Recommendation From Speciality Chemicals Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon. 

FINEOTEX CHEMICAL LTD. : FORMULATING THE RIGHT EQUATIONS

HERE IS WHY
✓Strong financial outlook
✓Technical barriers to entry in the industry
✓Focus on cost control

Fineotex Chemical Ltd. is one of the leading manufacturers of chemicals for textiles, construction, water treatment, fertilisers, and leather and paint industries. It has been in the business for 40 years now and manufactures over 400 specialty chemicals and enzymes required by various industries with primary focus on application in textile industry processes from pre-treatment to finishing. It also has a global reach across 60 countries. The company reported net sales of Rs 218.5 crore in FY21 compared to Rs 196 crore in FY20. That is a growth of nearly 11.3 per cent. The company has commendable international acceptance by high-profile customers such that it generates almost half of its sales from 60+ countries.

The EBIDTA stood at Rs 57 crore in FY21 as against Rs 35.7 crore in the previous year. That is a high growth of 60.3 per cent. Also, the PAT grew by a whopping 211.37 per cent, jumping from Rs 14.3 crore to Rs 44.5 crore from FY20 to FY21 respectively. The extraordinary growth in PAT was driven by superior quality and efficient products and strict control over costs. However, the cash flows from operating activities have decreased from Rs 28.35 crore in FY20 to Rs 9.2 crore in FY21, reducing to one third of its previous year.

Net sales for the quarter ended March 2021 stood at Rs 75 crore. That’s a growth of 29.3 per cent QoQ basis and 72 per cent YoY basis. The EBITDA was Rs 12.8 crore, which saw a growth of -7.1 per cent QoQ and 69.8 per cent YoY. The net profit number stood at Rs 12 crore, a decline of -15.38 per cent QoQ but a drastic growth of 295 per cent YoY. The company had acquired Biotex Malaysia (73 per cent owned) in 2011 which is engaged in developing products, research and development activities and application research in Malaysia. The net profit of Biotex Malaysia has grown ten times since acquisition.

Fineotex Chemical and Biotex Malaysia complement each other and form a synergy to offer distinguished specialty chemical solutions globally. The company has a good profitability record. For the last five years the profit has grown at 20.23 per cent CAGR. The ROE and ROCE stood at 23.5 per cent and 29.35 per cent, respectively. The company has relatively insignificant debt in the books. The EBITDA margin stood at 18.6 per cent in FY21, increasing by 120 bps from the previous year. The PAT margin stood at 20.4 per cent, a huge upside by 1,300 bps from the previous year. The company reported relatively better earnings per share of Rs 3.84 as compared to Rs 1.17 in FY20.

The company has made a successful entry in the new sector of home care hygiene and drilling specialty chemicals while maintaining focus on its core textile chemical business. It is setting up a brownfield facility at Ambernath in Maharashtra to be future-ready for the next phase of growth. The plant will facilitate the new home care and hygiene segment and has strategic location and cost advantages that will further drive the margins. The company has a high-profile customer base in India and overseas as well, a strong brand recall and technical barriers to entry in the industry, all of which give it a competitive edge. It has huge growth potential and an expert management team to seize the right opportunities. We recommend our reader-investors to BUY this stock.