Fineotex Chemicals: Stock Market Recursion

This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further

The Indian stock market has all types of companies. The deeper you look down the spectrum of market capitalization, the stranger things you will find, growing away from the analyst spot light. Fineotex Chemicals Limited (FCL) is one such micro-cap company. With only 72 employees on its rolls in India, FCL operates in the attractive space of speciality chemicals competing with foreign MNCs that dominate the space of textile finishing.

Textile speciality chemicals is a high margin business as textile finishing and processing is a key value chain activity for textile companies but forms only a small portion of their total costs – putting companies like FCL in a comfortable niche. Customer retention in this business is high, due to high switching costs and involvement and R&D is a key differentiator.

But what is really interesting about FCL is that it is a proxy play on the growth of the Indian stock markets. See below for the latest quarterly results.

2017-12-13_17-23-21.jpg

What’s unusual about the above schedule?

Out of the Non-current assets, Financial Assets (Investments) is more than Property Plant & Equipment!

Further, the company has 11 crores investment in land and property.

So what’s the real business here? Chemicals or investing?

See a partial snapshot (the full roll was too big and printed on the AR in landscape view!) of stock market investments made by the company from their annual report.

2017-12-13_17-46-51.jpg

See the names of other smallcaps – Vardhman Acrylics and Vidhi Dyestuffs, which are also speciality chemical companies and competing peers of FCL. The company also has a ton of mutual fund investments. A key risk with this type of balance sheet is that a deep stock market correction will prove a doubly whammy for FCL investors. Perhaps this partly explains why FCL trades at a Beta of 1.8, which is a very high indicator of volatility.

Thoughts on September Quarter Results

While maintaining healthy margins, thanks to pricing power in textile finishings and low input costs from crude prices, the company has struggled to grow its topline. This quarter the company has shown improvement, albeit marginal, in the standalone revenues and a slightly more impressive growth in consolidated revenues (FCL has subsidiaries in Malaysia and the Middle-East).

The EPS has grown by 25% in the standalone September Quarter 2017 over September 2016 results. It is fair to take same calendar quarters for comparison to adjust for cyclicity in demand. Its standalone PE is currently trading at 27, which puts the PEG at slightly more than 1, which is cheap compared to peers in the speciality chemicals space, especially considering FCL’s sustained high margins over the years.

DISCLAIMER:

This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I hold a position in FCL so my views are biased.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

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