Fine Organics a good bet with its fair valuation

ET Intelligence Group: The initial public offering (IPO) of Mumbaibased Fine Organics Industries, a supplier of additives to several FMCG majors, looks ‘fairly’ valued in comparison to its listed peers. Investor interest in peers such as Galaxy Surfactants and SH Kelkar, in the past three months, has been muted. The absence of long-term loans, a stable operating profit margin and augmented capacity, however, promise growth for the company.

BUSINESS MODEL
Fine Organics makes oleochemicalbased additives used in industries such as foods, plastics, cosmetics, paints and inks. For instance, the sponginess in bread and bakery products comes from emulsifying agents, which are oleochemical additives.


The additives are derived from palm oil, castor oil, rapeseed and sunflower oil. It is the first company in India to introduce slip additive—friction reducing agent — and is now the largest producer of slip additive globally. The company has an installed capacity of 64,300 tonnes per annum, and derives about 65 per cent of total revenues from the overseas markets.

CAPACITY ADDITION
The company wants to double its capacity in the next two years. Its largest facility of 32,000 tonnes at Ambernath in Maharashtra is likely to be commissioned in the last quarter of FY19. It will also commission a 10,000-tpa plant in a joint venture with Zeelandia, a Dutch company specialising in bakery ingredients.

FINANCIAL PERFORMANCE
Revenue rose 13.2 per cent annually in the past three fiscals to reach Rs 788 crore in FY17. Net profit rose 21 per cent annually to Rs 78.36 crore during the same period. Operating profit grew at 14.5 per cent to Rs 145.4 crore between FY15 and FY17.Net debt to net worth of the company dropped to 0.01x in the first nine months of FY18 from 0.48x in FY15.

RISK FACTORS
With about two-thirds of revenues in non-rupee terms, any adverse fluctuation in movement of currency may impact earnings of the company and pricing competitiveness.

VALUATION
Based on the annualised earnings of the first nine months of FY18, the asking price-earnings multiple at the higher band is 29.5 times, which has been in line with listed peers Galaxy Surfactants and SH Kelkar at 28.8 and 31.1, respectively. The RHP mentions nine-month FY18 EPS as Rs 26.38, which is annualised profit per share.