Fine Organic Industries IPO – Should you invest?

Fine Organic Industries IPO Review – Should you invest-minFine Organic Industries IPO – Should you invest?


Fine Organic Industries IPO would open for subscription on 20th June, 2018. Fine Organic Industries Limited is a company engaged in manufacturing of oleochemical-based additives. Fine Organic Industries revenues grew at 12% CAGR in the last 5 years. There is buzz in the stock market about this IPO for some time. What are positive factors in this IPO of Fine Organic Industries Limited? What are the hidden factors in the IPO of Fine Organic Industries? Should you invest in a Fine Organic Industries Limited IPO? Let me provide some insights about this IPO and do the review.

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About Fine Organic Industries Limited


They are the largest manufacturer of oleochemical-based additives in India and a strong player globally in this industry. They produce 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. As at December 31, 2017, they had a range of 387 different products sold under the ‘Fine Organics’ brand. They are the first company to introduce slip additives in India and they are the largest producer of slip additives in the world. Their success is the result of sustained efforts over the decades in all areas of their business, such as product innovation, process technology improvements, increases in scale, improved raw material procurement and focus on the cultural understanding of consumers. In the 12 months ended December 31, 2017, they had 603 direct customers (i.e., end-users of their products) and 127 distributors (who sold their products to more than 5,000 customers) from 67 countries. 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. Their plastics additives and specialty additives are also used in the packaging of foods and other fast moving consumer goods.

Fine Organic Industries IPO Issue details


IPO opening date: 20-June-2018

IPO closure date: 22-June-2018

Face Value: Rs 5 per share

Issue price band: Rs 780 to Rs 783 per share

Issue size: 600 Crores

IPO Lot size:   19 shares and 19 shares, there-off

Minimum investment: Rs 14,877 on higher price band

Leading Managers: JM Financials and Edelweiss Capital

Listing: BSE / NSE

Download Fine Organic Industries IPO RHP Prospectus at this link.

Objects of the Fine Organic Industries Limited IPO issue


The Objects of the issue are to achieve the benefits of listing Equity Shares on the Stock Exchanges and to carry out the sale of up to 7,664,994 Offered Shares by the Selling Shareholders. The listing of Equity Shares will enhance Company’s brand name and provide liquidity to the existing Shareholders. The listing will also provide a public market for Equity Shares in India. Company will not receive any proceeds from the Offer and all the proceeds from the Offer, less Offer related expenses, will go to the Selling Shareholders.

Company Promoters


1) Prakash Damodar Kamat

2)  Mukesh Maganlal Shah;

3) Jyotsna Ramesh Shah;

4) Jayen Ramesh Shah;

5) Tushar Ramesh Shah; and

6) Bimal Mukesh Shah.

Company Financials (reinstated-Consolidated)


1) The company generated revenue of Rs 497.5 Crores for the year ended Mar-13 and Rs 792.6 Crores for the year ended Mar-17 indicating 12% CAGR growth in the last 5 years. Revenues for the 9 months ended Dec-2017 was Rs 594.7 Crores.

2) The company posted a profit of Rs 20.8 Crores for the year ended Mar-13 and profit of Rs 77.6 Crores for the year ended Mar-17 indicating a 39% growth of profits in the last 5 years.  Profits for the 9 months ended Dec-17 was Rs 58.5 Crores.

3) Its FY17 basic EPS is Rs 25.33 and last 3 years average EPS is Rs 24.23. Its 9 months ended EPS is Rs 25.34. If we annualize its 9 months EPS to entire year, its EPS works out to be Rs 33.79.

Consolidated Finance Summary of Fine Organic Industries IPO - FY2013-FY2018-min

Company Financials (reinstated-Standalone)


1) The company generated revenue of Rs 497.5 Crores for the year ended Mar-13 and Rs 789.2 Crores for the year ended Mar-17 indicating 12% CAGR growth in the last 5 years. Revenues for the 9 months ended Dec-2017 was Rs 592.8 Crores.

2) The company posted a profit of Rs 20.8 Crores for the year ended Mar-13 and profit of Rs 79.4 Crores for the year ended Mar-17 indicating a 40% growth of profits in the last 5 years.  Profits for the 9 months ended Dec-17 was Rs 62.5 Crores.

3) Its FY17 basic EPS is Rs 25.9 and last 3 years average EPS is Rs 24.73. Its 9 months ended EPS is Rs 27.1. If we annualize its 9 months EPS to entire year, its EPS works out to be Rs 36.13.

Standalone Finance Summary of Fine Organic Industries IPO - FY2013-FY2018-min

What are the key strengths of Fine Organic Industries Limited?


Here are the key strengths of the company.

1) Largest Producer of Oleochemical-based Additives in India and One of the Few Large Players in the Oleochemicalbased

2) Additives Industry in the World.

3) Diversified Product Portfolio Catering to a Variety of High Growth Industries.

4) Specialised Business Model with High Entry Barriers.

5) Flexible and Strategically Located Production Facilities with In-house Development Capabilities

6) Strong R&D Capability with a Focus on Innovation.

7) Diversified Customer Base with Long Term Relationships with Marquee Customers.

8) Strong Management Team

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What are the Strategies of Fine Organic Industries Ltd?


Here are the key strategies of the company.

1) Expand their Total Installed Production Capacity and Product Range.

2) Expand into Manufacturing Premixes for Bakery and Confectionery Products and Pan Release Agents.

3) Increase Sales of Higher-Margin Downstream Products.

4) Global Expansion.

5) Continuing Focus on R&D.

Reasons to invest in Fine Organic Industries IPO


1) Good Revenue growth of 12% CAGR in the last 5 years

2) Good profit growth over 40% in the last 5 years. It earns around 10% margins on its revenues currently.

Risk Factors / Reasons not to invest in Fine Organic Industries IPO


1) Increase in the cost of raw materials as a percentage of their revenue from operations could have a material adverse effect on their results of operations and financial condition.

2) If their products fail to meet their customers’ quality standards, it could result in their removal from their end-user customers’ ‘approved supplier’ lists, which would have a material adverse effect their business, financial condition and results of operations.

3) Their commercial success also depends to a large extent on the success of their customers’ products with end consumers. If the demand for the products in which their products are used declines, this could have a material adverse effect on their business, financial condition and results of operations

4) They do not have long-term agreements with most of their customers.

5) Some of their long-term agreements for the sale of their products are for fixed prices, do not contractually stipulate minimum purchases and/or contain ‘meet or release’ provisions, which may have a material adverse effect on their profit margins.

6) Fluctuations of the Rupee against other currencies could adversely affect their financial condition and results of operations.

7) If the costs of setting up new manufacturing facilities are higher than expected, or if they are unable to secure sufficient term loans to finance the building of these new production facilities, it could have a material adverse effect on their business, financial condition, results of operations and growth prospects.

8) They have yet to obtain possession of the land on which they are in the preliminary stages of planning to set up the Ftheirth Ambernath Facility. If they are unable to obtain possession of the land, they may have to find an alternative plot of land, which may be more expensive and/or less favtheirably located.

9) Company and certain of their Directors are involved in certain legal proceedings. Any adverse decision in such proceedings may have a material adverse effect on their business, financial condition and results of operations

10) They are dependent on two of their suppliers for their key raw materials, and any disruption in supply could have a material adverse effect on their results of operations and financial condition.

11) they do not currently manufacture premixes for bakery and confectionery products and there can be no assurance that Fine Zeelandia’s business will be profitable.

12) If they are unable to estimate demand for their products and thereby effectively manage their inventory, it could have an adverse effect on their business, results of operations and financial condition.

13) Some of their Group Companies are in the same line of business as us. In the event their Promoters choose to concentrate or channel their efforts and restheirces through any of these Group Companies, the value of the Equity Shares may be adversely affected.

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Recommendation / Investment strategy – Fine Organic Industries IPO


On FY2017 standalone EPS of Rs 25.9 and on an upper price band of Rs 783, P/E works out to be 30x. On last 3 years average EPS of Rs 24.7, P/E works out to be 31.6x. If we take latest EPS (9 months ended Dec-17) and annualize it, the P/E works out to be 21.6x. Means company is asking for a higher price band Rs 783 where P/E would be in the range of 21.6x to 31.6x. There are no listed peers who are in similar business for comparison. However, the issue price at at this P/E of over 30x is considered as highly priced.

The company posted revenue growth of 12% CAGR in the last 5 years. It earns consistent margins of around 10%. However, its issue price is highly priced. I would have been excited if it would have been available at lower IPO price. One can wait and after listing if this is available at discounted price investors can invest. As of now, investors can stay away from such high priced IPOs.

Disclaimer: I do not have an interest in investing in this IPO and above analysis is based on my personal views. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

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Suresh

Fine Organic Industries IPO – Should you invest

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