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The zing thing!

Be it the caps on our water bottles, the bread we consume, or the plastic film that wraps our food… specialty chemicals find application in almost every walk of life. Fine Organics specializes in producing such specialty chemicals using vegetable oils as feedstock. Although the products are used in small quantities, they make a remarkable difference in the perception of products among consumers, in addition to reducing the cycle time and overall production cost, at times.

We visited Fine Organics’ Ambernath plant, along with its R&D center at Mahape. Here are the key takeaways:

Background

* The Ambernath facility was started in 2003 and spans over 10 acres. Due to land constraints, a new non-contiguous ~5-acre facility has been established at Ambernath, and the company is contemplating other avenues for greenfield expansions.

* The company follows a three-pronged philosophy: a) Fine Process Philosophy – renewables feedstocks, designs for degradation, safer chemistry, and nonhazardous routes; b) Fine Engineering Principles – minimum steps, energy efficiency, atom efficiency, and improved kinetics; and c) Fine Operations Culture – inherent safety, pollution monitoring, waste prevention, and nearzero solvents.

* The company focuses only on oleochemicals despite the limited chemistries. However, getting a consumer to accept a product is a complex and timeconsuming process, which is a big deterrent for a new player. Therefore, the company’s proven track record globally makes it relatively easier to commercialize new products.

A closely guarded science

* The chemical production process consists of three general steps – reaction, refining, and transformation. The refining separates the different fractions after the reaction, while the transformation gives shape to the final product, which is solid in most cases. The plant layout is vertical and enables the utilization of gravity for the movement of products.

* The company not only develops its own products but also the process technology to produce them. The company has its own pilot plant for scaling up production. The construction equipment is also sourced piece-wise from different vendors, and the final assembly is done in-house.

* Its facilities are fungible, barring the food additives facility, which cannot be used for non-food additives. The company uses the batch, continuous, and hybrid processes. Internal assessment suggests the processes are 25-sigma. The company is compliant on several standards, such as FSSC 22000, RSPO SCCS 2017, GMP+, FSSAI, Kosher, Halal, REACH, and Jhospa.

* 80% of the raw material is procured domestically, while the remainder – palm and palm kernel oil – is imported. It aims to make use of every fraction of the vegetable oil.

* The company has shifted entirely to natural gas and does not use any polluting fuel for generation for utilities. Electricity is sourced from the grid, with dieselgensets on standby.

* The company has near-zero solvent facilities.

* R&D center at Mahape:

* The company deploys ~20 staff at the R&D center, which is divided into two parts: food and non-food.

* The company is looking to add R&D capabilities for a host of new products, such as green surfactants, additives for additional dairy products, and various polymers.

Valuation and recommendation

* Since our initiation – Genie is Out, the stock has given a return of 20%. The stock trades at 44x FY23E EPS.

* The company guides that its upcoming expansion would be fully utilized by FY24E. We forecast a revenue CAGR of 18% and EBITDA CAGR of 29% (on the back of margin improvement to ~22%) over FY21–24.

* We value the company at 40x Sep’23E. We reiterate our Neutral rating on rich valuations. We have a Target Price of INR3,440.

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