility Rates

Average Natural Gas Prices (available) Rs./

Will be made available
Standard Cubic Meters

Total Railway Connectivity and Infrastructure Aurangabad: 24 Kms / Roha (24 Kms)

2 Airports offering access in proximity: Aurangabad, Navi Mumbai International

Airport Connectivity and Infrastructure
Airport (Proposed)
Logistics Infrastructure National or State Highways connectivity and
National Highway 52, National Highway 66, National Highway 166A offering access
Infrastructure

Both locations having port access in under 50 Kms: Jalna Dry Port (37 Kms), Dighi
Ports Connectivity and Infrastructure.
Port (34 Kms). Further, JNPT ports could also be used.

Various incentives and schemes available under 2019 Incentive policy for various
categories of units including interest subsidy, exemption from electricity duty,
Incentives offered by State waiver of stamp duty, power tariff subsidy, expansion and diversification incentive
Government as per the State for new units, and/or others.
Policy
Incentives/subsidies are dependent on category of units as MSME, Large scale
industries, mega projects.

LKP Research 6
 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Largest manufacturer of Oleo-chemical based additives in India and a key producer globally
FOIL is a pioneer in the Indian oleochemical industry with operations spanning over four decades.
The company is India’s largest oleochemical manufacturer with presence in India as well as the global
markets. FOIL is also one of the key players in the global oleochemical based additives industry
being among the top six global players in the food additives industry and among the top five global
players in the plastic additives industry. FOIL is also the first company to introduce slip additives in
India and is currently the largest producer of slip additives in the world. The company has built six
fully automatic state of the art facilities in India with capacity over 100,000 tonnes per annum. The
company’s manufacturing plants are backed by its strong R&D capabilities and indigenously built
proprietary technology. FOIL is also one of the leading players to develop proprietary technology
to manufacture green additives. The company enjoys the first mover advantage in majority of
the products in the oleochemical industry with only few other small players who manufacture
oleochemical-based additives in India. Along with being a market leader in India, the company also
enjoys competitive advantage over the global players in terms of pricing and costs restricting them
to build a market presence in India.

A Truly Global Player with Diversified Revenue and Customer base

India Outside India

57.7% 56.2% 54.9%

42.3% 43.8% 45.1%

2018 2019 2020

Source: Company, LKP Research

Strong R&D Capability with a Focus on Innovation
Plant Location Capacity (TPA) FOIL is a knowledge intensive company which requires constant innovation backed by robust
research & development capabilities. As we know, the products which the company manufactures go
1st Ambernath Facility 49,500
through various tests and validation to finally be able to sell commercially. Here the R&D efforts place
Badlapur Facility 6,400
significant emphasis on improving the production processes, improving the quality of the products,
Dombivli Facility 8,400 creating new additives and creating downstream products. Started with only 2 products back in
2nd Ambernath Facility 5,000 1973, now the company has scaled up its product portfolio having more than 400 products catering
3rd Ambernath Facility 32,000 to various end user industries such as food, plastics, feed nutrition, cosmetics, pharma, paints etc.

Patalganga facility* 10,000 FOIL has a dedicated team of 17 scientists, engineers and technologist with facility located in Mahape,
Navi Mumbai. The company has its own in house manufacturing facilities with indigenously developed
Total Capacity 111,300
proprietary technology to provide innovative solutions to its customers. The manufacturing facilities
*Patalganga facility – construction work is going
are all located in Maharashtra, India with a total capacity of around 111,300 tonnes per annum.

LKP Research 7
 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

The company has also set up a production facility in Leipzig, Germany with an installed capacity
of 10,000 tonnes per annum (the “German Facility”) which will be owned and operated by a joint
venture company FineAdd Ingredients GmbH, in which the company has a 50% equity interest.
Capitalizing on its strong R&D capabilities the company has also diversified away from the additives
business and started manufacturing & distributing premixes for bakery and confectionary products
and pan release agents. The company has joined hands with Zeelandia International in a 50:50 JV in
the name Fine Zeelandia Private Limited. This JV has set up a manufacturing facility in Patalganga,
India to manufacture these products with a total installed capacity of 10,000 tonnes per annum.
Fine Zeelandia also acts as an exclusive distributor for Zeelandia International Holdings B.V.’s range
of premixes for bakery and confectionary products and pan release agents in India, Sri Lanka,
Bangladesh and Nepal. Fine Zeelandia’s products is marketed at high-class star hotels, large niche
and high-quality bakeries and quick service restaurants.

Strong R&D Capabilities In-House Design and Engineering New Product Developments
• Value Creation; Effective and Efficient technical • In-house capabilities for plant designing and Specialty Additives for:
support to customers engineering • Feed nutrition
• Coatings
• Dedicated team of 17 Scientists,Engineers and • Minimize capital expenditures & quicker • Foods
• Polymers
Technologists commissioning • CosPha

Specialized Business Model with High Entry Barriers

FOIL is operating in an industry which has multiple entry barriers protecting the existing players from
competition and fragmentation. Base oleochemicals are produced from splitting, distillation and
fraction process which is a simple process having many players globally. Technology for producing
base chemicals is also easily available which makes this sub-segment non-specialized and more
of a commoditized product. However, what FOIL does is a step further which requires proprietary
technology, specialized skills and processes to manufacture green additives from these base
chemicals. Being a complex manufacturing process requiring years of R&D in making is very difficult
to replicate giving the established players an added advantage over the new entrants. This sub-
segment of oleochemical enjoys premium margins with only few players dominating the industry
globally including FOIL.
Oleochemical derived green additives is used in a very small quantity in the final product such as
under 1% in weight in plastic materials and under 2% in weight in food. However, any defect in
the additives will result in a disproportionately large amount of finished products being defective.
Therefore, many end users generally take 3 to 5 years to approve a vendor for the supply of these
additives after which the additive manufacturer can supply on commercial basis. Being a lengthy
& expensive product approval processes leads to high switching costs for customers. Due to this,
customers rely on established suppliers, as performance ingredients are very critical to their end
products. FOIL has a first mover advantage in this industry with established customer base and
stringent quality control parameters already in place.
Another entry barrier is the strict regulation that the additives manufacturers need to adhere to. As
these additives have a direct impact on human life as well as the environment, the additives industry
is governed by strict regulations across the world.

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 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Key Industry Factor

New product • Typically requires high R&D expenses

development and product • Only large scale players can afford
formulations • Product formulations kept confidential

Capex costs • Process design costs are very high.

• Only a few players have proprietary technology and not

Process Technology
sold to other new players.

Customer product • Lengthy (3-5 years) and costly, so customers prefer

approval process approved suppliers.

• Additives are typically under 2% weight in their

Quality conscious application materials. Hence customers prefer consistent
customers
quality over the additive prices.

Availability of raw • Raw material availability and procurement costs are

materials crucial to be competitive.

• Nearness of manufacturing plants to emerging markets

Access to markets
will give logistics cost advantages

The green additives industry is an oligopoly with very few players dominating the industry. Due to
these high entry barriers, it is difficult for new entrants to compete with the existing players having
decades of experience, products, and established clientele and R&D capabilities. FOIL is India’s
largest manufacturer of these green additives and globally it is among top six players. There are no
major companies in India apart from FOIL.

List of Major Players in the Oleochemical Business Globally

Segment Company Headquarters
Kerry Group Ireland
Danisco Denmark
Food Additives Palsgaard Denmark
Riken Vitamin Japan
Taiyo Japan

Croda UK
Emery Malaysia
Plastic Additives
PMC Biogenix USA
Peter Greven Germany

LKP Research 9
 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Strong Financial Track Record

FOIL is one of the leading global player in the oleochemical industry and the largest player in India.
The company has built a diversified client base and product portfolio which helped them achieve a
strong financial performance over the years. FOIL has grown its topline at a CAGR of c.11% during
2013-20 while its EBIDTA has grown at a CAGR of c. 25% during the same period.

Strong Topline Performance - CAGR of c.11%

Net Sales
1,060 1,038

856
779
660
615
567
496

2013 2014 2015 2016 2017 2018 2019 2020

Source: Company, LKP Research

The company enjoys higher operating margins as it is more of a knowledge intensive business rather
than capital intensive. The product development takes time, however, once developed and approved
provides a higher margin to the company as the operating leverage kicks in. FOIL has sustained its
margins at higher teen figures in the last seven years and we expect this to sustain in the range
of 20-25% going forward. Green additives are specialized products catering to niche end user
products and going forward, this industry is expected to play a major role in Indian Chemical story.
The company has grown its PAT margins at a CAGR of c.34% during 2013-20 indicating a significant
margin expansion during this period. The PAT margins have expanded by ~1185bps from 4% in 2013
to c.16% in 2020 and we expect this to expand further to high teen figure in next few years.

Superior Margin Profile with scope to improve further

EBIDTA Margin % PAT Margin %

23.2% 23.2% 23.8% 23.8%
22.0% 21.6%
21.0%
18.3% 18.3% 18.6% 18.4% 18.8%
17.7% 17.8% 17.7%
15.9% 16.0%
13.1%
12.9%
10.4% 11.0% 11.0%
9.9% 9.5%
8.9%

4.0%

2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Source: Company, LKP Research

Higher operating margin has helped the company to generate higher cash flows which enabled the
company to have a negative net debt in FY20. The operating cashflow to EBIDTA ratio touched almost
100% in FY20 indicating a superior operational performance in terms of margins as well as working
capital efficiency. The superior margin profile has also aided FOIL in earning higher return ratios.
Over the last five years, the company has been able to maintain its average ROE & ROCE at 26% and
31% respectively.

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 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Net Debt to Equity Industry Best Return Ratios

ROCE ROE

0.48 34%
33% 33%
30% 31%
29% 27% 28% 27%
26%
0.24 24% 24%
22%
0.10 0.04 19%
0.07
-0.14
-0.23

2015 2016 2017 2018 2019 2020 H1FY21 2015 2016 2017 2018 2019 2020 H1FY21

Fixed Asset Turnover (x) OCF to EBIDTA

OCF to EBIDTA
99.2%
10.23
8.67 72.1%
61.5% 62.9% 62.8% 63.6%
7.13 7.31 56.4%
6.18
5.75
5.20 32.7%
4.66

2018 2019 2020 2021E 2022E 2023E 2024E 2025E 2018 2019 2020 2021E 2022E 2023E 2024E 2025E

Source: Company, LKP Research

Outlook & Valuation

FOIL is the largest player in the oleochemical industry in India and among top six globally.
Oleochemical based additives are a greener alternative to the petrochemical based additives and
as the entire world is moving towards more sustainable resources; we believe the oleochemicals
are a multi-year growth story. Primary raw material for producing green additives are the vegetable
oil which can be easily sourced from domestic as well international market due to their abundant
supply. Unlike the petrochemical based additives which have limited sources and are prone to price
volatility. FOIL has been in this industry for more than four decades and has established a significant
knowhow, raw material source and clientele which are one of the most important factors in this
industry. The company’s product portfolio caters to various end user industries but predominantly
to polymer and food industry. Also, the company has expanded its product portfolio to produce
niche products which can be used in end user sectors such as into feed nutrition, coatings, rubbers,
etc. having a higher margin profile. Introduction of these new products has helped the company in
improving its gross margins from ~34% in 2013 to ~43% in 2020.
FOIL has recently set up two new plants, one in Ambernath (commissioned – 32,000 tpa) and other
in Patalganga (partly commissioned – 10,000 tpa) which has significantly increased its producing
capacity from 69,300 tonnes per annum to 1,11,300 tonnes per annum. The company has a
strong track record of robust financial performance with margin expansion and superior cash flow
generation. We expect this performance to continue going forward aided by newer products &
geographies along with higher traction for oleochemical-based additives in end user products.
We Initiate Coverage on FOIL with a BUY recommendation and a 12 months target price of ₹3,232
valued using the DCF method.

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DCF Model

Particulars (₹ In Crs) Mar-21 Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 Terminal year
Net income 144.6 211.4 274.6 334.4 393.1 466.7
Depreciation 31.1 33.3 35.7 38.0 40.5 43.0
Capital Expenditure -20.0 -35.0 -35.0 -35.0 -35.0 -35.0
Working Capital Changes -19.6 -54.0 -59.2 -67.7 -69.9 -79.5
Interest (After Tax) 2.9 2.3 1.7 1.3 1.5 1.8
FCFF 139.0 157.9 217.8 271.0 330.2 396.9 11,691.6
Discounted cash flow 139.0 143.7 179.0 200.8 221.2 240.4 8,665.4

Sum of discounted cash flows-Firm value 9,789.5

Less Debt 124.7
Add: Cash and Investment 243.2
Equity Value 9,908.0
Shares outstanding (in Crs) 3.07
Equity Price (₹) 3,232

Key Assumptions
Particulars %
WACC 10.5%
Long term Growth rate 7.0%

Key Managerial Personnel

Name Designation Description

Holds a M.Sc. Tech- Master of Science & Tech (Oils) from Institute of Chemical Technology (formerly
Mr. Prakash Kamat Executive Director & Chairman UDCT). Associated with the group since inception having experience in product development, process
technology and R&D

Joined in 1973. Holds a Bachelor’s degree in Science. Played a key role in establishing quality control
Mr. Mukesh Shah Managing Director
and marketing

Joined in 1986. Holds a Master’s degree in Science. Instrumental in creating a strong vendor-partner
Mr. Jayen Shah Executive Director and CEO
network

Joined in 1989 and led several initiatives like ERP, CRM, etc. Key role in the development of the first slip
Mr. Tushar Shah Executive Director and CFO
additive facility

Joined in 2009. Holds a Bachelor’s degree in Science from

Mr. Bimal Shah Executive Director Purdue University and a Master’s degree from Boston College. Led initiatives for new projects and
processes

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 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Business Overview
FOIL is India’s largest manufacturer of Oleochemical-based additives and is among the top six
global players. The company manufactures more than 400 additives which find its application in
end user industries such as food & beverage, plastics/polymer, cosmetic, pharmaceutical, rubber,
paints & coatings, feed nutrition etc. Majority of the company’s revenue comes from the food and
plastic additives business which contribute around 70-80% of the revenue. The company has six
manufacturing facilities all located in Maharashtra, India which is also in close proximity to the
JNPT port. The company’s production facility is back by robust R&D and innovation with facility in
Maharashtra itself.

Diversified Product Portfolio with Multiple End-users

Food Additives Polymer Additives Additives for Coatings

Used as anti-settling agents,

Additives for maintaining emulsifiers, thickening/
the quality and freshness of anti-sagging agents, wetting
Used for various and dispersing agents,
the food products, impart
functionalities in wide range defoamers, biocides and
better product structure
of plastic products made anti-mar waxes for use
integrity and helps in in coating applications.
from various polymers
increasing the shelf life of Capable of improving the
food products appearance and durability
of a coating

Emollients for Cosmetics Feed Nutrition Additives Specialty Additives

Enables manufacturing of
products with different
structures like creams, gels, Replaces harmful
pastes, lotions etc. Aids in antibiotics and improves A wide range of
achieving long term physical feed efficiency and specialtyperformance
stability for transport imparts several technical additives for various
and storage. Increases advantages to the end industries
sensory perception and the products
chemical stability of the
sensitive active agents

Source: Company, LKP Research

Leading Player in Oleochemical Industry

Source: Company, LKP Research

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 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

The company has a strong distribution network with 750+ direct customers (i.e., end-users of
our products) and 170+ distributors (who sell their products to more than 5,000 customers) from
70+ countries. The direct customers are multinational, regional and local players manufacturing
consumer products and petrochemical companies and polymer producers globally. Company’s
plastics additives and specialty additives are also used in the packaging of foods and other fast
moving consumer goods.

Key Financials
YE Mar 2018 2019 2020 2021E 2022E 2023E 2024E
Total sales(₹ Crore) 855.81 1,060.33 1,038.08 1,100.26 1,318.60 1,554.39 1,817.13
EBITDA margins (%) 18.5% 22.0% 23.2% 18.6% 21.6% 23.2% 23.8%
PAT margins (%) 11.1% 12.9% 15.9% 13.1% 16.0% 17.7% 18.4%
EPS (₹) 31.09 44.43 53.74 47.16 68.93 89.55 109.04
P/E (x) 80.95 56.65 46.83 53.37 36.51 28.10 23.08
P/BV (x) 19.51 15.43 12.47 10.59 8.56 6.85 5.51
EV/EBITDA (x) 48.97 33.12 31.73 36.76 25.98 20.06 16.28
ROE (%) 24.10% 27.24% 26.63% 19.84% 23.44% 24.37% 23.87%
ROCE (%) 39.02% 38.96% 30.77% 24.79% 30.49% 32.44% 31.72%

Key Risks & Concerns

Raw material cost fluctuation
The company’s primary raw materials are derived from vegetable oils, including rapeseed oil, palm
oil, palm kernel oil, sunflower oil, castor oil, soybean oil, rice bran oil. The company does not enter
into supply contracts that are longer than six months, and therefore, are subject to the risk of
increases in the costs of raw materials. The global vegetable oil prices are determined by demand in
biofuel & its consumption. However, prices of oleochemical-based additives base raw materials, i.e.,
vegetable oils, are relatively less volatile compared with other commodity prices.
Geopolitical & Forex Risk
The company generates around 55% of its revenue from the international market. Also the company
imports substantial amount of raw materials from countries like Indonesia, Malaysia etc. Imposition
of duties on essential raw materials can increase the company’s costs thereby impacting the margins.
For e.g. the government of India has imposed tax on import of Crude Palm oil and Crude Soyabean
at 35.75% and 35% respectively. Also fluctuations in the exchange rates can affect the company’s
margin profile.
Failure to comply with quality standards
Oleochemical based additives even though makes up only a small part of the end products, however,
they have a significant impact at the molecular level in the end product. Any defect in the company’s
products would result in a disproportionately large amount of finished products being defective.
Therefore, any lapse in the quality of the company’s products could result in the company being
removed from their end-user customers’ ‘approved supplier’ lists, which would have a material
adverse effect the business, financial condition and results of operations.

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 FINE ORGANIC INDUSTRIES LTD | Initiating Coverage

Income Statement

₹ Cr 2018 2019 2020 2021E 2022E 2023E 2024E

Total Revenue From Operations(Net) 855.8 1,060.3 1,038.1 1,100.3 1,318.6 1,554.4 1,817.1
% Growth 23.9% -2.1% 6.0% 19.8% 17.9% 16.9%
Expenses
Cost Of Material Consumed (incl. changes in inventory) 554.2 649.9 604.4 689.0 785.9 901.5 1,053.9
Purchases of stock–in-trade 3.6 5.3 4.9 4.8 5.8 6.8 8.0
Employee Benefit Expenses 51.6 62.8 72.5 80.8 96.9 114.2 123.6
Other Expenses 88.0 108.8 115.8 120.8 144.8 170.6 199.5
Total Expenses 697.4 826.7 797.6 895.4 1,033.3 1,193.2 1,385.0
EBITDA 158.4 233.6 240.5 204.8 285.3 361.2 432.2
EBITDA Margin 18.5% 22.0% 23.2% 18.6% 21.6% 23.2% 23.8%
Other Income 16.0 19.8 20.2 25.6 31.5 38.9 48.2
Depreciation and Amortization Expenses 20.0 17.5 34.7 31.1 33.3 35.7 38.0
Share of loss of joint ventures (net of tax) - -3.4 -5.1 -2.2 2.0 4.8 6.2
EBIT 154.3 232.6 220.9 197.1 285.5 369.2 448.6
EBIT Margin % 18.0% 21.9% 21.3% 17.9% 21.7% 23.8% 24.7%
Finance Cost 3.2 1.8 4.8 3.9 3.1 2.3 1.8
Profit / (Loss) before exceptional items and tax 151.2 230.8 216.1 193.2 282.5 367.0 446.8
Exceptional Items - - - - - - -
PBT 151.2 230.8 216.1 193.2 282.5 367.0 446.8
PBT Margin % 17.7% 21.8% 20.8% 17.6% 21.4% 23.6% 24.6%
Tax Expense 55.9 94.5 51.3 48.6 71.1 92.4 112.5
Profit / (Loss) for the year 95.3 136.3 164.8 144.6 211.4 274.6 334.4
PAT Margins % 11.1% 12.9% 15.9% 13.1% 16.0% 17.7% 18.4%
Source: Company, LKP Research

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Balance Sheet

₹ Cr 2018 2019 2020 2021E 2022E 2023E 2024E

Equities And Liabilities
Shareholders’ funds
Share capital 15.3 15.3 15.3 15.3 15.3 15.3 15.3
Reserves and surplus 380.3 484.9 603.6 713.3 886.5 1,111.5 1,385.5
395.6 500.2 618.9 728.7 901.9 1,126.9 1,400.8
Non-Controlling Interest 0.0 0.0 0.1 0.1 0.1 0.1 0.1
395.6 500.3 618.9 728.7 901.9 1,127.0 1,401.0
Non-current liabilities
Long term Borrowings - 92.8 91.5 58.2 24.9 - -
Other Longterm Liabilities - 3.9 7.6 8.0 9.6 11.3 13.2
- 96.7 99.0 66.2 34.5 11.3 13.2
Current liabilities
Short-term borrowings 53.6 20.2 - - - - -
Trade payables 69.9 53.4 85.8 97.6 111.4 127.8 149.4
Other Financial Liabilities 1.1 16.5 34.9 35.0 35.3 27.4 2.9
Short term Provisions 2.2 4.5 3.3 3.5 4.2 4.9 5.7
Current Tax Laibilities (Net) 5.0 7.3 4.6 4.6 4.6 4.6 4.6
Other current liabilities 2.4 3.6 5.6 5.9 7.1 8.4 9.8
134.2 105.4 134.1 146.6 162.6 173.1 172.4
Total 529.8 702.4 852.1 941.6 1,099.1 1,311.4 1,586.6

ASSETS
Non-current Assets
Fixed Assets
Tangible Assets 88.1 77.8 215.9 211.0 213.0 212.5 209.5
Capital work-in-progress 31.7 106.3 5.8 - - - -
Intangible Assets 0.3 0.3 0.9 0.5 0.2 - -
Financial Assets:
Non-current investments 10.61 9.97 32.80 32.80 32.80 32.80 32.80
Long-term loans and advances 0.97 1.01 1.00 1.00 1.00 1.00 1.00
Other fiancical assets 0.43 2.08 3.01 3.19 3.83 4.51 5.27
Deffered Tax Assets (Net) 4.85 0.20 6.72 6.72 6.72 6.72 6.72
Other non-current assets 59.71 70.49 61.65 65.34 78.31 92.32 107.92
196.6 268.2 327.8 320.5 335.9 349.8 363.2
Current Assets
Inventories 89.1 89.3 131.7 149.9 171.1 196.3 229.5
Financial Assets:
Trade Receivables 146.5 155.6 132.3 140.3 168.1 198.2 231.6
Cash and Cash Equivalents 10.7 108.1 205.7 73.7 57.9 61.2 95.5
Other Balances with Banks 1.7 1.1 4.8 204.8 304.8 434.8 584.8
Other financial assets 0.4 0.3 0.3 0.3 0.4 0.5 0.6
Current Tax Assets(net) 3.8 4.4 7.0 7.0 7.0 7.0 7.0
Other current assets 81.0 75.4 42.5 45.0 54.0 63.6 74.4
333.2 434.2 524.3 621.0 763.2 961.5 1,223.4
Total 529.8 702.4 852.1 941.6 1,099.1 1,311.4 1,586.6

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Cash Flow

₹ Cr 2018 2019 2020 2021E 2022E 2023E 2024E

CASH FLOW FROM OPERATING ACTIVITIES

Profit / (Loss) before Tax 151.2 230.8 216.1 193.2 282.5 367.0 446.8
Depreciation and Amortization 20.0 17.5 34.7 31.1 33.3 35.7 38.0
Interest (net) 1.6 0.0 (2.3) (8.4) (15.2) (23.8) (33.3)
Other Operating Activities (13.2) (14.4) (9.7)
Working capital changes (57.0) (15.9) 61.7 (19.6) (54.0) (59.2) (67.7)
Income tax paid (50.9) (86.1) (62.0) (48.6) (71.1) (92.4) (112.5)
NET CASH GENERATED BY OPERATING ACTIVITIES (A) 51.8 131.9 238.5 147.6 175.4 227.3 271.3
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditure (40.0) (81.7) (71.9) (20.0) (35.0) (35.0) (35.0)
Change in Investments (0.2) (4.2) (28.8) (200.0) (100.0) (130.0) (150.0)
Other Investing Activities (11.3) (7.5) 16.6 12.3 18.3 26.1 35.1
NET CASH GENERATED / (USED) IN INVESTING ACTIVITIES (B) (51.5) (93.4) (84.0) (207.7) (116.7) (138.9) (149.9)
CASH FLOW FROM FINANCING ACTIVITIES
Interest paid (2.1) (3.3) (6.3) (3.9) (3.1) (2.3) (1.8)
Dividend paid including DDT (27.7) (25.8) (40.7) (34.8) (38.2) (49.6) (60.4)
Other Financial Activities 26.2 88.1 (9.9) (33.3) (33.3) (33.3) (24.9)
NET CASH GENERATED / (USED) IN FINANCING ACTIVITIES (C) (3.6) 59.0 (56.9) (71.9) (74.5) (85.1) (87.1)
Net Change in Cash (A+B+C) (3.3) 97.5 97.5 (132.0) (15.8) 3.3 34.3
Cash & cash equivalents at the end of the year 10.7 108.1 205.7 73.7 57.9 61.2 95.5
Source: Company, LKP Research

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Financial Ratios

2018 2019 2020 2021E 2022E 2023E 2024E

Per Share data (₹)

EPS 31.09 44.43 53.74 47.16 68.93 89.55 109.04
Cash EPS 37.63 50.13 65.05 57.31 79.80 101.20 121.44
BV/Share 129.02 163.16 201.86 237.66 294.15 367.53 456.89
DPS 7.00 11.00 7.00 9.43 10.34 13.43 16.36
Payout (%) 23% 25% 13% 20% 15% 15% 15%
Growth Ratios (%)
Sales Growth 5.98% 22.63% -2.10% 5.99% 19.84% 17.88% 16.90%
EBIDTA Growth 9.33% 47.46% 2.94% -14.82% 39.28% 26.60% 19.65%
EBIT Growth 23.29% 50.72% -5.02% -10.79% 44.86% 29.32% 21.49%
EBT Growth 25.16% 52.64% -6.35% -10.59% 46.17% 29.92% 21.76%
PAT Growth 22.41% 42.93% 20.95% -12.26% 46.17% 29.92% 21.76%
Valuation Ratios (x)
P/E 80.95 56.65 46.83 53.37 36.51 28.10 23.08
Cash P/E 66.89 50.20 38.69 43.92 31.54 24.87 20.72
EV/Sales 8.97 7.30 7.35 6.84 5.62 4.66 3.87
EV/EBITDA 48.97 33.12 31.73 36.76 25.98 20.06 16.28
P/B 19.51 15.43 12.47 10.59 8.56 6.85 5.51
Mcap/Sales 9.02 7.28 7.43 7.01 5.85 4.96 4.25
Working Capital Ratios (x)
Fixed Asset Turnover Ratio 7.13 5.75 4.66 5.20 6.18 7.31 8.67
Asset Turnover Ratio 1.63 1.51 1.22 1.17 1.20 1.19 1.15
Inventory Days 58.32 49.73 78.88 78.88 78.88 78.88 78.88
Trade Receivables Days 61.84 53.57 46.53 46.53 46.53 46.53 46.53
Trade Payables Days 45.77 29.74 51.37 51.37 51.37 51.37 51.37
Profitabilty Ratios (%)
EBITDA Margin 18.5% 22.0% 23.2% 18.6% 21.6% 23.2% 23.8%
EBIT Margin 18.0% 21.9% 21.3% 17.9% 21.7% 23.8% 24.7%
EBT Margin 17.7% 21.8% 20.8% 17.6% 21.4% 23.6% 24.6%
PAT Margin 11.1% 12.9% 15.9% 13.1% 16.0% 17.7% 18.4%
Return Ratios
ROE (%) 24.10% 27.24% 26.63% 19.84% 23.44% 24.37% 23.87%
ROCE (%) 39.02% 38.96% 30.77% 24.79% 30.49% 32.44% 31.72%
ROA (%) 17.99% 19.40% 19.34% 15.36% 19.23% 20.94% 21.07%
Liquidity & Leverage Ratios (x)
Current Ratio 2.48 4.12 3.91 4.24 4.69 5.55 7.10
Interest Coverage Ratio 48.93 126.48 45.83 50.97 93.16 161.94 252.66
Net Debt/Equity Ratio 0.28 0.14 0.00 (0.12) (0.21) (0.30) (0.38)
Debt/EBIDTA Ratio 0.34 0.55 0.52 0.45 0.20 0.07 -
Financial Leverage 1.34 1.40 1.38 1.29 1.22 1.16 1.13
Gearing Ratio (%) 21.4% 10.6% 0.0% -9.7% -18.0% -26.8% -34.2%
Source: Company, LKP Research

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