Market Research : Meghmani Organics

meghmani-organics

Meghmani Organics ltd.

This Gujarat based specialty chemicals company is principally engaged in the manufacturing and sale of pigments (14% world market share in pigment industry), agrochemicals and Basic chemicals (4th largest caustic chlorine player in India), with exports amounting to 53% of sales. The company exports its products to 75 countries worldwide. The company has over a period of time, vertically integrated facilities across all businesses.

Reason to invest:

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.

peer-comparison-meghmani-organics
Peer Comparison (Values as on 12th March 2018)

Performance for the period 9MFY2018

This specialty chemicals company posted a whopping 25% increase in Net sales YOY for the period 9MFY18, outpacing the single digit-growth for the industry overall.

Deleveraging – The Company has strategically reduced debt over the course of last 5 years. Debt equity ratio has slipped from 1.6x in FY12 to a mere 0.6x in FY17.

segment-wise-sales-growth
Segment Wise Sales Growth (in Cr.)
segment-wise-percentage-increase in sales
Segment Wise Percentage Increase in Sales

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 9.2% in 9MFY18.

Outlook:

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

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 makes this company perfectly placed to tap 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.

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.

Technical and Fundamental:

  • Market Cap: 2225.25 Cr
  • EPS: 5.70
  • PEG: 0.13, which indicates that the stock is very undervalued in terms of valuation.
  • YOY Results: Net profits show more than 100% growth for past 3 years except in FY 2017, but is positioned to do same this year too. OPM has shown an increase of 10 % YoY. Additionally, Eps follow the same suit as net profits.
  • QOQ Results: Net profits show almost double net profits QOQ. A sign to be a great investment.
  • At the current stock price and financial performance, the stock has the Very Attractive valuation.

Entry price and Target : 

  • As the stock is already undervalued, so you can invest @ 75-85
  • Target -150 –is a result of expansion and low valuation, by the end of 2019

Verdict

With the current valuations, Meghmani organics ltd. is surely a multi-bagger stock. Strong fundamentals, a continuous growth record, experienced management and unequivocally bright future prospects make this stock a must buy.

Disclaimer : 

All blog posts of wealthblog.in are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.

 

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