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FOIL is India’s largest oleochemical-based additives manufacturer with presence in domestic as well as international market. It is also among the top six players globally in the oleochemicals industry. FOIL manufactures green additives derived from vegetable oils which are used in industries such as food & beverages, plastics/polymers, cosmetics, pharmaceutical, rubber, paints and coatings etc. Oleochemicals currently is at a nascent stage in the chemical industry, however, with evolving problems of pollution & global warming, oleochemical-based additives will substitute most of the petrochemical based additives. FOIL as a company is built around strong R&D capability, specialized knowledge and indigenously developed proprietary technology which makes it a market leader in the oleochemical industry. This industry has high entry barriers such as higher R&D cost, stringent regulations, long gestation period for product approval making this an oligopolistic industry with select few players globally. With growing awareness about the use of green additives, the demand for oleochemical-based additives is set to surge going forward. FOIL being the largest player in India will be at the forefront of this surge. Over the last seven years, the company has been able to report a net profit CAGR of ~34% along with double digit growth in revenues. However during FY20-21, the company has faced certain headwinds such as Covid-19 and rise in raw material costs, however, we believe that oleochemicals is a multi-year growth story with FOIL being a key player. We expect the company to grow its Revenue/EBIDTA/ PAT at CAGR of 15%/16%/19% respectively during FY20-26E. We Initiate Coverage on FOIL with a BUY recommendation and a DCF based target price of ₹3,232.

Olechemical Industry to play an important role in India’s Chemical Growth story

Oleochemical-based additives are at a nascent stage and are expected to grow significantly over the years led by increasing shift from petrochemical based additives. Green additives are 100% safe to use as it is derived from plants as compared to other chemicals that are derived from petrochemicals. Leading industry players have also started adopting more of the green additives in the manufacture of end products. The oleochemical-based additives are used in several industries such as food & beverages, feed nutrition, plastics/polymers, cosmetics, pharmaceutical, personal care, paints, rubbers, etc. The global oleochemicals market is valued at US$22 billion in 2020 and is expected to reach US$ 31.9 billion by 2025 growing at CAGR of ~7.7%. The growth in this sector is mainly derived from the growth in the end use industries majorly being foods, plastics, cosmetics & pharmaceuticals, rubber and coating industries.

Specialized Business Model with High Entry Barriers

FOIL is operating in the industry which has multiple entry barriers protecting the existing players from competition and fragmentation. Oleochemical derived green additives are used in a very small quantity in the final product, however, any defect in the additives will result in a disproportionately large amount of finished products being defective. Therefore, these products generally have a long gestation period for product approval. Another entry barrier is the strict regulation that the additives manufacturers need to adhere to, as these additives have a direct impact on human life as well as the environment. The additives industry is governed by strict regulations across the world due to human health and environmental concerns. Due to these high entry barriers, it is difficult for new entrants to compete with the existing players having decades of experience, products, and established clientele and R&D capabilities. FOIL is India’s largest manufacturer of these green additives and globally it is among top six players. There are no major companies in India apart from FOIL.

Investment Rationale

Olechemical Industry to play an important role in India’s Chemical Growth story

Oleochemicals are chemicals derived from natural oils and fats of plant origins. Oleochemicals can be categorised into basic oleochemicals such as fatty acids, fatty methyl esters, fatty alcohols, fatty amines and glycerol, and their downstream derivatives obtained from further chemical modifications of these basic oleochemicals (where FOIL has a market leadership). These oleochemicals exhibit special properties such as excellent emolliency, surface activity, emulsifying properties, as well as beneficial biological properties.

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