Fairchem Organics Limited — Q3 FY25 earnings call

Call held 19 Feb 2025

Management summary

Fairchem Organics faced a challenging Q3 FY25 with significant declines in revenue and EBITDA, primarily due to an adverse custom duty hike on raw materials and soft demand from the paint sector. Despite these headwinds, the company is optimistic about its high-value isostearic acid product, which is export-focused and expected to drive margin recovery. Management also highlighted a strong balance sheet with no long-term debt and ongoing efforts to commercialize a new product with substantial revenue potential, albeit with a longer development timeline.

Highlights

  • Isostearic acid business is performing well, with 90% of production targeted for exports to developed markets (Europe, US).

  • The company has no long-term debt and significant undrawn working capital facilities (Rs. 60-65 crores), indicating strong liquidity for future projects.

  • Management is confident that EBITDA margins can return to 12-15% next year with increased isostearic acid contribution and potential demand recovery.

  • Fairchem has retained its two-thirds domestic market share in dimer acid despite cost pressures and China dumping.

Concerns

  • Q3 FY25 revenue from operations declined by 23% YoY to Rs. 114 crores, and EBITDA declined by 61% to INR 8 crore.

  • EBITDA margins for Q3 FY25 were significantly compressed at 6.87%.

  • The Indian government's custom duty hike on crude vegetable oils (from 5.5% to 27.5%) has sharply increased dimer acid production costs, making it difficult to compete with finished product imports (7.5% duty).

  • Demand from the paint sector for linoleic acid/soya fatty acid saw a 30% volume drop QoQ in Q3 FY25.

  • Commercialization of a new high-value product (40,000 tons capacity) is an R&D-intensive process with a projected 2-3 year timeline for material impact.

Key financials

2 periods

Headline

  • Revenue from Operations
    ₹114 Cr
    YoY -23%
  • EBITDA
    ₹8 Cr
    YoY -61%
  • EBITDA Margins
    6.9%
  • Net Profit
    ₹3.54 Cr

9M FY25

  • Revenue from Operations
    ₹417 Cr
    YoY -10%
  • EBITDA
    ₹38 Cr
    YoY -20%
  • EBITDA Margins
    9.2%
  • Net Profit
    ₹21 Cr

What they filed

Q1 FY27: revenue up 34.4%, net profit up 900.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue139 114 121 131 112 −19%100 −12%117 −3%176 +34%
EBITDA9 8 4 5 4 −56%4 −50%8 +100%18 +260%
Net profit4 4 1 1 1 −75%0 −100%4 +300%10 +900%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Capital allocation

high confidence
  • Debt Debt disclosed
    There is no long term debt. There is a working capital against our receivables and inventory. As of now, the outstanding is against our inventory and receivables of say about Rs. 130 crores plus. Our actual drawal is less than 50 crores as on date.
  • Liquidity Undrawn ₹60 Cr Undrawn drawing power is approximately Rs. 60 crores-Rs. 65 crores. Can withdraw 60-75 crores from working capital and raise another 175 crores for projects.
    There is no liquid cash on book. The undrawn drawing power is approximately Rs. 60 crores-Rs. 65 crores that is the amount which we can spend. We don't have any liquid surplus cash which we are investing somewhere, no. ... Today I can, from working capital, I can withdraw 60 crores-70 crores-75 crores, and raise another 175 crores, put up to 250 crores. That is not an issue.

Guidance & targets

Profitability

  • EBITDA Margin Profitability · Next year (FY26) · High confidence 12-15%
    Keval Shah: '12% to 15% EBITDA margin, right?' Nahoosh Jariwala: 'Yes, exactly.'

    — Nahoosh Jariwala

Sales

  • Isostearic Acid Export Contribution to Total Sales Sales · Next year (FY26) · High confidence Substantially higher than 10%
    Isostearic next year would be naturally substantially higher than 10%.

    — Rajen Jhaveri

New Product Commercialization

  • Commercialization of new product (40,000 tons capacity) New Product Commercialization · FY26 · Medium confidence By FY26
    Yes, it should be. The way it is going, I feel that it should be.

    — Nahoosh Jariwala

Capacity Utilization

  • Full capacity utilization of new product (40,000 tons capacity) Capacity Utilization · Within 3 years · Medium confidence Within 3 years (from decision to go ahead)
    I mean, by that time, within three years, once we decide to go ahead, within three years we will be fully, we'll be working at full capacity.

    — Nahoosh Jariwala

What to watch in Q4 FY25

Isostearic Acid Sales Growth & Margin Contribution

Next quarter (Q4 FY25) and FY26
Current Export share 14% of total sales, 8-10% from isostearic acid. Margins 'more than double' of other products.
Target Substantially higher contribution to total sales and EBITDA margins.

Why it matters

This is the primary driver for margin improvement and revenue growth in the near to medium term.

As we will sell more and more of our isostearic acid our EBITDA margins would go up. ... Isostearic next year would be naturally substantially higher than 10%.

Risks & concerns

  • Adverse Custom Duty Structure

    high

    27.5% duty on crude vegetable oil raw material vs. 7.5% duty on imported finished dimer acid, leading to cost absorption and impacting bottom line.

    Management acknowledged

  • Demand Softness in Paint Sector

    medium

    30% QoQ volume drop in Q3 FY25 for linoleic acid/soya fatty acid, impacting topline and bottom-line.

    Management acknowledged

  • China Dumping in Dimer Acid Market

    medium

    Company is not making money on dimer acid due to dumping from China, despite maintaining market share.

    Management acknowledged

  • Delays in New Product Commercialization

    medium

    New product (40,000 tons capacity) is R&D-intensive, first in India, requiring careful optimization of manufacturing cost and yields, leading to a 2-3 year timeline for material impact.

    Management acknowledged

Q&A highlights

7 direct
FY25/FY26 Revenue Projections Direct
That also we had already mentioned that this was the internal projection made by the company and it doesn't hold good. At the bottom of that we have already mentioned that it requires entire reworking kind of a thing.

Management explicitly retracts prior revenue guidance due to unforeseen market conditions (duty changes, demand drop), indicating significant deviation from previous expectations.

Asked by Nirag Shah

Impact of Custom Duty Hike on Raw Materials Direct
the Chinese suppliers, we had to absorb most of the hike to retain our two-thirds domestic market share, which has impacted our bottom-line in a substantial manner.

Highlights a major external factor (government policy) directly impacting profitability and competitive position, forcing the company to absorb costs.

Asked by Chirag

New Product Commercialization Timeline and Challenges Partial
Because again as I explained earlier, this is a product which we are going to make for the first time in India and hardly 3 or4 companies are making in the world. So we will have to move cautiously, keeping in mind its manufacturing cost and yields... But we are very hopeful that we will be able to do it in 26.

Despite significant R&D investment and capacity allocation, management is cautious about providing a firm timeline for commercialization and profitability, citing complexity and the need for cost/yield optimization.

Asked by Nirag Shah

Isostearic Acid Market and Export Potential Direct
For isostearic acid, we are the fourth player in the world... 90% of our production will go as exports... Utilization in India is very limited. It is mainly for export market in developed countries.

Clarifies the strategic importance of isostearic acid as a high-value, export-oriented product where Fairchem is a global player, indicating a shift towards higher-margin offerings.

Asked by Siddharth Purohit

Paint Sector Demand and Market Share Direct
30% was drop in volume from Q2 to Q3 only. And Q2 again itself was a further drop from Q1. ... We haven't lost any of our buyers... They make inferior grade of products.

Confirms significant volume decline in a key end-user industry (paints) but management asserts market share retention due to product quality, suggesting industry-wide slowdown rather than competitive loss.

Asked by Ritesh Poladia

Dimer Acid Competition and China Dumping Direct
In Dimer, we don't see any drop. We are not seeing. We are able to maintain the market share. In Dimer, we are not making money because there is a dumping happening from China.

Identifies China dumping as a direct threat to profitability in the dimer acid segment, despite stable volumes and market share.

Asked by Siddharth Purohit

Capital Structure and Liquidity Direct
There is no long term debt... Our actual drawal is less than 50 crores as on date... The undrawn drawing power is approximately Rs. 60 crores-Rs. 65 crores.

Provides clarity on the company's debt-free status and strong liquidity position, indicating financial flexibility for future investments.

Asked by Chirag

Isostearic Acid Margins vs. Other Products Direct
Keval Shah: 'gross margins profile for isostearic would be more than double of what we do for dimer and linoleic?' Nahoosh Jariwala: 'Obviously, we are the fourth manufacturer in the world. so obviously, the margins are higher.

Quantifies the significant margin advantage of the new high-value product, reinforcing its importance for future profitability.

Asked by Keval Shah

2 min read 6 chapters

Detailed narrative

Financial Performance Overview

Fairchem Organics reported a challenging Q3 FY25 with revenue from operations declining 23% year-on-year to Rs. 114 crores. EBITDA saw a sharper decline of 61% to INR 8 crore, resulting in a compressed EBITDA margin of 6.87%. Net profit for the quarter stood at Rs. 3.54 crores. For the nine months ended December 31, 2024, revenue was Rs. 417 crores (down 10% YoY) and EBITDA was Rs. 38 crores (down 20% YoY), with a 9.21% EBITDA margin and approximately Rs. 21 crores in net profit.

Raw Material Cost & Duty Impact

The company faced significant pressure from a custom duty hike on crude vegetable oils, which increased from 5.5% to 27.5% in September 2024. This sharply raised production costs for dimer acid, while imported finished dimer acid attracts only a 7.5% duty, creating an unfavorable competitive landscape. Management stated they had to absorb most of this hike to maintain their two-thirds domestic market share, severely impacting the bottom line. They have made representations to the government for a policy reversal.

Paint Sector Demand & Market Share

Demand from the paint sector, a key end-user for linoleic acid/soya fatty acid, experienced a substantial slowdown. Volumes for these products dropped by 30% quarter-on-quarter in Q3 FY25, following a decline in Q2 as well. Despite the overall market softness, management asserted that they have not lost any major customers and maintain their market share due to the superior grade of their products compared to competitors.

Isostearic Acid Business Update

Fairchem is upbeat about its high-value product, isostearic acid, where it is the fourth global player. Launched 12 months ago, this product is gaining approvals, with 90% of its production targeted for exports to developed markets like Europe and the US, primarily for cosmetic and biodegradable lubricant applications. Management expects isostearic acid sales to increase every quarter, contributing 'substantially higher than 10%' to total sales next year and driving EBITDA margins back to 12-15%.

New Product Development & Commercialization

The company is developing another new high-value product, for which 40,000 tons of capacity has been earmarked. This product, a first in India and made by only 3-4 companies globally, is currently in the pilot plant sample approval stage. Management is proceeding cautiously, focusing on optimizing manufacturing costs and yields. While a material impact is expected in 2-3 years, they are hopeful for commercialization by FY26, with the potential to double current sales once full capacity is utilized within three years of project commencement.

Capital Structure & Liquidity

Fairchem Organics maintains a strong capital structure with no long-term debt. The company's actual working capital drawal is less than Rs. 50 crores, and it has undrawn drawing power of approximately Rs. 60-65 crores. Management highlighted that liquidity is not a concern, stating they could access up to Rs. 250 crores (Rs. 60-75 crores from working capital and an additional Rs. 175 crores) for new projects without issue.

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