Fairchem Organic

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.

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.

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.

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%.

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.

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.