01-01-1970 12:00 AM | Source: GEPL Capital
Stock of the week - Buy Fairchem Organics LTD For Target Rs. 2555 By GEPL Capital
News By Tags | #7608 #57 #3050

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Fairchem Organics formed in 2019 after getting demerged from Fairchem specialty Ltd to transfer its business of Oleo chemicals and nutraceuticals. Company manufactures specialty chemicals including Dimer Acid Dimer Acid, Linoleic Acid, Mixed Tocopherol Concentrate and Sterols Concentrate, which find application in various industries like nutraceuticals, paints, printing ink, detergents and adhesives etc.

Investment Rationale

* Revenue to boost with 66% Capacity Addition and Robust Utilization: The produces its products from acid oil & fatty acids, which are derived from the vegetable oil refineries, it has developed relations with suppliers spanning more than 20 years. Company expanded it raw material capacity from 72,000 MTPA in FY21 to 1,20,000 MTPA in FY22 (66% rise). Management expects capacity utilization to clock 70%, 80% and 90% in FY23E, FY24E, FY25E. This provides robust revenue visibility for Fairchem.

* Dominant Positioning in Key Olechemicals to Drive Business: Fairchem is the one of the only manufacturers of Linoleic Acid and Dimer Acid in India, having a large addressable market size in India and which is expected to clock ~4% CAGR over FY21-FY27. The company supplies Linoleic Acid to paints and ink manufacturers, while Dimer Acid finds use in the in the manufacturing of epoxy hardeners. Mixed Tocopherol concentrate and Sterols concentrate are nutraceutical products having usage in FMCG and food additives.

* Robust Financial Performance to support Growth: Over the years, company has a reported good financial performance. It has a healthy ROE of 37.7% and ROCE of 33.8%. . Its 5-year Revenue, Mar-22 EBITDA and PAT CAGR stood at 14%, 24% and 36%, respectively. More importantly, strong focus on R&D together with higher economies of scale and efficient sourcing of raw materials reflected in improvement in EBITDA margin from 11.6% in FY17 to 15% in FY22.

* Outlook and Valuations: We estimate a 15% CAGR in Topline over FY22-25E, which implies a forward PE (x) of 25.1 for FY 25E. We value it with a earnings multiple of 30x to FY25 earnings estimate which results per share value of Rs 2555. We recommend BUY on FAIRCHEMOR at CMP of Rs. 2136 with Target price of Rs. 2555 (20%).

Observation

* While looking at the broader picture, we can observe that the stock is currently nearing its 52- Week high, which tells that the stock already is in a strong momentum.

* Prices on 12th August 2022 gave a breakout of the bearish trend line , while in the latest trading session the stock have also given a breakout from the rounding bottom pattern this indicates the beginning of the trend on the upside.

* The breakout was confirmed by the high volumes and the gap which was created on 10th August 2022, which can be considered as a breakaway Gap (appears at the beginning of trend)

* Prices have penetrated upper Bollinger band, which is pointing towards the rising volatility for the upside move.

* RSI on daily as well as on weekly timeframe have sustained above 60 mark reflecting the rising momentum in the trend.

Buy Fairchem Organics LTD at CMP: Rs 2136 Target: Rs 2555 (20%)| SL: Rs 1965

Inference & Expectations

* The breakout is in sync with indicators and Higher Timeframes.

* Going ahead we expect the prices to rise higher till the level of 2428.

* We recommend a strict stop loss of 1965, strictly on the closing basis.

 

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