fairchem organics ltd share price Management discussions

OLEO CHEMICALS AND NUTRACEUTICALS: The Industry Structure and Developments: OLEO CHEMICALS:

Oleo Chemicals are preferred since they are produced from biological fats or oils i.e. natural sources. The demand for biodegradable chemicals is supporting oleo chemicals market. Fatty Acids, methyl esters and fatty alcohols are major oleo chemicals manufactured in India. The Company is mainly in the business of Fatty Acids which is one of the largest segments in Oleo Chemicals. Dimer Acid, Linoleic Acid / Soya Fatty Acid, other Distilled Fatty Acids are the main products of the Company in Oleo Chemical segment.

Dimer Acid: No organized data pertaining to demand / consumption of Dimer Acid in India is available. However, since the Company is in the business of this product now for nearly two decades, it is largely aware of the industrial users of the same. The Company also tracks the import data from China as Chinese suppliers are the main competitors for the Company. Based on Companys analysis, the Company continues to maintain its leadership position in Indian market by virtue of its pricing strategy, timely service, quick supply and fair terms of payment and quality product. Dimer Acid is a prime product of the Company which is made by processing blend of different raw materials. A couple of years back, the Company has internally developed a process which gives it optimum yield from processing of such blend. During the financial year under review, the Company was able to maintain its share in the domestic market of Dimer Acid and hopes to improve on the same in coming quarters.

Dimer Acid is used for making two kinds of polyamides i.e. Non-reactive and Reactive. Non-reactive polyamides are used by manufacturers of printing inks, adhesives, paper coatings, etc. Rising demand from industries such as printing inks, adhesives and paper coatings may drive global dimer acid market size for non-reactive polyamide resins. The demand for Reactive polyamide resins application will be driven by increasing surface coatings & adhesives demand in marine and construction.

Linoleic Acid / Soya Fatty Acid:

About 4 years back, the Company had worked on improvement in quality of this product and as a result was able to push the sales of said product. The end use of both - Linoleic Acid and Soya Fatty Acid - is same i.e. for making Alkyd Resins which in turn is used in making paints.

INTERMEDIATE NUTRACEUTICALS:

The word Nutraceutical is derived from two words viz. RsNutrition and RsPharmaceutical. When used in food, it provides health and nutrition benefits in addition to basic nutrition value present in food items. The consumers are now more health conscious and better informed about such nutritional products. The Company is in the business of (natural) Tocopherols and Sterols intermediate nutraceuticals and they are exclusively exported. Tocopherols have anti-oxidant properties. Tocopherols, after they are further concentrated by customers, are then used in (a) Pet Food, (b) food as it prevents rancidity. Tocopherols when converted into Natural Vitamin E finds the application in Pharmaceutical, cosmetic etc.. Sterols after they are further concentrated, finds its use in making of Cortico Steroids and as food additive. Due to unremunerative prices of the product exported by the Company, being intermediate in nature vis-a-vis price expectation of Indian suppliers of its specific raw material, the Company did limited business of this stream during the F.Y. 2022-23 also. The Company has decided to continue with this limited business so that in future when there is an opportunity to upgrade the streams of Tocopherols and Sterols, the same can be explored immediately.

Strengths, Opportunities and Threat:

The major strength in Oleo Chemical business is Companys ability to process by-products having no technical specifications and make higher grade fatty acids and intermediate nutraceuticals meeting stringent quality standards. In fatty acids, the Company enjoys leadership position in its area of business. Another advantage in favour of the Company is its strong customer and supplier relationship of more than 25 years.

Ideally, there is a place for one company in this business of Oleo Chemicals and Nutraceuticals in India due to limited availability of the main raw materials within India. The import of the said raw material with applicable basic import duty is not a very viable proposition at current prices of raw materials as well as prime finished product obtained therefrom.

HUMAN RESOURCE MANAGEMENT:

Out of all the resources, human capital is of immense importance which may decide overall growth of Oleo Chemicals business. Human capital has the inherent capacity of delivering more than 100 % unlike other resources. During the year, the industrial relations remain very cordial. As at March 31, 2023, the Company had 215 employees on the payroll of the Company.

OUTLOOK :

The outlook of Oleo Chemicals business appears to be promising. The Company is continuously working on process optimization and strives to explore the ways to beat the inflation and thereby maintain / reduce per unit processing cost. This is one area where the Company benefits without any corresponding loss to either its customer or supplier of raw material and so this benefit is permanent.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY :

There are adequate internal control systems for financial reporting. Internal audit has been done by a firm of Chartered Accountants. The Company is continuously exploring to strengthen its internal control either based on feedback of statutory / internal auditors or based on the need felt from day to day operations. With effect from December, 2018, entire finance dept. is shifted to the office at works and so now all the employees of the Company are at single location. This has its own advantages.

Computation of Ratio and significant changes therein

No. Ratios	F.Y. 2022-23	F.Y. 2021-22	Change ( % )
1 Debtors Turnover Ratio	12.11	12.09	-
2 Inventory Turnover Ratio	7.11	8.69	-18%
3 Interest Coverage Ratio	10.36	14.31	-28%
4 Current Ratio	2.22	2.04	9%
5 Debt Equity Ratio	0.19	0.27	-30%
6 Operating Profit Margin ( % )	11.16	16.36%	-32%
7 Net Profit Margin ( % )	6.72%	10.57%	-36%
8 Return on Net Worth ( % )	17.92%	33.91%	-47%

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios: a) The significant fall in Interest Coverage Ratio is due to fall of more than 35% in Profit before Tax. b) The significant fall in Debt Equity Ratio is due to prepayment of outstanding Term Loan during the year and higher equity base as at March 31, 2023 versus previous year. c) The significant fall of 32% in Operating Profit Margin is due to relatively higher raw material cost as a percentage to sales during the year versus previous year. d) The significant fall of 36% in Net Profit Margin is due to relatively higher raw material cost as a percentage to sales during the year versus previous year. e) The significant fall of 47% in Return of Net worth is due to fall in Net Profit Margin due to reasons explained in above para.