Verdict: A Fine Pick

IPO Snapshot:

Fine Organic Industries Limited is entering the primary market on Wednesday 20^th June 2018, with an offer for sale (OFS) of up to 77 lakh equity shares of Rs.5 each by promoters, in the price band of Rs. 780 to Rs. 783 per share. Representing 25% of the post issue paid-up share capital, total issue size is Rs. 600 crore at the upper end of the price band. Issue closes on Friday 22^nd June and listing is likely on 2^nd July.

Company Overview:

Fine Organic Industries is India’s largest oleo-chemical-based additives maker and the world’s largest slip additives maker, used in specialty application by plastics, food, cosmetics, ink, paints, rubber and pharmaceutical industries. With a wide portfolio of 387 products sold under ‘Fine Organics’ brand, company’s current manufacturing capacity stands at 64,300 TPA, spread across 3 locations near Mumbai, Maharashtra. It is embarking upon greenfield expansion at 4 locations (3 in India, 1 in Germany) to augment capacity by 67,000 TPA over the next 2 years, with an investment of Rs. 270 crore, to be funded via internal accruals and debt (no IPO proceeds). This includes a 10,000 TPA plant in Germany and a Rs. 55 crore forward integration unit in Mumbai, with Dutch partner Zeelandia (in an equal JV for bakery pre-mixes). Company serves 631 direct customers and 127 distributors (who in-turn cater to over 5,000 customers) domestically and in 69 countries worldwide. Exports account for 60% of revenue, while additives for plastic industry makes up for 70% of company’s revenues.

Financial Performance:

During the 3 years period between FY14-17, company’s revenue increased at a CAGR of 13% to Rs. 815 crore, from Rs. 568 crore in FY14. Since raw material costs account for over 60% of revenue, EBITDA margins have fluctuated between 18-23%, with FY17 EBITDA seen at 18.3%. Input cost pressures is a key risk, in addition to forex currency movements, due to higher share of export revenues. Hence, during FY14-17, PAT growth was lower at 8% CAGR, to Rs. 78 crore in FY17, leading to net margins of 9.6%. However, reducing debt levels (net debt of Rs. 98 crore as of 31-3-14 declined to Rs. 2 crore as of 31-12-17) partly aided net margins, thanks to reduced interest outgo.

Company’s 9MFY18 revenue stood at Rs.590 crore, while EBITDA margin came at 19.1%, as the company undertook cost control measures to restrict impact of rising raw material prices – which jumped from 61% of revenue in FY17 to 65% in 9MFY17, as import tax on crude palm oil (up from 7.5% to 30%) and refined palm oil (up from 15% to 40%) increased between Aug to Nov 2017. Net profit for 9MFY18 stood at Rs.61 crore, leading to an EPS of Rs. 26.38, against FY17 EPS of Rs.25.56. 

As of 31-12-17, company’s net worth stood at Rs. 362 crore (BVPS Rs.118) with total debt (all short term) of Rs. 28 crore and cash equivalents of Rs. 26 crore. Thus net debt is only Rs. 2 crore, which is very healthy, so as to not strain the balance sheet, as future expansion will be partly debt-funded. Outstanding debtor and inventory days are contained below 45 days, which is another positive, while FY17 RoNW was strong at 24.7%. 

Objects of Issue and Shareholding Pattern:

Since the IPO is a 100% OFS, no proceeds will flow into the company. Promoter shareholding will decline to 75%, post listing. It exhibits a lot of confidence that the company is doubling capacity over the next 2 years, without any equity dilution in the ensuing IPO. Two bits here: ability to market additional produce and second, to service fresh debt from cash flows of new projects.   

Valuation:

At 783, company’s market cap and enterprise value (EV) will be Rs. 2,400 crore. Estimating FY18 EBITDA and PAT of Rs.165 crore and Rs. 90 crore respectively, EV/EBITDA and PE multiples are 15x and 27x respectively. Per se, these multiples appear on the higher side. However, on broad peer comparison, the picture is a bit different.

While there are no direct peers to the company as the listed speciality chemicals universe is wide spread, issue can be broadly benchmarked with 2 listed entities catering to FMCG/ food/cosmetics industry: 

1. Galaxy Surfactants, having debuted on the bourses early this year, makes performance and specialty care surfactants and reported FY18 revenue, EBITDA and PAT margins of Rs. 2,434 crore (up 13% YoY), 12.2%, 6.5% respectively. With current market cap of Rs. 4,500 corre, share is trading at historic EV/EBITDA of 16x and PE multiple of 28x. Despite lower margins vis-à-vis Fine Organic, Galaxy’s valuation multiples are identical to the former.
2.  S H Kelkar, making fragrances and flavours, reported FY18 revenue, EBITDA and PAT margins of Rs. 1,020 crore (down 4% YoY), 16.7%, 9.1% respectively. With current market cap of Rs. 3,300 crore, share is trading at historic EV/EBITDA of 20x and PE multiple of 35x. While higher margins of S H Kelkar support higher valuations, of late, its growth rates have tapered off, which is quite contrary to Fine Organic, on course to double capacity over the next 24 months.

   Thus, issue pricing appears fair.

Conclusion:

Near debt free status, healthy margins, high entry barriers (as typical additive approval time ranges between 3-5 years) are key positives for the company, catering to the growing consumption related industries. Since issue pricing is more-or-less in line with listed peers, one can expect moderate listing gains. If one has a longer view, the stock looks very promising. Hence, advised to add this stock to one’s portfolio, to witness some ‘fine’ gains over the medium-to-long term. 

Disclosure: No interest.