1

Please refer to important disclosures at the end of this report

1

Fine Organic Industries Ltd (FOIL) is the largest manufacturer of oleochemical-

based additives in India and a strong player globally. FOIL produces a wide range

of specialty plant derived oleochemical-based additives used in food, plastic,

cosmetics, paint, ink, coatings and other specialty application in various

industries. As at March 31, 2018, company had a range of 387 different products

sold under the ‘Fine Organics’ brand.

Largest producer of Oleochemical-based additives in India: FOIL commands largest

market share in Oleochimcal-based additives in India and is also one of the sixth and

fifth global players in food and plastic additive industry respectively. FOIL is the first

company to introduce slip additives in India, which gives the company a first-mover

advantage.

Specialized business model with high entry barriers: FOIL manufactures specialty

chemicals (derived from derivatives of vegetable oils) that require specialized skills,

processes and equipments in order to match the quality of standard in the countries in

which they are sold, as set by various regulations, industry bodies and by customers.

This provides FOIL a significant advantage and restricts to new entrants, hence curtails

competition.

Diversified and long-term association of customer base: With presence of extensive

distribution network in India and worldwide, FOIL has been able to sell its products in

69 countries. FOIL’s customer base comprises of direct customers and distributors.

With the help of distributors, the company has been selling its product to more than

5,000 customers; few of the customers are engaged with the company for more than a

decade.

Capacity addition to aid top-line growth going ahead: FOIL currently has 64,300

t.p.a. installed capacity and intends to almost double the same in the next 3-4 years

through own and JVs in India and overseas. Current installed capacity is near to fully

utilization level.

Outlook & valuation: In terms of valuation, pre- issue works out to 22x of annualized

FY18 EPS of `35 (at the upper end of the issue price band). We believe FOIL is

strategically placed owing to (a) market leadership in Slip additive, (b) maintaining

healthy operating margin in the range of 18-22% and (c) diversified client base along

with geography mix. However, due to lack of immediate triggers in revenue growth

owing to near to utilization level of current capacity and no major capacity additions in

near future, we have a NEUTRAL view on the issue.

Exhibit 1: Key Financial

Y/E March (` cr)

FY2015

FY2016

FY2017

Net Sales

607

652

778

% chg

-

8

19

Net Profit

53

76

78

% chg

-

44

2

EBITDA (%)

18.3

22.3

18.7

EPS (Rs)

17

25

26

P/E (x)

45

31

P/BV (x)

12

9

7

RoE (%)

26

30

24

RoCE (%)

37

42

37

EV/EBITDA

22

16

Source: RHP, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price band

NEUTRAL

Issue Open: June 20, 2018

Issue Close: June 22, 2018

QIBs 50% of issue

Non-Institutional 15% of issue

Retail 35% of issue

Promoters 75%

Others 25%

Present Eq. Paid up Capital: `15.3cr

Offer for Sale: **0.76cr Shares

Post Issue Shareholding Pattern

Post Eq. Paid up Capital: `15.3cr

Issue size (amount): *`598 -**`600cr

Price Band: `780-`783

Lot Size: 19 shares and in multiple

thereafter

Post-issue implied mkt. cap: *`2390cr -

**`2401cr

Promoters holding Pre-Issue: 100%

Promoters holding Post-Issue:75%

*Calculated on lower price band

** Calculated on upper price band

Book Building

Kripashankar Maurya

+022 39357600, Extn: 6004

[email protected]

Fine Organic Industries Ltd.

IPO Note | Specialty Chemical

June 18, 2018

2

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

2

Company background

Fine Organic Industries Limited (FOIL) is the largest manufacturer of oleochemical-based

additives in India and a strong player globally in this industry. FOIL produces a wide range

of specialty plant derived oleochemicals-based additives used in the Food, Plastic,

Cosmetics, Paint, Ink, Coatings and other Specialty Application in various industries. Fine

Organics has a range of 387 different products sold under the ‘Fine Organics’ brand. FOIL is

the first company to introduce slip additives in India and it is the largest producer of slip

additives in the world. Fine Organics currently has 64,300 t.p.a capacity and is planning to

set up an additional production facility in Ambernath with a planned installed capacity of

32,000 t.p.a. FOIL sells its products in 69 countries through 127 distributors (who sell their

products to more than 5,000 customers) and 631 direct customers.

Product portfolio

Plastics Additives

Usage

Slip Agents

Friction reducing additives

Anti-Stats

Mitigates build-up of electrical charges

Lubricants

Flow improvers and mould release agents

Processing

Aids

Helps in melting high molecular weight polymers

Anti-Foggin

Converts water droplets formed on plastic films

into a continuous transparent water layer

Source: Company, Angel Research

Food & Other Additives Usage

Emulsifiers

Extracts desired aesthetic structure and texture

Preservatives

Preventing food from spoilage or toxic

Food & Beverage

Used in biscuits, voluminous sponge, chewing

gums, etc.

Cosmetic &

Pharmaceutical

Added to creams, gels, lotions, varnishes, etc.

Rubber

Additives for elastomers to reduce dampening /

abrasion

Paint & Coating

Anti-settling agents, emulsifiers, anti-sagging

agents

Feed Nutrition

Replace harmful antibiotics & improve feed

nutrition

Source: Company, Angel Research

Exhibit 1: Capacity

Source: Company, Angel Research

0

20000

40000

60000

80000

100000

120000

140000

Ambernath

Facility

Badlapur

Facility

Dombivli

Facility

Patalnganga

Germany

Total

Capacity

TPA

Current Capacity (TPA)

New Capacity (TPA)

3

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

3

Issue Details

The company is raising ~`600cr through an offer for sale in the price band of `780-`783. The

offer will constitute ~25% of the post-issue paid-up equity share capital of the company,

assuming the issue is subscribed at the upper end of the price band. The company is

offering 0.76cr shares that are being sold by Promoters.

Exhibit 2: Pre and Post-IPO shareholding pattern

No of shares (Pre-issue)

%

No of shares (Post-issue)

%

Promoter

30,659,976

100%

22,994,982

75%

Other

0

0%

7,664,994

25%

30,659,976

100%

30,659,976

100%

Source: RHP, Angel Research; Note: Calculated on upper price band

Objects of the offer

 As the issue is an offer for sale, company will not receive any proceeds from the offer.

Key Management Personnel

Prakash Damodar Kamat: He is an Executive Director and Chairman of FOIL. He holds a

Masters degree in science and technology (oils) from Institute of Chemical Technology

(formerly UDCT), University of Bombay. He joined Fine Organic group in 1970 and has been

associated with Fine Organic group since inception. He has work experience in product

development, process technology and research and development. He received the

distinguished alumni award in 1999 from the UDCT for his commitment and depth of

knowledge of paints, plastics, oils, textiles, metal working and food industries in India and

overseas. He is a co-founder of FOIL and has played a key role in developing several

products, processes and leading engineering research and development.

Mukesh Maganlal Shah: He is an Executive Director and Managing Director of FOIL. He

holds a Bachelors degree in science from the University of Bombay. He joined Fine Organic

group in 1973 and played a key role in establishing the quality control, sales and marketing

departments at Company. He formed and guided a team of sales and marketing

professionals that helped the organization's products reach customers across India and find

applications beyond the food industry. He has been associated with Company since

inception.

Jayen Ramesh Shah: He is an Executive Director and Chief Executive Officer of FOIL. He

holds a Masters degree in science from the University of Bombay. He joined Fine Organic

group in 1986 and was instrumental in creating a vendor partner network needed to

support Company. He played a key role in developing and managing channel partners for

the organizations products in India. He has experience in procurement, vendor

development and business development. He has been associated with our Company since

inception.

Tushar Ramesh Shah: He is the Executive Director and Chief Financial Officer of FOIL. He

has completed second year while pursuing for Bachelors in science (S.Y. B.Sc.) from the

University of Mumbai. He joined Fine Organic group in 1989 and led several change

management initiatives like the introduction of enterprise resource planning, customer

relationships management and financial systems that helped FOIL to scale up operations.

He played a key role in the development of FOIL’s first slip additive manufacturing facility.

4

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

4

He helped in the setting up of offices in North America and Europe. He has been associated

with FOIL since inception.

Bimal Mukesh Shah He is the Executive Director of FOIL. He holds a Bachelors degree in

science from Purdue University and a Masters degree in management from Boston College.

He joined Fine Organic group in 2009. Under the mentorship of Prakash Damodar Kamat,

Bimal Mukesh Shah has transitioned into a position to lead several initiatives for upcoming

projects, processes and additional capacities. He has experience in operations,

instrumentation and projects.

Investment Argument

Largest producer of oleochemical-based additives in India

FOIL is the largest manufacturer of oleochemical-based additives in India and one of the

few large players in global oleochemical-based additives industry. FOIL is 1 of 6 global

players in the food additives industry and 1 of 5 global players in the plastic additives

industry. The ‘Fine Organics’ brand has a legacy of over 44 years and the brand is widely

recognized in the major markets in which the company competes. Although FOIL has only

been operating for over 15 years, the ‘Fine Organics’ brand is in use by Promoter Group

entities since 1973. FOIL manufactures a wide range of oleochemical-based additives in

India. Fine Organics is the first company to introduce slip additives to the Indian market.

FOIL is among the few other players who manufacture oleochemical-based additives in

India. However, FOIL has only partial presence in the oleochemicals-based additives

portfolio. The company has a huge first-mover advantage in India, alongside various other

competitive advantages over other global players. This gives FOIL an advantage in pricing

products competitively and allows to provide stiff competition to new players.

Diversified product portfolio catering to a variety of high growth industries

FOIL has a range of 387 products sold under the ‘Fine Organics’ brand, used in the (a)

plastic industry and (b) food industry and others (cosmetics, printing inks, coated papers,

lube additives, wires and cables, coatings and other specialty applications) industries. The

Indian and global food emulsifiers market is expected to grow to Rs9 billion (at a CAGR of

10-12%) and USD 3.4 billion (at a CAGR of 4.1%) over FY16-21 respectively. The Indian and

global plastic additive market is expected to grow to Rs55-60 billion (at a CAGR of 8-10%)

and USD 30 billion (at a CAGR of 6%) over FY16-21 respectively.

Exhibit 3: Plastics Additive

Source: RHP, Angel Research

Exhibit 4: Food Additive

Source: RHP, Angel Research

22000

30000

58000

90000

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

CY2016

CY2021E

Mn

Market size

Global Plastic Additives (US$)

India Plastic Additives `

2800

3400

5400

9000

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

CY2016

CY2021E

Mn.

Maret size

Global Food Emulsifiers (US$)

India Food Emulsifiers `

5

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

5

Specialised business model with high entry barriers

There are multiple entry barriers for a new entrant in the global oleochemical-based

additives industry, such as product formulations, process technology and customer

stickiness to established players. Sometimes end users typically take three to five years to

approve additives, after which the additive manufacturer can supply on a commercial basis.

As a result, FOIL is one of the few large global players in this industry. FOIL’s products

require specialized skills, processes and equipment, as manufacturing additives from base

oleochemicals is a highly complex process. Therefore, many of FOIL’s specialty and

formulated products are also difficult to replicate. This provides the company with a

significant advantage over new entrants, as competitors would need to invest a great deal

of resources to gain a foothold in the markets in which they compete.

Diversified customers base with long-term relationships with marquee customers

FOIL’s customer base comprises direct customers and distributors. Direct customers are

end-users of its products. Distributors are entities that purchase the products and then sell

these products. Currently, FOIL had 631 direct customers and 127 distributors (who sell to

more than 5,000 customers). Their direct customers are multinational, regional and local

players manufacturing consumer products, such as Hindustan Unilever and Parle Products,

and petrochemical companies and polymer producers globally. FOIL has an extensive

distribution network in India and worldwide, enabling their products to be sold in 69

countries.

Robust performance

FOIL’s net revenue has grown at CAGR 13.52% over FY15-17, due to capacity expansion at

Ambernath facility in the year 2015 and margin has been in the range of 18-22%. Due to

improvement in margin and reduction in debt has helped PAT to grow at CAGR 21% during

the same period from `53cr to `78cr.

6

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

6

Exhibit 5: Revenue and PAT trend

Source: RHP, Angel Research

Exhibit 6: Revenue Mix

Source: Company, Angel Research

18%

22%

19%

18%

0%

5%

10%

15%

20%

25%

0

20

40

60

80

100

120

140

160

FY15

FY16

FY17

9M FY18

` CR.

Revenue Trend

EBIDTA

PAT

EBIDTA Margin

423

456

569

418

184

196

210

163

0

100

200

300

400

500

600

FY15

FY16

FY17

9M FY18

` Cr.

Revenue Mix

Plastic additives

Food Additives

7

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

7

Outlook & valuation:

In terms of valuation, pre- issue works out to 22x of annualized FY18 EPS of `35 (at the

upper end of the issue price band). We believe FOIL is strategically placed owing to (a)

market leadership in Slip additive, (b) maintaining healthy operating margin in the range of

18-22%, (c) diversified client base along with geography mix (Top client contribute ~3% of

revenue), and (d) Indian food industry is expected to grow at CAGR of 13-15% over FY17-

2022. However, due to lack of immediate triggers in revenue growth owing to 100%

utilization of current capacity and no major capacity additions in near future, we have a

NEUTRAL view on the issue.

Key Risks

Raw material prices

FOIL’s key raw material is vegetable derivative oil, changes in demand supply pattern of

derivative oil may adversely affect operational efficiency of the company.

Currency risk

Company’s majority of revenue comes from export segment; any adverse fluctuation in

movement of currency may impact earnings of FOIL.

8

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

8

Income statement

Y/E March (` cr)

FY2015

FY2016

FY2017

Total operating income

607

652

778

% chg

-

8

19

Total Expenditure

496

507

633

Raw Material

382

388

498

Personnel

44

55

64

Others Expenses

69

65

71

EBITDA

111

145

% chg

-

31

0

(% of Net Sales)

18

22

19

Depreciation& Amortisation

23

30

24

EBIT

88

116

122

% chg

-

31

5

(% of Net Sales)

15

18

16

Interest & other Charges

8

5

Other Income

2

10

4

(% of PBT)

2

9

4

Extraordinary Items

0

Share in profit of Associates

-

Recurring PBT

83

118

122

% chg

-

42

3

Tax

29

41

43

PAT (reported)

53

76

78

% chg

-

44

2

(% of Net Sales)

9

12

10

Basic & Fully Diluted EPS (Rs)

110

158

162

% chg

-

44

2

Source: RHP, Angel Research

9

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

9

Balance Sheet

Y/E March (` cr)

FY2015

FY2016

FY2017

SOURCES OF FUNDS

Equity Share Capital

4.8

Reserves& Surplus

202

246

324

Shareholders Funds

207

251

329

Total Loans

29

21

0

Other Liab & Prov

0

Total Liabilities

237

272

329

APPLICATION OF FUNDS

Net Block

102

103

97

Capital Work-in-Progress

8

6

3

Investments

0

5

11

Current Assets

154

205

221

Inventories

64

76

92

Sundry Debtors

86

87

111

Cash & Bank

3

42

18

Loans & Advances

54

42

61

Other Assets

53

55

53

Current liabilities

135

143

117

Net Current Assets

19

62

105

Other Non Current Asset

Total Assets

237

272

329

Source: RHP, Angel Research

10

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

10

Cash Flow Statement

Y/E March (` cr)

FY2015

FY2016

FY2017

Profit before tax

83

118

122

Depreciation

23

30

24

Change in Working Capital

85

149

96

Interest / Dividend (Net)

(0)

(1)

Direct taxes paid

(35)

(40)

(49)

Others

(105)

(146)

(144)

Cash Flow from Operations

50

109

46

(Inc.)/ Dec. in Fixed Assets

(46)

(24)

(15)

(Inc.)/ Dec. in Investments

4

(4)

(1)

Cash Flow from Investing

(43)

(28)

(16)

Issue of Equity

-

Inc./(Dec.) in loans

-

(33)

Others

(10)

(53)

(23)

Cash Flow from Financing

(10)

(53)

(55)

Inc./(Dec.) in Cash

(3)

28

(25)

Opening Cash balances

6

3

31

Closing Cash balances

3

31

14

Source: RHP, Angel Research

Key Ratio

Y/E March

FY2015

FY2016

FY2017

Valuation Ratio (x)

P/E (on FDEPS)

45.1

31.4

30.6

P/CEPS

31.7

22.6

23.5

P/BV

11.6

9.5

7.3

EV/Sales

4.0

3.6

3.1

EV/EBITDA

21.9

16.4

EV / Total Assets

10.3

8.7

7.2

Per Share Data (Rs)

EPS (Basic)

110.2

158.3

162.2

EPS (fully diluted)

17.4

24.9

25.6

Cash EPS

24.7

34.6

33.3

DPS

5.5

5.9

Book Value

67.6

82.7

107.4

Returns (%)

ROCE

37.3%

42.1%

37.0%

Angel ROIC (Pre-tax)

39%

52%

41%

ROE

25.7%

30.2%

23.8%

Turnover ratios (x)

Inventory / Sales (days)

39

43

Receivables (days)

52

49

52

Payables (days)

32

30

Working capital cycle (ex-cash) (days)

59

61

65

Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price

band

11

Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

11

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Fine Organic Industries Ltd.td | IPO Note

June 18, 2017

12

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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13