Megh­mani Or­gan­ics Ltd: Ex­pan­sion to drive fur­ther growth

Money Times - - Expert Eye - By Vi­hari

(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.

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