Meghmani Organics Ltd: Expansion to drive further growth
(BSE Code: 532865) (CMP: Rs.112.10) (FV: Re.1)
We had recommended this stock earlier at Rs.54.75 on 14 August 2017, where-after it hit a high of Rs.129.40. Since the stock has fallen to the current level, it is being recommended again as it has the potential to rise to Rs.150 in the long-term. Meghmani Organics Ltd (MOL) manufactures pigments and agrochemicals. Caustic soda is manufactured using the latest ‘membrane‐cell technology’ from Asahi Kasei Chemical Corporation, Japan. It specializes in the manufacture of green and blue pigment products that span multiple applications. It also produces a broad spectrum of commonly used pesticides for crop and non-crop applications. Its wholly-owned subsidiaries include Meghmani Europe BVBA, Meghmani Organics USA, PT Meghmani Organic s Indonesia and Meghm an iO verse a sF Z E. It holds 57% stake in Meghmani Fine chem, a caustic manufacturing firm. Caustic soda constitutes about 30% of sales, Pigments 34% and agrochemicals 36% of sales. Exports constitute 55% of sales.
MOL’s pigment manufacturing facilities are located at – i) GIDC Vatva, Ahmedabad (2,940 TPA) for manufacture of Pigment Green 7; ii) GIDC Panoli, near Ankleshwar (17,400 TPA) for manufacture of CPC Blue, Alpha Blue, Beta Blue and Pigment Blue 15 products; and iii) Dahej SEZ Ltd (10,800 TPA) for the manufacture of CPC Blue, Alpha Blue and Beta Blue products. This division derives ~80% of its net sales from exports.
MOL has a 60 MW captive power plant, which results in lower power cost and high margins since power cost is 60% of the total raw material cost in caustic soda production. It ventured into caustic soda manufacturing through a 57% JV (Meghmani Finechem Ltd) with International Finance Corporation (IFC) in 2009 at an investment of Rs.550 crore for a 1,19,000 TPA capacity at Dahej. In FY15, it enhanced its capacity by 40% to 1,67,000 TPA, making it the fourth‐largest caustic‐chlorine‐flakes capacity in India after Grasim Industries, Gujarat Alkali and DC MS hr ir am. MOL is one of the largest phthalocyanide‐based pigment manufacturer in the world with a global market share of 7% in terms of volume. Its vertically integrated facilities for CPC blue and end products such as pigment green and pigment blue give it a competitive advantage as pigments are crude derivatives and their prices are relatively stable despite sharp corrections in crude prices. These pigment products are used in multiple applications including paints, plastics and printing inks. The pigment division derives 80% of its net sales from exports. Its marquee clients comprise mainly MNCs like Sun‐DIC, Flint Group, Akzo Nobel, DuPont and PPG Industries. MOL’s expertise and high‐degree customisation has helped it develop long‐term client relationships resulting in 90% repeat business.
MOL has a global distribution network through 70 overseas distributors and subsidiaries in USA, Europe, Indonesia and Dubai and a representative office in
China. It has warehouses in Belgium,
Turkey, Russia, USA and Uruguay. It has pan India presence through its branded agrochemical distribution chain of 2,370 stockists and distributors. Its customers comprise mainly MNCs that are leading players in their respective industries.
MOL has invested Rs.650 crore capex over the last five years. Its subsidiary Meghmani Finechem commenced commercial production of caustic potash-flake (KOH) of 60 tonnes per day
(21,000 TPA) in April 2016 at its existing manufacturing facility situated at GIDC
Dahej, Gujarat. The facility was set up at a cost of Rs.65 crore.
MOL has obtained approval from the Environmental Protection Agency of USA for amending its label registration for the product Permethrin Technical 95.5% with the addition of 'Use on Agricultural
Crops, Domestic Farm Animals, Mosquito and Others usages’.
Caustic Potash has several universal applications. The largest users of Caustic
Potash are Soap, Detergent, Fertilizers and Chemical companies. MOL is ready to leverage on these opportunities through its investments across all business areas.
For FY17, MOL posted net profit of
Rs.87.7 crore on sales of Rs.1559 crore fetching an EPS of Rs.3.5. During Q2FY18, net profit soared 69% to Rs.55 crore on 13% higher sales of Rs.471 crore fetching a consolidated EPS of
Rs.1.8. During the quarter, it reduced its interest cost by Rs.3.3 crore YoY. During H1FY18, net profit soared 62% to
Rs.98.3 crore on 15% higher sales of
Rs.937 crore fetching a consolidated EPS of Rs.3.
With an equity capital of Rs.25.4 crore and reserves of Rs.693 crore, MOL’s share book value works out to Rs.27.4. The value of its gross block was Rs.946 crore. Investments were Rs.29 crore. Debts of Rs.461 crore give it a DER of 0.64:1. MOL plans to reduce its debt by Rs.100 crore by FY18. The promoters hold 50.1% of the equity capital, FIIs hold 10% and PCBs hold 8.9%, which leaves 31% stake with the investing public.
The global pigments market is expected to grow at 4.5% CAGR to reach $14.7 bn over FY13-18. The paints and coatings industry accounting for 39% of the overall end-user market is expected to drive the future demand due to growth in end-user industries.
The Asia Pacific pigments market is expected to grow at 5.6% CAGR over FY13-18 to reach over $6.4 bn by 2018. The global Agrochemicals market is expected to grow at 3.6% CAGR. Asia-Pacific leads the market for agrochemicals
followed by Latin America, North America and Europe. India is the 4th largest producer of pesticides after USA, Japan and China. The global Chlor Alkali market is currently valued at $70 bn and is expected to grow at 6% CAGR over FY2014-19 to reach $94 bn. The Asia-Pacific region is the world's largest market for Chlor Alkali products. In the Agrochemicals segment, it plans to increase the number of high value products and have high margins branded revenue. It plans to increase pan India distribution network for which an exclusive supply chain management department for the formulation products has already been set up. It has been constantly investing in R&D to gain a competitive edge over its peers.
MOL continues to build on its strong position as a leading diversified Indian chemical company exporting to 75 countries and servicing 400+ marquee clients. Going forward, the capex of Rs.557 crore undertaken over the past five years is set to fuel further growth with enough capacity to support revenue growth up to Rs.2000 crore. Based on its current going, MOL is likely to post an EPS of Rs.7.5 in FY18 and Rs.10 in FY19. At the CMP, the stock trades at a forward P/E of 14.9x on FY18E and 11.2x on FY19E earnings. A reasonable P/E of 17.5x will take its share price to Rs.131 in the medium-term and Rs.175 thereafter. The stock’s 52-week high/low is Rs.129.4/34.1.