Meghmani Organics - Poised to Gain from A Sweet Spot in the Indian Chemical Industry 

Summary

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• Strong product Portfolio and a large Geographic Footprint
• Sustainable and Scalable business opportunities
• Continue to focus on increasing domestic presence and capture market share

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Meghmani Organics (NSE:MEGH) is a leading diversified chemicals company specializing in the manufacture of pigments and agrochemicals in India. The company was formed primarily as a pigments manufacturing company and later diversified into agrochemicals in 1995.

 

Meghmani operates through a global distribution network with subsidiaries in the US, Brazil, and a representative office in China. The company has a presence in almost every continent and earns a large percentage of its revenues (~55%) from exports. Meghmani has three pigment manufacturing facilities and six multifunctional agrochemicals facilities in the state of Gujarat. The group has more than 30 brands of various pesticides formulations and more than 3,000 distributors and dealers across India.

 

Meghmani’s Segments: The company operates through three major segments - Agrochemicals (accounting for ~45% of revenues), Pigments (~30%), and Chlor-Alkali (~25%).

 

Pigments Segment

 

Meghmani specializes in green and blue pigments, which have varied applications in printing inks, paints and coatings, and plastics. About 75% of the company’s pigment revenues come from exports. Meghmani ranks amongst the top three global Phthalocyanine based pigment players. Pigments account for 36% of the overall company’s revenue. Meghmani’s pigments business accounted for Rs. 1,000 crores in revenues and Rs. 100 crore in PAT in the last year.

 

Agrochemicals Segment

 

Meghmani manufactures three categories of Agrochemical products, pesticide intermediates, technical, and formulations. Its agrochemical products are used in Crop Protection, Veterinary, Public Health, and Wood Protection. Meghmani ranks among the top 10 producers of pesticides in India. Major products are 2,4-D, Cypermethrin, Permethrin, Bifenthrin, Lambda-cyhalothrin, Profenophos, and Chlorpyrifos. It is also one of the leading low-cost Caustic-Chlorine players in India. Meghmani’s agrochem business accounted for Rs. 2,000 crores in revenues and Rs. 260 crore in PAT in the last year.

 

Meghmani Pros

 

1. Large Foothold and strong Global Customer Base - Meghmani has a strong customer base of more than 400 marquee clients including prominent MNCs and several crop protection majors, and a footprint extending to more than 75 countries globally. Over the years, the company has established long-standing relations with its customers. It has a strong foothold in agro-based world economies like Brazil and Latin American countries besides in Asian, European, and African countries.

 

2. Cost Advantage from Integrated operations and Extensive R&D - Meghmani commands a 14% share of the global pigments market. The company continues to expand into new geographies and foray into new pigments. A well-integrated manufacturing base with expandable plant capacities is a strong competitive advantage. The company’s innovation into newer molecules and process development allow it to enhance its technical capacities and adopt cost-effective processes.

 

3. Growing Indian Market - Meghmani benefits from a growing preference for Indian chemical manufacturers against China in the global market. India is the fourth-largest producer of agrochemicals in the world. The Indian agrochemicals industry was valued at around INR 42,000 crore in FY20. The industry is expected to grow at a CAGR of 8%-10% by 2025. The global Dyes and Pigments Industry is also expected to grow at 5% CAGR from 2020 to 2027, as per Grand View Research. Increasing demand from packaging inks, textiles, paints and coatings, construction, and plastics, etc. should support future growth. As per Ken Research, India’s Pigments market is poised to achieve a 5.5% CAGR in 2017-22. Pro-business laws in the country also act as a strong tailwind for Meghmani.

 

The Reorganization

 

Meghmani Organics will demerge its agrochem and pigments business into a separate subsidiary, Meghmani Organochem which will later be renamed Meghmani Organics Limited. And amalgamate its trading and equity investment business in Meghmani Finechem. Currently, Mghmani Organics holds a 57% stake in Finechem. The restructuring is expected to unlock value for shareholders and also provide tax benefits and aims to position ‘Chloro Alkali and its Derivatives’ as independent and sustainable businesses. For every 1,000 shares of Meghmani Organics, 90 shares of Meghmani Finechem will be given. The promoter holding will be 70% in Meghmani Finechem post the demerger. 

 

 

Challenges

 

• High Material cost and Inflation - Though backward integration supports better supply chain and cost control management, the company is still susceptible to high material costs and inflation. Meghmani reported lower profits in the last quarter due to higher raw material costs.
• Intense Competition - Meghmani is a global supplier and faces strong competition from China. The company faces competition from large multinational companies, national and regional domestic players, traders, and exporters of agrochemicals. The chloralkali industry is also very competitive and dominated by large players.
• High Working Capital and Cyclicality - Large working capital requirements and the cyclical nature of business are other challenges. Meghmani’s diverse product portfolio and established global and national presence position it well to navigate through erratic monsoons and unfavorable weather conditions.

 

Future Opportunities & Expansion

 

Meghmani is confident of sustainable growth in Pigment beyond Phthalocyanine Pigment Blue and Green and is exploring opportunities to foray into new and lucrative variants of Pigment. AgroChem and Pigment industries are poised for sustainable growth over the next 5 -7 years time span. It plans to achieve the agrochemicals segment top line of Rs. 2,000 crore by FY23. The company has Rs750 crores in CapEx planned in the next 2-3 years up to FY2024. It doubled its 2,4-D capacity and is also expanding the formulation plant. The revenues from these plants should contribute meaningfully in FY22.

 

 

Source: Company Investor Presentation

 

The management is eyeing a revenue target of Rs. 1,200 crores by FY’24 for the Pigments division and revenue target of Rs. 2,000 crores by FY’24 for the Agrochemicals division.

 

Valuation

 

Meghmani Organics has a market capitalization value of Rs.3,500 crores and is trading at ~15x its trailing earnings. Its ROE and ROCE metrics are decent near ~20 levels. The company’s shares are currently trading near the Rs.140-mark, very close to its 52-week high price of Rs.~154.

 

 

Meghmani has been consistently raising its dividend payouts for the past few years despite huge capital outlays for future growth. The company also has a consistently improving debt to equity from 0.56 in FY17 to 0.23 in FY21. It has delivered strong profit growth of 35% CAGR (after adjusting extraordinary items) in the last five years. 

 

 

Meghmani over the years

 

Revenues have grown at CAGR 8% over FY17-21, with higher contribution from Agrochemical division. Promoter holding currently stands at ~51%. Meghmani has a healthy financial risk profile and the capital structure should further strengthen as the company’s Capex accrue to the business and the reorganization comes into play.

 

Covid-19 Impact

 

Most of Meghmani’s products in the agrochem and pigments segments were under essential services and were not impacted by the pandemic. However, its chemicals segment suffered owing to COVID-19 induced operational disruptions and lower volumes. The company’s capacity utilization during the challenging times of FY21 stood at ~77% for the Pigment division and ~76% for the Agrochemical division.

 

Bottom Line

 

Improving product mix, growing synergies, and strong backward integration should support Meghmani’s future growth and healthy operating margins. Meghmani’s backward integrated facilities are a big competitive advantage, given China’s current rising raw material prices. The capacity expansion and new formulation plant should cater to the growing agrichemicals demand in the domestic and global market. The business restructuring further has a strong potential to unlock value for the shareholders.

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Stock Disclosures:

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Author Disclosures:

This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.