Stock Idea

August 6, 2014

Current

Previous

CMP : Rs.15
Rating : BUY Rating : NR
Target : Rs.3 Target : NR
4

(NR-Not Rated)

STOCK INFO
BSE
532865
NSE
MEGH
Bloomberg
MEGH IN
Reuters
MEGH.BO
Sector
Agro Chemicals
Equity Capital (Rs mn)
254
Face Value (Rs)
1
Mkt Cap (Rs mn)
411
52w H/L (Rs)
16.0/3.8
Avg Daily Vol (BSE+NSE)
289,969
SHAREHOLDING PATTERN

(as on 30th Jun. 2014)

Institutions
Others, Incl Public
Promoters

1.0
48.3
50.7

Source: BSE

21/Jul/14

07/Jul/14

23/Jun/14

09/Jun/14

28/Apr/14

26/May/14

14/Apr/14

12/May/14

MEGHMANI v/s SENSEX

31/Mar/14

17/Mar/14

03/Mar/14

20/Jan/14

17/Feb/14

06/Jan/14

03/Feb/14

23/Dec/13

09/Dec/13

28/Oct/13

25/Nov/13

14/Oct/13

11/Nov/13

30/Sep/13

16/Sep/13

02/Sep/13

19/Aug/13

05/Aug/13

Source: Capitaline, IndiaNivesh Research

04/Aug/14

STOCK PERFORMANCE (%) 1m 3m

12m
MEGHMANI
9
72 274
SENSEX
0
16
35

400
350
300
250
200
150
100
50

Meghmani

Sensex

Source: Capitaline, IndiaNivesh Research

Daljeet S. Kohli
Head of Research
Mobile: +91 77383 93371, 99205 940
87
Tel: +91 22 66188826
daljeet.kohli@indianivesh.in
Amar Mourya
Research Analyst
Tel: +91 22 66188836

Meghmani Organics Ltd.

(Meghmani)
A classic turnaround story...

Meghmani Organics Ltd (Meghmani), top 100 global generic agrochemicals playe
r and
one of the largest blue pigments producers in the world, is seeing a significant
business
turnaround after many years of dismal performance. With uptick in Agrochemica
l cycle,
following triggers should lead to business turn-around- (1) margin expansion on
the back
of stabilization of recently commenced facilities, (2) better profitability in absence
of
incremental capex, should lead to commencement of debt repayment, (3) With pe
rmissions
in place from state level Pollution Control Board, Meghmani is well positioned to r
amp-up
amar.mourya@indianivesh.in

operations to peak capacity, (4) Implementation o Changing global dynamics, positive for pigments industry
f stringent Pollutions norms in China,
makes Indian Agrochemical and Pigments busines The pigment industry suffered heavily in last five years on account of
huge
s attractive, and (5) ability to attract
new order wins from MNC clients given that all s competition from Chinese players. The key reason for China becoming
afety and Environment certifications are
more
in place. On a/c of industry down cycle and lever competitive (v/s India) in global market was as follows: (1) huge gov
ed balance sheet of the company,
ernment
Meghmani stock has been trading at lower 1-year incentives for exports, (2) less stringent pollution norms, (3) lower depende
forward EV/EBITDA multiple of ~3.9x.
nce on
With revival in business cycle, we have assigned import for raw material and intermediates. However, in recent years China i
5.9x EV/EBITDA multiple (21% discount
s taking
to global peers) to arrive at FY16E based price ta strict legal initiatives to reduce Carbon emissions. This had forced many agr
rget of Rs 34/share. Given the huge upside,
ochemical
we maintain BUY on the stock.
and dyes companies to close down recently. In our view, this opens tremend
ous
export opportunity to Indian pigment manufacturers. The stricter environme
ntal
norms also take away cost advantage of Chinese players; hence it provides
equal
turf for Indian manufacturer to operate in global market. Additionally, impro
ved
global economic condition led to rise in demand for pigments across
various
industries [E.g Textiles, Printing Ink, Plastic, Paints, Leather, Paper and Rubb
er]. Given
the companys established industry position and global presence [250 custo
mers in
65 countries] Meghmani remains a major beneficiary of changing industry d
ynamics.

Agrochemicals, key revenue & margin driver

Source: Company, IndiaNivesh Research

Key Investment Rationale

IndiaNivesh Research

On back of strong global presence with subsidiaries in USA, Belgium,

Mexico,
Indonesia and China and warehouses in Germany, Turkey, Russia, and Urug
uay, we

IndiaNivesh Securities Private Limited Chowpatty, Mumbai 400 007. Tel: (022) 66188800
IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva

INDNIV.

Stock Idea (contd...)

expect agrochemical segment to report higher revenue and margin goingahead.
g reasons:
ol boards
ant from
ring (subever, now
ted issues
emicals
or, which

The underperformance on revenue and margin in past was due to followin

(1) shutdown of Chharodi (Gujarat) plant due to continuous pollution contr
intervention, (2) Loss of production for three years due to re-location of pl
Chharodi to Dahej, (3) Impact on margin due to high toll manufactu
contracting), and (4) Instability in newly started 2,4 D plant at Dahej. How
all the odds have turned in favour of Meghmani, given that above highligh

are resolved. We forecast revenue growth of 16.2%/14.0% for Agroch

segments in FY15E/FY16E. The key margin tailwind is plant utilization fact
is expected to reach ~53% in FY15E from 48% in FY14.
601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum

Source: Company; IndiaNivesh Research; NOTE: PBT Excludes Interest

MFLs (Basic Chemical) plant has stabilized (57% stake of Meghma

ni)

Meghmani Finechem Ltd (MFL) Chlor-alkali plant, which got commissioned

in FY09costs were
y and
260 mn)
nterest
the revenue
in
ent expect
(V/S Rs.691
number of
action,
hemicals

10, in the first 3-4 years, did not earn major profits whereas huge capital
incurred. The total cost of the plant was cRs.5,500 mn (Rs.1,850 mn Equit
Rs.3,700 mn debt). Meaning, nearly 70% of the total long-term debt (Rs.5
on the books was raised to set-up this plant, which resulted in increase in i
expenditure by ~157% Y/Y in FY10. Commencement of plant led to rise in

but profitability took a significant hit. Now, with this plant stabilised, uptick
revenues from this plant should help in debt servicing. In FY15, managem
revenue of Rs.4,750 mn (V/S Rs.2,624 mn in FY14) and EBIT of Rs.750 mn
mn in FY14) from MFL. The caustic-chlorine chemicals are used in
industries such as pigments, plastics, petroleum and natural gas extr
manufacturing of organic chemicals, industrial solvents, water treatment c
and pharmaceuticals.

Capex cycle coming to an end

All investments either in Agro Division or Pigments division are complete a
nd all
as well
n board
goinghence
ion Board.
will help
nt has
here on.

new facilities were commissioned in FY13-14. This will boost the turnover
as margins going-ahead. Additionally, no further capital investments are o
and hence likely to generate huge free cash flow in order to reduce debts
ahead. Similarly, investments in Pollution related areas are complete and
plans can go back to full capacity utilization without stoppages from Pollut
Most of the plants are ISO 14000/9000 and OSHAs 18000 certified, which
in attracting contract manufacturing business from MNCs. The manageme
guided for only maintenance capex ranging between Rs100-500 mn from

Recent quarter performance shows a sign of revival

After many quarters of sluggish performance in Q1FY15 Meghmani Organi
cs Ltd
n net

IndiaNivesh Research

(Meghmani) reported revenue and EBITDA growth along with turnaround o

Meghmani Organics Ltd | Stock Idea

August 6, 2014 | 2

Stock Idea (contd...)

profit front. Top line grew by 22% Y/Y to Rs.3,127 mn led by Pigment, Agro
chemicals,
o Rs.499
l cost. As
g the
n in

Basic Chemicals, and Others (See Table Below). EBITDA went up 20% Y/Y t

mn on account of higher revenue growth, partially offset by rise in materia

a result, EBITDA margin contracted 29bps y/y to 16.0% in Q1FY15. Durin

quarter, Meghmani reported net profit of Rs.78 mn (v/s net loss of Rs.36 m
Q1FY14).
Quarterly Performance
(Rs Mn)
Net Sales
Other Operating Income
Total Income

Q1FY15
3,078
50
3,127

Raw Material Consumed

1,757

1,894

1,370

-7%

28%

Stock Adjustment
Purchase of Finished Goods
Employee Expenses
Other Expenses
Total Expenditure

113
-20
167
610
2,628

256
-476
160
719
2,552

102
108
132
432
2,144

-56%
-96%
5%
-15%
3%

10%
-118%
27%
41%
23%

EBITDA

499

480

416

4%

20%

Interest
Other Income
Depreciation
PBT
Tax
Net Profit
Extra-ordinary Items
Minority Interest
Reported Net Profit

177
18
202
138
-2
140
62
78

199
20
198
103
5
97
-5
57
46

152
13
196
81
115
33
3
36

-11%
-8%
2%
34%
-139%
43%
NM
9%
71%

17%
40%
3%
69%
-102%
NM
NM
2185%
NM

0.3

0.2

-0.1

71%

NM

254

254

254

0%

0%

EPS
O/shares

Q4FY14
2,967
65
3,032

Q1FY14
2,516
44
2,560

Margin %
EBITDA Margin (%)
PAT Margin (%)

Q/Q Ch %
4%
-24%
3%

Y/Y Ch %
22%
12%
22%

BPS

16.0%
2.5%

15.8%
1.5%

16.2%
-1.4%

Segment Performance
(Rs Mn)
Q1FY15
Pigment
1,119
Agrochemicals
1,002
Basic Chemicals
855
Other/Unallocated
342
Total
3,317
Source: Company, IndiaNivesh Research

Q4FY14
1,098
1,044
824
359
3,326

Q1FY14
890
938
651
245
2,724

13
99
Q/Q Ch %
2%
-4%
4%
-5%
0%

29
390
Y/Y Ch %
26%
7%
31%
39%
22%

Debt burden to reduce going-forward

On account of consistent capital spending over last six years, the compan
ys gross
debt increased from Rs.1,466 mn in FY08 to Rs.6,232 mn in FY14. This ha
d also
restrained the improvement in free cash flow (FCF) despite strong operati
ng cash
flow. Given the improving business environment and reduction in capital s
pending
cycle, we believe that companys FCF should improve going forward, whic
h would
help in reducing the long-term debt. On a consolidated level the company
has the
total debt of cRs.6,232 mn (Rs.2459 mn short-term & Rs.3,773 mn lon
g-term).
The management intends to repay ~Rs.1000 mn each in FY15E and FY16
E.

Risk & Concern

Significant rise in input (H-Acid & Dye intermediary) prices

The inputs such as Dyestuff now sell at Rs.550/kg, up from Rs.180

six months
ago. H-Acid, an amorphous dye intermediary, now costs Rs.1,800/kg comp
ared to
Rs.300 a year ago. The significant rise in input prices is impacting Pigment
segment
profitability. In Q1FY15, the segment reported +26% Y/Y revenue gro
wth but
profitability declined by 129 bps Y/Y to 4.2%. The key reason is domestic r
ates of
chemicals used for pigments/dye manufacturing (Vinyl Sulphone, Hydrauli
c Acid &
Naphthalene) have zoomed up due to fall in Chinese imports. We see this
as a nearterm concern over pigments segment margin.

IndiaNivesh Research

August 6, 2014 | 3

Meghmani Organics Ltd | Stock Idea

Stock Idea (contd...)

Valuation
At CMP of Rs.15, the stock is trading at EV/EBITDA multiple of 4.4x FY15E
and 3.9x
FY16E estimates. In our view, the current valuations are significantly belo

w 7.5x

global peer average. On back of various available triggers (1) debt reducti

on, (2)

margin expansion, (3) higher plant utilization, and (4) favourable business

dynamics

the stock is poised for re-rating. With revival in business cycle, we have as

signed

5.9x EV/EBITDA multiple (21% discount to global peers) to arrive at FY16E

based

price target of Rs 34/share. Given the huge upside, we maintain BUY on th

e stock.

We intend to come out with Initiating Coverage soon.

Financials
Income Statement
Y E March (Rs m)

Balance Sheet
FY12

FY13

FY14

FY15e

FY16e

Net sales

10,622

10,585

11,783

13,367

14,871

Y/Y Ch %

1.6

0.4

11.3

13.4

11.3

COGS

7,020

6,642

7,495

8,519

9,478

Minority

SG&A

2,045

2,091

2,329

2,642

2,939

Long-term loans

EBITDA

1,557

1,852

1,959

2,205

2,454

Others

4.7

19.0

5.8

12.6

11.3

EBITDA Margin %

14.7

17.5

16.6

16.5

16.5

Interest

735

643

676

568

459

Deprecaition

747

753

802

1,015

1,056

EBIT

75

456

480

623

939

EBIT Margin %

0.7

4.3

4.1

4.7

6.3

Y/Y Ch %

Y E March (Rs m)

FY12

FY13

FY14

254

254

254

254

254

Reserves & Surplus

4,505

4,766

4,927

5,551

6,614

Net Worth

4,760

5,020

5,181

5,805

6,868

568

797

924

1054

1187

4903

4217

3773

2773

1773

412

310

431

431

Share Capital

126

134

61

59

60

FY16e

431

Total Liabilities

10,642

10,343

10,308

10,062

10,258

Gross Block

10,343

11,608

12,683

13,195

13,732

Less Depreciation

3,085

3,825

4,627

5,642

6,698

Net Block

7,257

7,783

8,056

7,553

7,035

Capital Work in Progress

196

246

Others

1118

1499

1736

1978

2200

Investments
Defered tax (net)

Other Income (Inc Forex)

FY15e

Extra Ordinary Exps/(Income)

PBT

201

591

542

683

999

Current Assets

6,849

6,703

7,823

8,086

8,800

Tax

191

299

181

228

300

Sundry Debtors

3,326

3,429

3,523

3,955

4,400

94.8

50.7

33.4

33.4

30.0

Cash & Bank Balance

440

99

373

256

252

10

291

361

455

699

Loans & advances

1,360

1,363

1,432

1,604

1,784

96.5

2702.8

23.8

26.1

53.8

Inventories

1,722

1,811

2,496

2,270

2,363

Effective tax rate %

Reported PAT
Y/Y Ch %
Minority & Exceptional

119

133

130

133

Current Liabilities

3,095

3,658

4,196

4,437

4,660

Adj. PAT (APAT)

10

172

228

325

567

Provisions

1,683

2,229

3,117

3,117

3,117

RPAT Margin %

0.1

1.6

1.9

2.4

3.8

Net Current Assets

2,071

816

510

532

97.4

1620.2

32.6

42.3

74.6

10,642

10,343

10,308

Y/Y Ch %

Total assets

10,062

1,023
10,258

Source:Companyfilings;IndiaNivesh Research

Source:Companyfilings;IndiaNivesh Research

Cash Flow

Key Ratios

Y E March (Rs m)

FY12

Operaing Profit

810

1,100

Depreciation

747

753

Interest Exp

-735

Changes in Working Capital

-227

Cash Flow After Chang in WCapital

Tax
Others
Cash flow from operations
Capital expenditure (net)
Free Cash Flow
Other income
Investments
Cash flow from investments

FY13

FY14

FY15e

FY16e

Y E March

FY12

FY13

FY14

FY15e

1,156

1,191

1,398

Adj.EPS (Rs)

0.0

0.7

0.9

1.3

2.2

802

1,015

1,056

Cash EPS (Rs)

2.9

3.5

4.1

5.3

6.4

-643

-676

-568

-459

DPS (Rs)

189

-541

34

-315

BVPS
ROCE %

FY16e

0.1

0.1

0.1

0.1

0.1

18.3

19.3

20.5

22.9

27.1

594

1,398

742

1,672

1,679

8.4

11.9

12.9

13.9

16.2

-191

-299

-181

-228

-300

ROE %

22.0

29.2

17.8

33.6

33.6

26

343

597

-113

-120

ROIC %

-0.1

1.4

2.0

3.0

5.3

429

1,442

1,158

1,331

1,259

EBITDA Margin %

14.7

17.5

16.6

16.5

16.5

-1,092

-1,278

-1,075

-517

-538

PER (x)

382.7x

22.3x

16.3x

11.5x

6.6x

-662

164

83

814

722

P/BV (x)

0.8x

0.8x

0.7x

0.6x

0.5x

164

-50

240

P/CEPS (x)

5.1x

4.1x

3.6x

2.8x

2.3x

EV/EBITDA (x)

6.2x

5.2x

4.9x

4.4x

3.9x

Dividend Yield %

0.7

0.7

0.7

0.7

0.7

m cap/sales (x)

3.0x

2.5x

2.2x

1.6x

1.6x

-928

-1,328

-835

-512

-538

Long-Term Debt (Decrease) Increase

587

-504

-143

-1,000

-1,000

Dividend paid (incl tax)

-25

-26

-25

-25

-25

net debt/equity (x)

1.4x

1.3x

1.1x

0.9x

0.6x

Share Issue / Repurchase & Others

123

300

net debt/ebitda (x)

4.1x

3.4x

3.0x

2.3x

1.6x

Cash flow from Financing

685

-513

-49

-936

-725

Debtors (Days)

113

117

108

108

108

Net change in cash

220

-342

274

-117

-4

Creditors (Days)

38

51

53

54

54

Cash at the beginning of the year

220

440

99

373

256

Inventory (Days)

58

62

76

62

58

Cash at the end of the year

440

99

373

256

252

Cash Conversion Cycle (Days)

133

127

131

116

112

Source:Company filings; IndiaNivesh Research

17

120

89

Source:Company filings;IndiaNivesh Research

IndiaNivesh Research

Meghmani Organics Ltd | Stock Idea

August 6, 2014 | 4

Disclosure of Interest Statement

Stock Idea (contd...)

1.
Analyst ownership of the stock
2.
Clients/Company Associates ownership of the s
3.
Broking relationship with company covered
4.
Investment Banking relationship with company
covered

Yes
Yes
No
No

Disclaimer:

The projections and the forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject
to significant
uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of th
e estimates on which
the projections are forecasts were based will not materialize or will vary significantly from actual results and such variations will likely increase o
ver the period of
time. All the projections and forecasts described in this report have been prepared solely by authors of this report independently. All the forecas
ts were not
prepared with a view towards compliance with published guidelines or generally accepted accounting principles.
This report is for information purpose only and this document / material should not be construed as an offer to sell or the solicitation of an offe
r to buy, purchase or
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with any contract or
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Actual results may differ materially from those set forth in the projection. Forward-looking statements are not predictions and may be
subjected to change without
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601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007.
Tel: (022) 66188800 / Fax: (022) 66188899
e-mail: research@indianivesh.in | Website: www.indianivesh.in

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