Listed in July 2018 at Rs 815, a 4 per cent premium over its IPO price, the stock of this Mumbai-based chemical manufacturer has already given nearly 280 per cent return in less than 3 years.
A debt-free company, it has seen revenue grow at a CAGR of 11 per cent from FY13-20, while its Ebitda has expanded at a CAGR of 25 per cent during this period. Operating margins expanded faster due to scale benefits and an improving product mix. Over the last five years, the company has been able to maintain an average ROE at 26 per cent and ROCE at 31 per cent.
The stock is Fine Organic Industries. With a market capitalisation of Rs 9,500 crore, it is the largest player in the oleochemical industry in India and among the top six players globally. A substitute for petrochemicals, oleochemicals are manufactured from natural sources. The green chemical is used in several industries such as plastics, packaging, foods, cosmetics, pharmaceutical, paints, rubbers, etc. Food and polymer additives alone contribute 60-70 per cent of the company’s revenues.
In its September update, PMS firm Marcellus Investment Managers, run by Mukherjea, had informed investors that it has added Fine Organic to its Little Champs portfolio, a collection of 15-20 stocks that are leaders in their respective segments.
“We have been steadily building up our positions further in Fine Organics over the last year or so. They make emulsifiers and anti-fungal agents that go into breads and baked products, which we all consume. It is the largest player in that market of supplying food emulsifiers and anti-fungal agents for baked products. They also have a very strong presence in supplying specific inputs that to into the production of aerated drinks,” Mukherjea told ETNow.
The company is gradually finding a global market, where environmentally conscious western consumers do not want to have products with animal fat and petrochemical based inputs.
“My reckoning is beyond the domestic monopoly that gives them 30-35 per cent ROCEs and consistent growth of 20 per cent in their business, it is a powerful export franchise as well. The Indian promoters have built this up with lots of hard work over 50 years. This could potentially become a multibagger play in our portfolio,” said the author of Coffee Can Investing.
Oleochemicals have strong entry barriers, as these green additives have a long gestation period for product approvals.
Fine Organics has recently set up two new plants, one in Ambernath and another in Patalganga, which have significantly increased its production capacity from 69,300 tonnes per annum to 1,11,300 tonnes.
Hidden Treasure
Shareholding pattern of the stock reveals retail investors are yet to discover this gem even though four mutual funds have lapped it up already. As on March 31, 2021, MF shareholding stood in the company stood at 13.2 per cent.
FPIs, including Goldman Sachs, held nearly 6 per cent stake in Fine Organics. On the other hand, retail shareholders, those having investments worth less than Rs 2 lakh, held just 4 per cent. Promoter shareholding is high at 75 per cent.
Brokerage firm LKP Securities recently initiated coverage on the stock. It estimates the earnings per share or EPS of Life Organic to double to Rs 109 by FY24. Revenue is expected to increase from Rs 1,100 crore (FY21 estimated) to Rs 1,817 crore in three years. ROCE is expected to remain above 30 per cent.
Life Organics has a strong distribution network with over 750 direct customers from more than 70 countries. A Marcellus note says the shifting preference across the world towards green additives augurs well for the company, which has a first mover advantage and market leadership position in the segment.
Key risks to the company’s potential include regulatory actions and fluctuations in raw material costs. There could be a geopolitical and forex risk as well, as the company imports a substantial amount of raw materials from countries like Indonesia and Malaysia and generates 55 per cent of its revenues from exports.
