Fine Organic Industries Ltd IPO - Should you subscribe?

Incorporated in May 2002, Mumbai based Fine Organic Industries Ltd is the largest manufacturer of oleochemical-based additives in India and a strong player globally in this industry. The company 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. As at December 31, 2017, it had a range of 387 different products sold under the ‘Fine Organics’ brand. As on December 31, 2017, it had 603 direct customers (i.e., end-users of its products) and 127 distributors (who sold its products to more than 5,000 customers) from 67 countries.

The company was founded by Late Ramesh Maganlal Shah and Prakash Damodar Kamat as Fine Organic Industries in early 1970 at Mumbai which was registered in 1973 as a partnership firm.  The company is more than 40 years old.

The company has  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 December 31, 2017, these three facilities have a combined installed capacity of approximately 64,300 tonnes per annum. Each of the current manufacturing facilities has the ability to manufacture wide range of products, which provides with the necessary flexibility to cater to changing demands in the market, thereby avoiding dependence on any one major product category.

Issue Details: Fine Organic Industries Ltd issue is opening on June 20, 2018 along side government PSU IPO RITES Ltd. Fine Organic is also 100% Offer For Sale arrangement. 

List of selling share holders: Currently, promoters and promotor group are holding 100% equity shares in the company. They are offloading 25% equity shares.

Investors classification : Out of 7664994 shares, 35% shares are reserved for Retail Individual Investors

Object of the offer:  As it is 100% Offer For Sale, the company shall not receive any proceeds from the issue. 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 Selling Shareholders. The listing of Equity Shares will enhance the Company’s brand name and provide liquidity to the existing Shareholders. 

Pricing of the share: The company has set the price range between Rs. 780 - Rs. 783. We have to take Fiscal 2017 EPS Rs. 25.33 (Basic/Diluted on consolidated basis) as base to find out PE because Fiscal 2018 financials are not provided in DRPH. At lower and upper price band, PE comes to around 31. The selling shareholders have asked the price which is 7 times of its NAV (Net Asset Value). There are no listed peers in the similar line of business, so pricing comparison is not possible. 

As the company has edge over its business and is the largest manufacturer of oleochemical based additives, there should be huge demand for such companies stocks. This is altogether a new industry segment. Further, the company is planning to set up additional production facilities in India and abroad and the same can start operations in a year or two. There is a huge opportunity for growth ahead. However, as it is 100% offer for sale and the present market scenario is very bearish, one can wait for initial two days before applying. The anchor invest list is also very important before taking any decision.

The company has the strengths like it is the largest producer of oleochemical based additives in India and one of the few large players in the oleochemical based additives industry in the world, diversified product portfolio catering to a variety of high growth industries, specialized business model with high entry barriers, flexible and strategically located production facilities with in house development capabilities, strong R & D capability with a focus on innovation, diversified customer base with long term relationship with marquee customers, strong management team.

The company's financials: The company's revenue from operations for Fiscals 2015, 2016, 2017 and the nine months ended December 31, 2017 was Rs. 614.71 Crore, Rs. 659.74 Crore, Rs. 789.65 Crore, Rs. 587.04 Crore respectively. Its EBITDA for Fiscals 2015, 2016, 2017 and nine months ended December 31, 2017 was Rs. 113.95 Crore, Rs. 145.84, Rs.145.51 Crore and Rs. 104.38 Crore, respectively.

Its Return on Equity for Fiscals 2015, 2016 and 2017 and the nine months ended December 31, 2017, was 29.46%, 31.35%, 26.51% and 16.64%, respectively. Its  profit after tax margins (profit for the period as a percentage of revenue from operations) were 9.28%, 11.55%, 9.84% and 9.97% for Fiscals 2015, 2016 and 2017 and the nine months ended December 31, 2017, respectively.

Other details : The company has paid 450% dividend in Fiscal 2016 & 2017 and 300% in Fiscal 2015. However, the same percentage can not be expected after IPO.

The company is a cash rich company. The debt equity ratio was only 0.08 as on March 31,2017.

Conclusion: The anchor investors list is already published. The company has received bids from anchor investors for 12,77,563 shares i.e. 33% of QIB quota. The company is fundamentally strong but the market is not good. I am NEUTRAL in this IPO.

(Note: I write review based on my knowledge and understanding. The reader of this blog should do his/her own research before applying)