BROKING | DEPOSITORY | DISTRIBUTION | FINANCIAL ADVISORY|MERCHANT BANKING

FINE ORGANIC INDUSTRIES LTD

IPO Report

Issue Date 20th June-22nd June 2018

Price Band 780-783/Share

Bid Lot 19 & in multiplethereof

Face Value Rs 5/Share

Listing BSE, NSE

Offer For Sale 7,664,994 Eq Shares

Fresh Issue ----

Pre Issue Eq Shares 30,659,976 Eq Shares

Post Issue Eq Shares 30,659,976 Eq shares

BRLM JM Financial Ltd,

Edelweiss Financial Services

Registrar Karvy Computershare

Private Ltd

Research Analyst : Astha Jain

IPO Details

Company is the largest manufacturer of oleochemical-based additives in India and a strong player globally in this industry. Co produce 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, co had a range of 387 different products sold under the ‘Fine Organics’ brand.

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. As a result, co is one of the few large global players in this industry. The high barriers to entry enable co to obtain higher EBITDA and profit margins for its products compared to other manufacturing industries where barriers to entry are lower. Largest Producer & one of the Few Large Players in the Oleochemical based Additives Industry in the World : Co manufacture a wide range oleochemical-based additives in India. Co was the first company to introduce slip additives to the Indian market. There are only a few other small players who manufacture oleochemical-based additives in India. Co have a huge first-mover advantage in India, alongside various other competitive advantages over other global players. This gives co an advantage in pricing products competitively and allows co to provide stiff competition to new players. Hence, no major domestic or global player has set up a manufacturing facility in India. Strong R&D Capability with a Focus on Innovation : Co’s R&D efforts place significant emphasis on improving its production processes, improving the quality of co’s present products, creating new additives and creating downstream products, such as Acetem, Datem, and Lactem. Co is in the process of developing a downstream product called Citrem, which is a hydrophilic (attracted to water molecules and water-soluble) emulsifier used in the confectionary industry. Co is also developing other blends of existing products for foods, plastics and other applications.

Valuation The co is bringing the issue at p/e multiple of approx. 30 on annualized 9MFY18 eps at price band of Rs 780-783/share. Co being the one of the largest player in Oleochemical based additives industry in has posted decent financial performance. However looking after the current market volatility & valuations of issue, we recommend “Long Term Subscribe” on issue.

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Company Overview

Company is the largest manufacturer of oleochemical-based additives in India and a strong player globally in this industry. Co produce 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. In the 12 months ended March 31, 2018, co had 631 direct customers (i.e., end-users of co’s products) and 127 distributors (who sold co’s products to more than 5,000 customers) from 69 countries. Co’s direct customers are multinational, regional and local players manufacturing consumer products and petrochemical companies and polymer producers globally. Co’s plastics additives and specialty additives are also used in the packaging of foods and other fast moving consumer goods. Co currently have three production facilities: one in Ambernath (Maharashtra) (the “First Ambernath Facility”); one in Badlapur (Maharashtra) (the “Badlapur Facility”); and one in Dombivli (Maharashtra) (the “Dombivli Facility”). As at March 31, 2017, these three facilities have a combined installed capacity of approximately 64,300 tonnes per annum. Each of co’s current manufacturing facilities has the ability to manufacture wide range of products, which provides co with the necessary flexibility to cater to changing demands in the market, thereby avoiding dependence on any one major product category. Co’s products are also manufactured for co on a job-work basis by Olefine Organics (“Olefine”), a partnership firm and a Promoter Group entity, at a manufacturing facility in Ambernath, Maharashtra (the “Second Ambernath Facility”). The Second Ambernath Facility is situated on a plot of land that MIDC currently leases to Olefine. Co will be taking over operation of the facility in the near future. As at December 31, 2017, the Second Ambernath Facility had an installed capacity of approximately 5,000 tonnes per annum. Co is currently planning to set up an additional production facility in Ambernath with a planned installed capacity of 32,000 tonnes per annum (the “Third Ambernath Facility”). Co expect it to commence operations in the fourth quarter of Fiscal 2019. In addition, co is currently planning to set up a new production facility in Leipzig, Germany with a planned initial installed capacity of 10,000 tonnes per annum (the “German Facility”). Co expect it to commence operations in the third quarter of Fiscal 2020. This facility will be owned and operated by a joint venture company (which co plan to name FineAdd Ingredients GmbH, (“FineAdd”)), in which co will have 50% equity interest. Co is also in the preliminary stages of planning the development of two additional production facilities: one in Patalganga (Maharashtra) with a planned initial installed capacity of approximately 10,000 tonnes per annum (the “Patalganga Facility”); and one in Ambernath (Maharashtra) for which co is awaiting possession of the land and have yet to decide on the planned initial installed capacity (the “Fourth Ambernath Facility”).

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Investment Rationale

Largest Producer of Oleochemical-based Additives in India and One of the Few Large Players in the Oleochemical based Additives Industry in the World Co is the largest manufacturer of oleochemical-based additives in India and one of the few large players in global oleochemical-based additives industry. Co is one of six global players in the food additives industry and one of five 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 co compete. Although company has only been operating for over 15 years, the ‘Fine Organics’ brand has been in use by Promoter Group entities since 1973. Co manufacture a wide range oleochemical-based additives in India. Co was the first company to introduce slip additives to the Indian market. There are only a few other small players who manufacture oleochemical-based additives in India. However, they have only a partial presence in the oleochemicals-based additives portfolio. Co have a huge first-mover advantage in India, alongside various other competitive advantages over other global players. This gives co an advantage in pricing products competitively and allows co to provide stiff competition to new players. Hence, no major domestic or global player has set up a manufacturing facility in India.

Diversified Product Portfolio Catering to a Variety of High Growth Industries

As at March 31, 2018, co had 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. Diversified Customer Base with Long-Term Relationships with Marquee Customers

Co’s customer base comprises direct customers and distributors. Direct customers are end-users of co’s products. Distributors are entities that purchase co’s products and then on-sell these products. In the 12 months ended March 31, 2018, co had 631 direct customers and 127 distributors (who sold co’s products to more than 5,000 customers). Co’s direct customers are multinational, regional and local players manufacturing consumer products and petrochemical companies and polymer producers globally. Co have an extensive distribution network in India and worldwide, enabling co’s products to be sold in 69 countries in the 12 months ended March 31, 2018.

Risk factors

Increases in the cost of raw materials as a percentage of co’s revenue from operations could have a material adverse effect on co’s results of operations and financial condition.

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

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Objects of Offer

The objects of the Offer 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 Promoter Group Selling Shareholders. The listing of Equity Shares will enhance co’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 Promoter Group Selling Shareholders.

Financial Statements

Rs Cr

Particulars FY15 FY16 FY17 9M FY18 Total Income 635.93 686.01 814.94 590.43 Operating Exp 525.00 540.76 669.50 486.17 EBIDTA 110.93 145.25 145.44 104.26 EBIDTA Margin (%) 17.44 21.17 17.85 17.66 Other Income 2.03 10.21 4.41 8.78 Depreciation 22.58 29.56 23.71 14.63 EBIT 90.38 125.90 126.14 98.42 Interest 7.70 8.31 4.57 3.02 PBT 82.68 117.59 121.57 95.40 E/O Item 0.00 0.00 0.00 0.00 PBT After E/O Item 82.68 117.59 121.57 95.40 Tax 29.49 41.11 43.21 34.45 PAT 53.19 76.48 78.36 60.94 Other Comp Inc 0.00 0.00 0.00 0.00 Adjusted PAT 53.19 76.48 78.36 60.94 NPM(%) 8.36 11.15 9.62 10.32 EPS 17.32 24.91 25.52 19.88 ROE (%) 25.67 30.46 23.81 16.83 ROCE (%) 30.31 36.30 32.91 24.41 Book Value 67.50 81.79 107.21 118.14

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HEM SECURITIES LIMITED

MEMBER-BSE,CDSL,SEBI REGISTERED CATEGORY I MERCHANT BANKER

Sebi Registration No For Research Analyst: INH100002250

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GROUP COMPANIES

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MEMBER-NSE

HEM MULTI COMMODITIES PRIVATE LIMITED

MEMBER-NCDEX, MCX

HEM FINANCIAL SERVICES LIMITED

NBFC REGISTERED WITH RBI

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