Thread by @HarshGandhi_CPA

A thread on Fairchem Organics

1.The Company is in the business of oleochemicals and nutraceuticals. 97% of the total revenue comes from oleochemicals. Hence, in this analysis, I have ignored Nutraceuticals.

Now what are the oleochemicals and where are they used? (1/n)

Olechemicals are basically derived from plants, processed through and end products are different fatty acids which are used mainly in Paints, Ink, Amines, Soaps detergents, personal care and pharmaceutical industries.

2.This is the ONLY company who has mastered and developed innovative manufacturing process to produce fatty acids by using the by products/waste generated by vegetable edible oils. Yes, they basically manufacture oleochemicals from the waste products.

So naturally their cost of producing is at the lowest as compared to any other competitors and this is their moat.

3.The main two chemicals which company produces are Linolic Acid and Dimer Acid which forms majority part of their revenue.

These two products are used in Paints, Amines, Textiles and cosmetics.

*Linolic Acid*

For Paints, this chemical acts as a key ingredient for fast protective coating. Hence, their end product has critical application in paint industry and big players obviously do not want to

compromise on quality.

Asian Paints is their main client for Linolic Acid.

This is the ONLY company to manufacture this product of such quality in India.

*Dimer Acid*
Dimer Acid is used in anti corrosion coating. It also used in stabilisation of lubricant used in Rollingmil

This is the ONLY company that manufactures this product in India.

4.The company enjoys huge cost advantage because they produce these two products from waste and due to this state of art technology, there are strict entry barriers.

5.CAPEX
The company has increased capacity from 45k to 72k MTPA in FY21 and the new capex is ongoing which will increase the capacity to 120K by FY22.

All capex have come through internal accruals except for recent new expansion for which they have taken a debt.

With the new capex coming online, their revenue will DOUBLE.

The company is completely backward integrated because it uses waste as raw materials for its main products hence margins are not fluctuating.

6.Financial Metrics
5 years analysis (CAGR)
Revenue has grown by 14%
Ebitda grown by 24%
Pat grown by 36%

Ebitda margin from 11% to 18% now. Q1FY22 EPS is 24%.
PAT margins from 5% to 11%.

Debt to equity at 0.28
Roce of 30%.

Consistently generating good cash from operations and have been generating good free cash flows over past 3 years.

*Important note*
The company announced Q1FY22 result recently. The EPS is 17 as compared to EPS of 32 of FY21 full year.

Once the new capacity will come online, EPS can shoot significantly.

Market cap - 2k cr
Sales FY21 - 400 cr
Sales FY22E - 700 cr
Market cap to sales - 3x

7.Shareholding

Paid up capital - 13cr
Promoter holding - 74%

This is really good small cap company having a moat in their manufacturing process, their products having critical application in end industry, new capex, and good promoters.

Note:
This is not an investment advise. Purely for educational purpose. Kindly do your own due diligence before investing.

#FairchemOrganics

@NeilBahal your validation or any improvement is appreciated.