Fairchem Organics Ltd Management Discussions

OLEO CHEMICALS AND INTERMEDIATE NUTRACEUTICALS:

The Industry Structure and Developments:

OELO 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, Isostearic Acid, other Distilled Fatty Acids are the main products of the Company in Oleo Chemicals segment.

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 more than 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. About 5 years back, the Company had 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 maintain the same in coming year. The Company has also been able to develop export market and we expect to gradually increase the export during financial year 2026-27.

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.

About few 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. Since last couple of years, the Company has been able to sell this product to another Indian customer for altogether different application and again it appears to be long term in nature.

The Company introduced an in-house developed high value new product viz. Isostearic Acid mainly used in Lubricants and Cosmetics industry. As per the available data, there are very few, say 3 to 4, manufacturers of this product globally and our Company is the first Indian and perhaps the first Asian company to successfully make it with internationally acceptable quality without importing any technology or taking help of any external specialist / consultant for the same. As the approvals have a long gestation time, we expect good export volume in coming years.

The word Nutraceutical is derived from two words viz. Nutrition and Pharmaceutical 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 not had any volume during the period under review. However, in future when there is an opportunity to upgrade the streams of Tocopherols and Sterols, the same can be explored immediately.

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.

The Company is currently having 3 prime material products viz. (A) Dimer Acid, (B) Linoleic Acid and (C) Isostearic Acid. The per cent share of these 3 products in terms of value during the year was 73.1%. The performance was impacted both from volume and margin perspective due to higher raw material cost which was not fully passed in the finished product and demand moderation from our customer due to continual macro uncertainty from U.S.A. tariff to recent middle east war crisis.

The Company is the leading Indian producer competing mainly with Chinese suppliers for Indian market. The end use of this product is in making Polyamides which in turn goes for making adhesives etc.

The Company is the only Indian company for the kind of Linoleic Acid needed for superior grade paints. So, for such use, the Company is the preferred supplier. There are few other companies making near about quality and are competing with the Company for requirement in non-premium grade paints. The end use of this product is in making Alkyd Resin which in turn goes for making paints.

This is the new launch by the Company based on in-house product development work in its R & D section. No other Indian Company makes it. Based on the information available, there are only 3-4 companies in the world - in Europe and U.S.A. - making it. The end use of this product is in lubricants and cosmetics. As of now, export is the main market.

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 very cordial. As at March 31,2026, the Company had 212 employees on the payroll of the Company.

The outlook of Oleo Chemicals business appears to be promising. The Company is continuously working on process and cost optimization and development of new product along with maintaining excellent relationship with the complete supply chain. While the macros are uncertain due to middle east crisis, we are consciously optimistic due to lower tarrif in US, likely FTA with UK and EU and recent rupee devaluation likely to improve our export competitiveness in the coming year.

The availability of right kinds of raw materials in adequate quantity at fair prices is the main risk / concern for the business of the Company. The raw materials are the by-products of certain vegetable oil refineries processing soft crude vegetable oils. In India, agriculture is a political tool for ruling Govt. and so once in a while it tweaks with import policy etc. India is not self-sufficient in meeting its vegetable oil demand and depends substantially on imports of mainly crude vegetable oils from Indonesia, Malaysia, Brazil, Argentina, Ukraine, Russia etc. Many a times, export policy / restrictions of one or more of these countries and other factors such as war results in insane raw material prices which is difficult to immediately transferred to finished products pricing.

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.

a) Though the interest cost has remained same, percentage in Interest Coverage Ratio has reduced due to substantial fall in Net Profit Before Tax.

b) The reason for decrease in Current Ratio is due to rise in Current Borrowings which is the result of higher level of inventories as at March 31,2026 compared to previous year.

c) The reason for increase in Debt Equity Ratio is due to relatively higher rise in Current Borrowings vis-a-vis increase in equity.

d) The fall in Operating Profit Margin is due to higher raw material cost.

e) The reason for fall in Net Profit Ratio is mainly due to higher raw material cost and fall in sales volume this year compared to last year.

f) The reason for decrease in Return on Equity Ratio is mainly due to substantial fall in total net profit.