Let’s zoom out for a moment and check how different markets are doing this year. Four markets stand out: India, Indonesia, Singapore & Thailand.

The easiest way would be to bet on the fastest growing economy. According to estimates, the Indonesian economy is projected to grow at 5%, Singapore at 3%, Thailand at 2.7% and India at 7%.

India it is! But, how do we filter all the stocks? Currently India has more than 1300 securities.

Luckily, the Indian market is very extreme. More than 60% of the companies don’t produce significant free cash flows. So that's my first filter, leaving us with 866 companies. Add ROCE of 25% and that narrows the search down to less than 150 companies.

As the contest has a timeline of 1 year, I started looking for sectors that are going to witness a huge surge in demand in a short timeframe. Luckily I found this:

Some context: The entire paint industry in India has a profit of 6000 crores. Now Grasim is committing 5000 crores for the next 3 years, nearly the same amount of the profit of the entire industry.

Will Grasim gain market share? Currently, the industry is fairly concentrated as only one company (Asian paints) controls 50% of the market. That being said, the market is big enough for more players as seen below.

So if we can find a company that supplies chemicals to these paint companies, we should do well as the demand side is robust. That’s the basis for Fairchem.

Fairchem makes oleochemicals that are used in the paint industry. Fairchem has 2 main products: Linoleic and Dimer acid & they are the only domestic players. To summarise, the demand is robust and Fairchem has cornered the supply side.

Unlike its competitors, Fairchem has a very unique way of manufacturing these products. They bought machines from Germany and Switzerland that allows them to use waste products from oil refineries. They focus on green manufacturing processes which reduce effluents to ensure sustainability. In other words, Fairchem takes waste material and turns it into high value added products. You can see the entire value chain below:

This gives fairchem 2 unfair advantages:

When it comes to their customers, Fairchem supplies to every paint company, but their biggest client is Asian paints, making up nearly 40% of their revenue. Prima facie, this might seem like a concentration risk but remember, Asian paints has 50% market share in India.

As I mentioned previously, Fairchem is the only domestic player, so they mainly compete with Chinese players. Fairchem has been able to gain market share every year due to their location of plants. Notice how most of their plants are situated near their key customers. This is why more than 53% of their business comes from clients that have been with them for more than 20 years!

Let’s take a quick look at their financials: As this is a domestic monopoly business, Fairchem has been able to improve the cash conversion cycle.

If you take a look at their plant capacity, you will notice the company just went through a capacity expansion plan. This entire capex was funded through internal accruals and it’s a brownfield capex, so that means the company will reap the benefits in a short span of time.

One oddity that needs to be highlighted is their margins. On an annual basis, these look fairly stable but when zoom in, you will notice some volatility. Notice how the company went from 19% op. margins to 11% in just 2 quarters. That’s because of:

Normally, I would cover the valuation aspect but when a company plans to nearly double their net income in the next 3 years and the demand side is robust, a PE ratio of 38 seems reasonable. Especially when it has a ROCE of 38% and this will increase as the capacity utilisation increases.

Let’s zoom out for a moment and check how different markets are doing this year. Four markets stand out: India, Indonesia, Singapore & Thailand.

The easiest way would be to bet on the fastest growing economy. According to estimates, the Indonesian economy is projected to grow at 5%, Singapore at 3%, Thailand at 2.7% and India at 7%.

India it is! But, how do we filter all the stocks? Currently India has more than 1300 securities.

Luckily, the Indian market is very extreme. More than 60% of the companies don’t produce significant free cash flows. So that's my first filter, leaving us with 866 companies. Add ROCE of 25% and that narrows the search down to less than 150 companies.

As the contest has a timeline of 1 year, I started looking for sectors that are going to witness a huge surge in demand in a short timeframe. Luckily I found this:

Some context: The entire paint industry in India has a profit of 6000 crores. Now Grasim is committing 5000 crores for the next 3 years, nearly the same amount of the profit of the entire industry.

Will Grasim gain market share? Currently, the industry is fairly concentrated as only one company (Asian paints) controls 50% of the market. That being said, the market is big enough for more players as seen below.

So if we can find a company that supplies chemicals to these paint companies, we should do well as the demand side is robust. That’s the basis for Fairchem.

Fairchem makes oleochemicals that are used in the paint industry. Fairchem has 2 main products: Linoleic and Dimer acid & they are the only domestic players. To summarise, the demand is robust and Fairchem has cornered the supply side.

Unlike its competitors, Fairchem has a very unique way of manufacturing these products. They bought machines from Germany and Switzerland that allows them to use waste products from oil refineries. They focus on green manufacturing processes which reduce effluents to ensure sustainability. In other words, Fairchem takes waste material and turns it into high value added products. You can see the entire value chain below:

This gives fairchem 2 unfair advantages:

When it comes to their customers, Fairchem supplies to every paint company, but their biggest client is Asian paints, making up nearly 40% of their revenue. Prima facie, this might seem like a concentration risk but remember, Asian paints has 50% market share in India.

As I mentioned previously, Fairchem is the only domestic player, so they mainly compete with Chinese players. Fairchem has been able to gain market share every year due to their location of plants. Notice how most of their plants are situated near their key customers. This is why more than 53% of their business comes from clients that have been with them for more than 20 years!

Let’s take a quick look at their financials: As this is a domestic monopoly business, Fairchem has been able to improve the cash conversion cycle.

If you take a look at their plant capacity, you will notice the company just went through a capacity expansion plan. This entire capex was funded through internal accruals and it’s a brownfield capex, so that means the company will reap the benefits in a short span of time.

One oddity that needs to be highlighted is their margins. On an annual basis, these look fairly stable but when zoom in, you will notice some volatility. Notice how the company went from 19% op. margins to 11% in just 2 quarters. That’s because of:

Normally, I would cover the valuation aspect but when a company plans to nearly double their net income in the next 3 years and the demand side is robust, a PE ratio of 38 seems reasonable. Especially when it has a ROCE of 38% and this will increase as the capacity utilisation increases.