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#FairchemOrganics Q1 23 Concall Highlights

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Introduction
1. Fairchem Organics Ltd. is engaged in the business of manufacturing of Oleo Chemicals and Nutraceuticals, since the last 25 years.

2. Oleochemicals means the chemicals derived from vegetable oil. The company’s key oleochemical products include dimer fatty acid,

linoleic fatty acid and nutraceutical products include Mixed Tocopherols and sterols.

3. Nutraceutical falls in broad guidelines which are part of vitamins. Mixed Tocopherol is an antioxidant as well as used as a raw material in the manufacture of natural vitamin E.

4. The company has a state -of-the-art Manufacturing unit in Gujarat which was set up in 1995 and has over the years gone through various stages of expansion, backward integration, debottlenecking, energy savings and

technological advancements to create a one of its kind world class facility.

5. Over the last year the company has expanded their capacity from 40,000 MTPA to 1,20,000 MTPA currently.The expansion was little bit delayed between 72,000 MTPA to 1,20,000 MTPA because of covid

due to which certain critical equipment were not able to reach on time. But now all the expansion is completed.

6. The capacities company is referring to is measured in terms of input of raw materials and not based on the output of the final product.

7. The company has done capacity expansion utilizing minimum capex which was funded through internal accruals.

8. Fairchem is the one of the only manufacturers of Linoleic Acid and Dimer Acid in India, which are the major part of the overall revenues.

In Dimer fatty acid, Fairchem is the only manufacturer in India and balance is being imported. Also in Linoleic fatty acid Fairchem is the only manufacturer in India, a pseudo Linoleic acid is being manufactured

by a couple of other players which is sold more to the unorganized players in the paint industry.

9. The products that Fairchem manufactures finds application in paints, inks, amides, cosmetics, lubricants etc. whereby the company’s main product has application in a large

number of different industries.

10. The mixed tocopherol concentrate and sterol concentrate of nutraceutical stream is being used by the FMCG companies which Fairchem is currently exporting to US based companies since last more than 20 years.

11. The company has plans for forward integration whereby it will be further upgrading the mixed tocopherol streams to manufacture Tocopherol 50 and a product called sterol 90 which goes in making of corticosteroids In this process a byproduct

called methyl ester will get generated which is commonly called as biodiesel.

12. Another co-product which is coming out from the Dimer fatty acid stream called monomer fatty acid is also going to get upgraded for manufacturing of stearic acid and iso-stearic acid.

Iso-stearic acid will be manufactured for the first time in India.

13. On the operational front EBITDA Margin improved during the quarter due to company’s effort of controlling the raw material cost to a certain extent due to economies of scale kicking in due to

the higher volumes on the back of higher capacity utilization of the new plant capacity

14. The company has completed its capacity expansion and the increased capacity in terms of throughput of raw materials of 1,20,000 MTPA is operational now as at the end of June 2022.

Q&A Highlights
1. Margins of 18% are sustainable in the long run because of two reasons-
1) Economies of scale
2) Forward integration

2. The company can process multiple raw materials coming out of soft oils. Typically soft oils are oils like soya, sunflower, corn, vape,

canola, rice, groundnut etc. soya and sunflower being the major raw materials they use these RM but the company can also utilize other raw materials. About 50% of the raw material is derived from soya and sunflower oil.

3. Current capacity utilization is 65-70%. Every year the company intends to increase volumes by 10-15% because the paint industry which is the company’s basic market is expected to grow in the range of 10-15% and the top players in that segment are expected to grow by about 20%.

Next three years the company would be able to reach its full capacity.

4. Biodiesel products will be operational by the end of this year.

5. The company is supplying the nutraceutical products to three US based companies that control about 80% of the global market.

The new products have also got approved so the company expects a bounce back in the nutraceutical segment as well.

6. Asset turnover is expected to increase because the company has done the capacity expansion with the minimum capex.

Asset turnover is expected to improve every year.

7. In Dimer fatty acid the only competition is the imports and it is majorly imported from China.

8. The company has captured market share from the Chinese players in Dimer acid.

9. In Linoleic acid, when GST was introduced

the unorganized sector started losing the market to the organized sector.

10. The company doesn’t foresee any major raw material constraint in the future.

11. Volumes processed in Q1FY23 were between 14-15000 MT. Last year the RM volumes processed were 59,000 MT

12. Comparing quarterly performance of the company may not give a proper reflection of the potential of the company. There will be growth at the end of the year in terms of value as well as volume. On an annual basis the company would be better

off in terms of topline as well as bottomline.

13. The company has fungible equipment. If the demand for oleochemicals is more they will process more acid oil, if there is more demand for nutraceuticals they will process more deodorized distillate (DoD).

14. Opportunity size in stearic acid is more than 2 lakh tons. Iso stearic acid is a tailor made product which the company intends to export in the US and Europe. Pilot plant product approvals are already in place. The company doesn’t see any issue in exporting full quantities

whatever the company would be manufacturing because it will be a very small part of the global demand.

15. Iso stearic acid is a green product which finds application in cosmetics,aviation fuel etc.

(Continued ...)

16. Input to output ratio is around 94-96%. If 100 tons of RM is being processed the output will be between 94-96 tons.

17. The volumes of linoleic acid as well as dimer acid showed a jump in Q1FY23 as compared to previous quarter so the additional sales value during the

quarter viz a viz previous quarter is partly because of the higher volumes of these 2 prime products apart from higher per unit realization.

18. During october 2021 to march 2022 period, there was a lot of volatility due to change in policy during the six months period at

different points of time by Indonesia and Malaysia as far as the palm oil export is concerned. Then there was the Russia Ukraine war which disrupted the supply of sunflower oil etc. So the Indian oil demand consists of domestic production as well as import of sunflower oil from

Ukraine and Russia, import of palm oil from Indonesia and Malaysia etc. When there was a ban on imports the prices jumped and when the prices jumped everything was then in a turmoil and the end users of Fairchem’s products e.g., paint companies etc would take their decision

whether to use up their inventory or create or maintain that level of inventory by buying fresh inventory. So after these things stabilized during the first quarter Fairchem has bounced back to its original level.

19. The company’s top customer accounts for 40% of the revenue.

20. The company enters in raw material purchase contracts as well as finished product contracts which are not beyond one month. As the raw materials are commodities and the finished products are sold on B2B basis

there can be some lag of one or one and a half month or so in transferring the raw material price hike. The company is in the position of transferring the price hike. Two months would be the maximum lag period in transferring the price increase.

21. In FY22 the Dimer acid contributed roughly 30-35% to the revenues.

22. In FY22 the company’s prime products (dimer acid, linoleic acid and tocopherols) contributed 73% to the revenues.