Meghmani Organics – Dark Horse Series – 4

Meghmani Organics is the Gujarat based specialty chemicals company engaged in the manufacturing and sale of:

1. Pigments (14% market shares in pigment industry)
2. Agrochemicals (4th largest caustic chlorine player in India)
3. Basic chemicals (Export amounting to 53% of total sales)

The company exports its products to 75 countries worldwide.

Background of the company

1986: Began operations to produce Phthalocyanine Green 7, popularly known as Pigment Green 7 at Vatva Plant.

1995: Diversified into the manufacture of Agrochemicals at Chharodi Plant.

1996: Expansion of pigments business. Panoli Plant was established to manufacture CPC Blue. CPC Blue is a key raw material used for the manufacture of our Pigment Blue (15) and Pigment Green (7) Products.

2003: Ankleshwar Plant was acquired to expand our range of Agrochemical Products.

Production Facilities

The company operates from its 4 plants situated at a various location in Gujarat.

[su_service title=”Pigment Plants” icon=”icon: industry”](1)Vatva – GIDC, 14 km from Ahmedabad city, Gujarat State, Western India. (2) Panoli, 200 km south of Ahmedabad city, Gujarat State, Western India [/su_service]

[su_service title=” Agrochemical Plants” icon=”icon: industry”](1) Chharodi, 40 km Ahmedabad city, Gujarat State, Western India (2) Ankleshwar, near Panoli, Gujarat State, Western India [/su_service]

Sale Growth:

Peer comparison

Meghmani Organics Ltd. rewarded investors the most among stocks in the agrochemicals sector in the year 2017. And now due to the overall mid and small-cap correction going on, it is trading more than just cheap at 11.30 PE levels with Price to book value of 2.47, way more cheap as compared to its peers.

Performance for the period 9MFY2018

There is a 25% increase in net sales YOY for specialty chemicals for the period 9MFY18, this is higher than the industry’s overall growth of single digit. The company has drastically reduced its debt from 1.6 (debt to equity ratio) to 0.64 in FY17.

Profit after tax has increased by 89% YOY to Rs.121 in 9MFY18 from Rs.64cr in 9MFY17.

Overall Margins have improved from 6.1% in 9MFY17 to 9.8% in 9MFY18.

Pigments

Global pigment industry is growing at a CAGR of 3.8% and is expected to reach $32 billion in 2023. With 14% world market share in pigments (Phthalocyanine based), 78% sales in exports and a brand presence in 75 countries worldwide, Meghmani is set to create a strong foothold in the global market.

Developed countries are now focusing on sourcing dyestuff and pigments from cost-effective Asian markets.

Major applications of these pigments are in plastic and printing ink industries which are also growing at a CAGR of 7% and 5% respectively. With over 70 overseas distributors and a strong client relationship (90% business coming from repeat clients), Meghmani’s continuous increase in production and utilization levels will invariably be met by rising demand in future.

Agrochemicals

• EBITDA increased 456% on account of higher realization on products; EBITDA Margin up at 19% as compared to 5% in Q3 FY17

Indian Agrochemical industry is growing at a 12% CAGR as compared to 8-10% historically. It is set to touch $7.5Bn by FY2019

Still, India’s pesticide consumption is one of the lowest in the world with per hectare consumption of just 0.6 Kg compared to a world average of 3 kg/ha. This offers immense opportunity for future growth.

Also, agrochemical products worth $6.3Bn are ready to go off patent by 2020, resulting in an increased market for generic players like Meghmani.

In the Agrochemical segment, the company produces:-

• Pesticide intermediaries sold to technical grade pesticide manufactures.

• Technical grade pesticides sold to pesticide formulators.

• Pesticide formulations sold both in bulk and in small packing to institutional customers and retailers respectively.

Products across all value chains make this company perfectly placed to tap the huge growth potential in this niche sector.

This has perfectly been depicted by the company’s massive 33% YOY increase in agrochemical segment sales for the period 9MFY18

Fundamentals

Market Cap: 2225.25 Cr.

OPM has shown an increase of 10 % YoY.

QOQ Results: Net profits show almost double net profits QOQ.

Dividend Yield: 0.48%

NPM latest quarter: 13.90%

Technicals

Stock PE: 11.08 (Industry PE: 43.89)

EPS: 7.54

Book Value: Rs. 34.34

Debt to Equity Ratio: 0.64

Price to Book: 2.46

PEG: 0.13, which indicates that the stock is very undervalued in terms of valuation.

Rs.540 crore CAPEX across Three projects underway for future growth

The first Project is the Company’s CMS project of 40,000 MTPA which will result in the captivating consumption of 41,000 MTPA of Chlorine. It is set to be commissioned in Q4 FY2018. The project is expected to add Rs.140cr of revenue in full year of operation (i.e. by March 2019)

The Company’s second Project involves 50% capacity expansion of the Caustic Soda Plant to 2,40,000 MTPA using the zero gap membrane cell technology and increases the Company’s Captive Power Plant capacity to 90MW from 60 MW now.

The Company’s third Project is to set up a Hydrogen Peroxide (50%) project of 25,000 MTPA. which also used in Pharma and Agro Chemical Industries. The 2nd and 3rd projects will involve investments to the tune of Rs.400 cr. These are expected to be commissioned by June 2019 and add Rs.300 cr in revenue in the full year of operations.

With the current valuations, Meghmani organics ltd. is surely a multi-bagger stock. It has strong fundamentals, good product portfolio, continuous growth record, and bright future prospects make this stock a must buy.