Description

Investment Summary

Fineotex Chemical is a high quality small mid cap business in India ($480mm enterprise value) listed in the Bombay Stock Exchange since 2011 that I have owned for the past few years. I expect the stock to multiply 5x in the next decade outperforming the Sensex and NIFTY indices. Any sell off in Indian markets should be seen as an opportunity to average into Fineotex.

Fineotex is a specialty chemical manufacturer with significant technical barriers to entry and strong growth tailwinds over the next 10 years. Fineotex’s export network spans over 70 countries and export revenues account for nearly 20% of revenues. The company's strategic collaborations and recent expansion plans position it well for revenue growth

Noteworthy, the company has increased production capacity by 2.5x from 43,000MT to 104,000 MT with its Ambernath plant capacity setting the stage for strong growth which Mr. Market has not paid full attention to and headline PE multiples are misleading.

In 2019, the company had increased capacity to 43,000MT and since then revenue has multiplied 3x. 

The company's majority shareholder is Surendrakumar Tibrewala, more background on the management section.

Ashish Kacholia, super investor in India owns about 3% of the company.

At a high level, lets look at the company's past track record. Since FY12 the company has roughly grown revenue 7x from $10mm to $68mm and grown revenue every year since 2011, except one year in FY2014.

Profits at the same time have multiplied 14 times to $14mm growing over 15% atleast 60% of the time. 

Gross profits of $26mm in FY2024 have grown from just $3mm in FY2014. If you look at cash gross margins from FY2013 to FY2024, this has been stable in the mid 30s and I expect this to reach the mid 40s over the next decade as Fineotex grows revenue due to its increased production 

In the last 4 years, operating cash flow has grown 4x from $3mm to $12mm. The company has been investing for future growth primarily through internal cash flow and the net change in cash on balance sheet, is due to operations, not financing. 

Given the growth plans, the company recently completed a ₹342 crore preferential allotment, executed in two phases through warrants, with around ₹120 crore already received. Promoters have participated in this fundraising. As mentioned in their Q4 FY24 earnings call, Fineotex plans to pursue a domestic acquisition within a 3-4-year timeframe, although specific developments have yet to be announced.

 Return on unlevered equity is 30% consistently and if one looks at the drivers of ROE, it is as a result of margin expansion with net margins of nearly 20% which were 8% in FY2014. Asset turns have been consistent. The company has a consistently net cash balance sheet since FY 2008

Return on assets is 20% improving from 7.5% in FY2014.

The company is not "capital intensive" as such, a high level CFO/capex+acquisitions ratio is 2x and capex has been funded entirely through internal cash flows.

There has been no share dilution the last decade, the company has done small repurcahses in 2017 and 2021 both substantially below current prices and reduced share count slightly. 

The company has increased dividends per share over the last several years, again through internal cash flows.

Dividends and repurchases accounted for ~22% of FCF since inception, I expect dividends per share to increase. 

I calculated the incremental ROICs on the business in various phases and they are below: 

2006-2009: 25% 

2009-2012: 47% 

2012-2015: 61% 

2015-2018: 25% 

2018-2022: 23% 

As can be seen above, the company consistently earns returns on incremental capital well in excess of its cost of capital. 

In sum, the key value drivers for Fineotex over the next decade will be strong growth rates, returns on capital  and operating cash flow growth and prudent capital allocation. Looking at headline PE multiples or cash flow yields is misleading, because revenue in the next decade is likely to grow multi-fold and money is made, focusing on where the puck is going not, where it is today, especially for a smaller mid cap with strong growth, returns on capital, cash flow growth and prudent capital allocation 

Brief Company History

Fineotex Chemicals was founded in 1979 by Mr. Surendra Tibrewala and has since evolved into a prominent player in the specialty chemical sector, serving a diverse range of industries, including textiles, home care, hygiene, mining, garments, water treatment, leather, construction, paint, agrochemicals, and adhesives.

Fineotex Chemicals began as a specialty chemical company solely focused on the textile industry. Over the years, it has successfully diversified into complementary sectors, including hygiene and cleanliness, oil and gas, and industrial and consumer care. 

● 2004-2007: Fineotex Chemical Pvt Ltd was incorporated, which later got converted into Fineotex Chemicas td.

● 2011: Fineotex Chemicals Ltd was listed on the Bombay Stock Exchange (BSE). Following this, the company established a wholly-owned subsidiary in Malaysia and acquired a majority stake in the Biotex Group.

● 2015-2019: The company was recognized as a Star Export House and increased its manufacturing capacity to 43,000 MTPA.

● 2020-2021: Fineotex undertook significant capital expenditures, investing ₹270 million to develop a new facility in Ambernath, Maharashtra. During this time, they also signed joint ventures with Healthguard and Eurodye and formed a partnership with Sasmira.

● 2022-2023: The company continued its expansion efforts with additional capital expenditures, further increasing the Ambernath facility's capacity by 40,000 MTPA and acquiring an additional 7 acres of factory land.

Industry overview 

The Indian chemical industry is a critical segment of the economy, ranking as the second largest in the global chemical value chain, following China.

Indian chemicals industry is around $300bn size next year with 80000 products, employing 2mm people.

3^rd largest consumer of polymers

4^th alrgest producer of agrochemicals

6^th largest producer of chemicals

industry contributes 3.4% to the global chemicals industry and approximately 7% to India’s GDP

Notably, nearly 25%-30% of Indian chemical volumes are exported outside the country. The specialty chemicals segment is one of the fastest-growing areas within the chemical industry, anticipated to grow at a CAGR of 12.4%, reaching a market value of $64 billion by 2025.

India’s chemical sector benefits from a robust network of over 200 national laboratories and 1,300 research and development (R&D) centers, providing a strong foundation for innovation

The specialty chemicals segment is one of the fastest-growing within the Indian manufacturing sector driven by strategic advantage and favorable market dynamics

This growth is driven by increased demand from various end-user industries, favorable government policies, a burgeoning domestic customer base, and shifts in consumer lifestyles

Global companies are looking to de-risk their supply chains, which have been heavily reliant on China. This shift presents a significant growth opportunity for India’s chemical sector.

The Indian government also supports the industry through R&D and promoting the ‘Make in India’ campaign. Government initiatives such as the Production-Linked Incentive (PLI) schemes and the Petroleum, Chemicals, and Petrochemicals Investment Region (PCPIR) policy enhance infrastructure development and regulatory facilitation, attracting substantial investments.

Cost-optimized manufacturing remains a cornerstone of India’s competitive edge, offering significant advantages over developed economies. A skilled workforce adept at driving technological advancements further enhances India’s manufacturing prowess.

Business Overview 

Fineotex Chemicals is a leading specialty chemical company operating in the textile chemicals and cleaning & hygiene segments. 

In total, Fineotex boasts a portfolio of over 470 chemical products across all segments. 

Key products are the below: 

1. Textile Chemicals: Fineotex Chemicals offers a comprehensive range of products that cater to the entire textile value chain. Their offerings include polymer softeners, enzymes, wetting agents, dyes, acids, alkalis, softeners, and thickeners, supporting processes from weaving and pre-treatment to dyeing, printing, and finishing. Key Customers in the Segment: Notable clients include Chenab Textiles, ICT Ltd, Welspun India, Vimal, Raymond, Shahi, and many others.

2. Cleaning and Hygiene Chemicals: The company provides tailored cleaning and hygiene solutions for various applications, including housekeeping, kitchen care, disinfectants, and public health hygiene. Key Customers: RSPL (Ghadi Detergent), Patanjali

3. Drilling and Specialty Chemicals: Fineotex develops non-toxic, eco-friendly solutions for diverse needs, such as mosquito life cycle controllers. Exploration into emerging high-growth products, particularly in hygiene and drilling specialties, positions Fineotex to engage effectively with India’s leading detergent manufacturers and premier oil and gas  companies

Strategic alliances with partners and institutions, including EuroDye, HealthGuard, and Sasmira, further enhance our market presence and product offerings

With a global presence in 70 countries and a strong network of over 110 dealers, Fineotex serve multiple industries, regions, mitigating the risks associated with dependence on a single industry or client group.

Research and development (R&D) serves as a significant barrier to entry in the specialty chemicals sector, enabling companies to create highly differentiated products that enhance branding. Fineotex allocates substantial resources to R&D, including establishing a state-of-the-art facility in collaboration with the Sasmira Institute, a premier textile institution in India. Partnerships with Eurodye CTC, Healthguard, and Biotex Malaysia further strengthen their R&D capabilities. 

Fineotex Chemicals operates on a fungible capacity basis, allowing flexibility in manufacturing different products using the same equipment and facilities. This adaptability facilitates diversification and enables the company to meet new market demands without substantial retooling. By not specializing in a single product or segment, Fineotex mitigates business risks. As per the management, there are always new trends and requirements coming up and there are always new products that need to be added. So, investors would appreciate that Fineotex is not trying to fit into one particular product or industry. Rather, it is trying to fit in multiple sectors to grab onto any opportunities that come up.

Manufacturing capacity

Fineotex operates three state-of-the-art manufacturing plants located in Navi Mumbai (India), Ambernath (India), and Selangor (Malaysia), setting their current manufacturing capacity at 104,000 MTPA. The new facility, adjacent to existing Ambernath plant, will cater to the growing demands in specialty performance chemicals, encompassing textile, home care, cleaning, hygiene, and drilling specialties

Fineotex recently acquired seven acres of land at Ambernath for ₹35 crore to support its growing demand, expanding production capacity across textiles, home care, cleaning, hygiene, and drilling sectors. With a current capacity of 104,000 MTPA—up from 43,000 MTPA just three years ago—the company is utilizing 72% of this, or 76,000 MTPA.

The first phase of the new facility will add 20,000 MTPA, projected to drive a 19% incremental revenue growth beyond the natural expansion from existing capacity, with estimated additional revenue of around ₹100 crore once fully operational.

Management

Fineotex is a family owned business, with the owners holding 62.88% of the company. Founded in 1979 by Mr. Surendra Tibrewala, Fineotex has established itself as a key player in the specialty chemicals sector.

Mr. Surendra Tibrewala serves as the Chairman and Managing Director of Fineotex. He holds dual degrees in commerce and law and began his career at the age of 20 in the specialty chemical industry. With over three decades of experience as a trader, manufacturer, and reseller in specialty and auxiliary chemicals, he brings a wealth of expertise to the company.

Mr. Sanjay Tibrewala is the Executive Director and Chief Financial Officer of Fineotex. A graduate of Narsee Monjee College of Commerce and Economics at the University of Mumbai, he has approximately nine years of experience in the specialty chemical sector. As a promoter, he plays a crucial role in managing the company's strategy and expanding into new geographies.

Other Board of Directors
Aarti Jhunjhunwala: Head of International Marketing
Navin Mittal: Independent Director
Alok Dhanuka: Independent Director
CS Dhanuka: Independent Director
CS Bindu Shah: Independent Director
Dr. Sunil Waghmare: Independent Director

The company is free from any kind of promoter pledges. There are no concerning resignations in the company from both directors or auditors.

Financials

As mentioned in the investment summary, since FY12 the company has roughly grown revenue 7x from $10mm to $68mm and grown revenue every year since 2011, except one year in FY2014. I expect revenue to multiply 5x to $300mm in the next decade. 

Gross profits of $26mm in FY2024 have grown from just $3mm in FY2014. If you look at cash gross margins from FY2013 to FY2024, this has been stable in the mid 30s and I expect this to reach the mid 40s over the next decade as Fineotex grows revenue due to its increased production 

Commodity chemical companies often struggle with pricing power and operate as price takers. By shifting from a commodity model to providing customized solutions and technical services, Fineotex has captured greater pricing power, contributing to its resiliency in margins.

Net profits have multiplied 14 times to $14mm in the last 10 years growing over 15% atleast 60% of the time. I expect net margins to be between 15-20% in the next several years. In the last 4 years, operating cash flow has grown 4x from $3mm to $12mm.

The company has been able to show impressive growth in its financials even amidst the global chemical industry crisis. If one were to consider the past 3-year CAGR growth of FCL, one would find a healthy revenue growth of 35%+ 

Comparing it with a few of the largest specialty chemical companies in India, i.e., Tata Chemicals, SRF, Gujarat Fluorochemicals, BASF, their revenue CAGR growth stands at 15%/16%/17%/13%, far below the CAGR growth rate of FCL.

Now comparing the profits growth for the past 3 years, Fineotex grew by a CAGR of 40%. On the other hand, net profits growth shown by Tata Chemicals, SRF, Gujarat Fluorochemicals, BASF has CAGR growth rates of 1%/3.7%/25%/0.6%.

Fineotex business model has also been successful in increasing its margins. Between 2020 to 2023-24, EBITDA margins increased from 18% to 26%. Investors will also appreciate the fact that FCL operates on the higher side of EBITDA margin in the chemical industry.

Other big players in the sector like Tata Chemicals saw a margin improvement from 15% to 18%, SRF saw a decline in margin from 25% to 20%, GFC too saw a decline in margin from 23% to 21%, and BASF’s margins saw resiliency between 6% to 7%.

Return on unlevered equity is 30% consistently and if one looks at the drivers of ROE, it is as a result of margin expansion with net margins of nearly 20% which were 8% in FY2014. Asset turns have been consistent. The company has a consistently net cash balance sheet since FY 2008

In sum, the key value drivers for Fineotex over the next decade will be strong growth rates, returns on capital  and operating cash flow growth and prudent capital allocation. On each of these metrics, I expect revenue growth to multiply 5 fold over the next decade. Returns on capital 30%+ with net cash balance sheet. 

Looking at headline PE multiples or cash flow yields is misleading, because the company is a small mid cap grower operating in India's growth economy. If one acts as a business owner, and buys and forgets Fineotex, I expect a 5x upside in the next decade. It should be a core part of a small cap portfolio. 

in the next decade is likely to grow multi-fold and money is made, focusing on where the puck is going not, where it is today, especially for a smaller mid cap with strong growth, returns on capital, cash flow growth and prudent capital allocation 

Any sell off in Indian markets should be seen as an opportunity to average into Fineotex.

Risks 

Price Fluctuations

While volumes in the chemical sector are gradually increasing, any gains from these volumes may be offset by price fluctuations. Prices are anticipated to stabilize, albeit at lower levels, by the third and fourth quarters of 2024. A significant factor contributing to this instability is widespread destocking globally. Although the USA region appears to have completed its destocking phase, uncertainty remains regarding when restocking demand will return. Additionally, China continues to export cheap chemicals, creating further challenges for Indian chemical exports despite the Directorate General of Trade Remedies imposing restrictions on various chemicals, petrochemicals, and bulk drug products. Increased competition from the USA and the Middle East also poses a threat to the Indian chemical industry.

Rising Operating Costs

The management has reported skyrocketing freight costs due to the Red Sea crisis, a shortage of vessel containers, and difficulties in tracking inventory requirements. Currency fluctuations have also contributed to increased operational expenses. Despite these macroeconomic challenges, FCL has demonstrated remarkable resilience in maintaining its gross profit and EBITDA margins, which have remained high both year-over-year and quarter-over-quarter. Their focus on sustainable solutions has played a key role in driving higher margins.

Catalyst

Manufacturing capacity expansion positions company for strong revenue growth over the next decade