Meghmani Organics

Over the past year, stocks of agri-business companies have seen their valuations soar, with rising farm product prices contributing to strong demand for these companies, amid recessionary times.

The stock of Meghmani Organics, a mid-sized player , is a good investment option in this context.

At the current market price of Rs 17.4 (face value Re 1), the stock offers good value, trading at just over eight times its trailing 12-month consolidated earnings.

This is at a steep discount to agrochemical majors such as United Phosphorus (16 times) and Rallis India (14 times). Meghmani Organics’ current valuation does not reflect its solid growth record, its large roster of product registrations and diversified client and geographical base that moderates risk.

Scaling up

Originally listed in the Singapore Stock Exchange, the company made its India debut through an Initial Public Offer (IPO) at Rs 19 in May 2007.

Though the stock now trades almost at offer price, the company’s earnings have expanded strongly in the three years since, with net sales more than doubling to Rs 795 crore between 2005-06 and 2008-09 and net profits (consolidated) growing at 24 per cent annually, excluding forex losses.

Between March 2006 and 2009, the company scaled up its pigment capacities by 70 per cent to 25,520 tonnes and agrochem (technical) capacities nearly three-fold to 12,040 tonnes.
High-entry barriers

Meghmani Organics makes a wide spectrum of generic agrochemicals and intermediates for use in crop protection as well as public health and foodgrain storage.

It also manufactures green and blue pigments which find application in printing, plastics, paints and textile businesses.

Exports account for about 76 per cent of the total sales, with the agrochemicals business contributing about 55 per cent of revenues in 2008-09.

India’s rising reputation as a low-cost manufacturing base for specialty chemicals has led to more global majors looking to outsource manufacture of intermediates to players such as Meghmani.

In the pigments business, the company’s large roster of clients (over 300), backward integration and its ability to customise help it hold its own against other global suppliers.

Upbeat trends in global farm product prices, pressure to lift farm yields and increasing offtake from the growing Asian economies have spurred stronger global demand for agrochemicals with double-digit growth rates forecast over the next five years.

Players such as Meghmani appear well-placed to capitalise on this expansion. The company’s established presence in 56 countries and the fact that it holds registrations for over 140 products across these markets present formidable entry barriers against competition.
Strategic moves

Both the agrochem and pigments business are subject to pricing pressures as the pace of new formulation/product launches is quite high; reflected in the moderation in the company’s operating profit margins over the past three years.

Over the next year or so, Meghmani can expect some relief on this front, due to declining costs of packaging materials and freight, the two key items of cost. Margins could also benefit from the company’s substantial backward integration measures to manufacture intermediates along with end-products.

Another of Meghmani’s key advantages lies in its diversified revenue streams, which help reduce agri-related as well as client related risks to its business. For one, the company’s presence in the Indian and overseas markets has helped it offset weakness in one market with more aggressive sales in another.

In 2008-09, a lacklustre year for global pigment sales, the company managed a 24 per cent growth in the Indian market to compensate for the sluggish 5 per cent growth in exports. In the June quarter of 2009-10, a 68 per cent expansion in exports of agrochemicals made up for weak domestic sales owing to the poor monsoon.

Two, with the company’s revenues well-spread-out over geographies, poor offtake in one region can often be offset by better performance in the others.

From the time of the IPO, Meghmani has more than doubled the revenue contribution from promising markets such as Asia (from 8 to 18 per cent) and South America (from 6.5 to 15 per cent), even while managing impressive growth in traditional markets such as North America.

The number of product registrations it holds has increased to 140, with over 400 more in the pipeline.

via BL

Religare - Meghmani Organics

Religare - Meghmani Organics

Meghmani Organics: Invest at cut-off

Investors with an appetite for risk can subscribe to the initial public offering (IPO) from Meghmani Organics being made in the price band of Rs 17-19 per share (face value Re 1). A consistent track record of financial performance and a well-diversified client base for pigments and agrochemicals suggest that the company can deliver secular earnings growth over the next few years. At the higher end of the price band, the offer is priced at about 9 times the likely earnings for FY-08. Despite reasonable earnings prospects, the lack of market fancy for stocks in this sector may curtail the scope for listing gains on this offer.

Meghmani Organics is raising Rs 102 crore through this offer to fund its working capital requirements, set up new manufacturing units for High Performance Pigments and agrochemical formulations, and invest in a subsidiary to finance a 3MW wind power plant. The company's current revenues are derived mainly from domestic as well as export sales of pigments (green and blue) and generic agrochemicals. Exports accounted for about three-fourths of sales in the latest financial year. The key clients for the pigments business are ink, paint and plastic manufacturers both in India and abroad. The company counts global majors such as the Flint Group and Paramount Colors among its clients for pigments and Micro Flo, Valent and FMC Corp as its agrochem clients.

Diversified revenue base

Though Meghmani is only a mid-size player in the pigments and agrochemicals market, the company's revenue base appears well diversified both geographically as well as in terms of customers. The diversified client base ensures low reliance on individual customers (though some are large global players) and the geographic spread of sales reduces market- and currency-related risks.

The outlook for the pigments business appears strong in the light of the improving growth prospects for the paints and inks industry in the domestic as well as the global context.

Entry barriers to this business are relatively high by virtue of the company's specialisation and the customisation involved in the manufacturing process. The outlook for the generic agrochemicals business is less bright. Though the business offers scope for strong volume growth (India being a low-cost manufacturing base), it is subject to persistent pricing pressures. Generic products such as acephate, cypermethrin and imidachloprid, which are the key product lines for the company, have seen steady price declines in recent years.

Meghmani Organics on its part, has managed strong volume and sales growth over the past three years (sales have grown at a compounded annual rate of 23 per cent), despite the pricing pressures. The company's ability to sustain high revenue growth amidst rather sluggish market conditions and fairly intense competition in its businesses, suggests cost competitiveness. At the same time, operating profit margins have hovered at healthy 23-25 per cent levels. The profit growth has however lagged sales expansion, at 11 per cent annualised growth over three years. Though the company has managed strong volume growth, higher raw material costs (several inputs are linked to the crude oil basket) and declines in realisations in the agrochem business have tempered the profit rise.

From here, the company appears well-placed to deliver a 15 per cent earnings growth over the next couple of years, with the help of new manufacturing facilities, an improved product mix, a strong new product pipeline and reduced tax incidence. In the pigments business, it has 12 products at various stages of development. In the agrochemicals business, where the time and regulatory procedures involved in obtaining registrations are the key entry barrier, Meghmani already holds 90 registrations across 50 countries, with over 415 pending registrations. Expansion in the product portfolio would help the company sustain revenue growth and offset pricing pressures in its key businesses.

For the year ended March 2007, the company has managed net profits of Rs 40.7 crore (15 per cent growth) on net sales of Rs 470 crore (21 per cent). This translates into per share earnings of Rs 2.02 on the current equity base and Rs 1.60 on the fully diluted equity base (assuming pricing at the upper end of the band). The offer price, at Rs 19, dilutes trailing 12-month earnings by about 12 times. Despite the reasonable earnings prospects, the low valuation accorded to stocks of specialty chemical and agrochemical majors could be a constraint to significant price gains on this stock.

Meghmani Organics : Moving up the value chain

Meghmani Organics, promoted by Jayanti Patel, Ashish Soparkar and others, is a Gujarat-based pigments and agrochemical manufacturer with a strong focus on research and development. The company’s plants at Vatva and Panoli in Gujarat together have a capacity to manufacture 1,200 tonnes per annum of green pigment and 10,200 tonnes per annum of CPC blue crude. It also produces Alpha blue and Beta blue pigments on a smaller scale. The Charodi and Ankleshwar plants, again in Gujarat, churn out agrochemical formulations, intermediates and technicals.

CPC blue crude pigment is the major raw material for manufacturing other pigments like pigment blue and pigment green. These pigments have varied end-use application ranging from printing inks, plastics, rubber, paints, textiles, leather and paper.

The agrochemicals segment contributes slightly over 50% to the total sales, with the rest contributed by pigments. A large chunk of business comes through exports: 66% of the agrochemicals produced and 85% of pigments are exported. The pigments go to around 58 countries. The USA and the European Union together contribute around 45% of the revenue.

Meghmani Organics enjoys several cost advantage over its competitors because of its integrated multi-functional plants and its proximity to raw material sources. The major customers for pigment products include the Flint Group Frankfurt GMBH, Paramount Colors, and Sudarshan Chemicals. The major customers for agrochemicals products include Micro Flo LLC, Valent USA, and Hindustan Insecticides.

The Singapore Depository Shares (SDS) issued in August 2004, representing 38.17% of the existing equity share capital, are traded on the Singapore Stock Exchange (SGX).

Meghmani Organics plans to raise Rs 102 crore through its IPO in the Indian markets to fund its expansion. The company wants to set up a high-performance pigment facility (to be commissioned by October 2007) at Vatva in Ahmedabad and a multi-purpose agro-chemicals plant at its Panoli facility (to be commissioned by August 2008).

Strengths

* Has already commercialised two high performance pigments green 36 and blue 60, which can improve profitability once the new plant is in place to manufacture them. Development of yellow, red and orange pigments will augment the pigment product portfolio.

* Holds around 90 registrations worldwide for its agrochemical business and has 415 registrations pending in 56 countries worldwide.

* Rightly placed to benefit from the global outsourcing drive. A number of players in the US/EU prefer to source chemical products from countries such as India due to cost cutting and pollution problems.

* An established track record of stable growth with experienced management. Has also won Investor’s Choice Award for the Most Transparent Company from the Securities Investors’ Association of Singapore for two consecutive years since its listing on SGX in August 2004.

Weaknesses

* The agrochemicals industry is a highly crowded, with a low rate of growth

* A number of key raw materials are derivatives of crude oil, which may witness strong fluctuations, putting pressure on margin.

* The tax benefits available to the 100% EOU Panoli – 1 plant, which manufactures blue crude, alpha blue and beta blue pigments expired in the year ending March 2007. Other such tax benefits are likely to elapse by end March 2009.

Valuation

Currently, Meghmani Organics’ SDS is trading at SG$ 0.365, translatings into Rs 19.3 per equity share( 2 SDS= one equity share).

The price band is Rs 17-Rs 19 per equity share of Rs 1 face value. At the lower band of Rs 17 per share, the P/E would be 10.4 times the annualised EPS for the nine-month ended December 2006 on post-issue equity of Rs 26.06 crore.

At the upper price band of Rs 19 per share, the P/E would be 11.3 times the annualised EPS for the nine-month ended December 2006 on post- issue equity of Rs 25.43 crore.

In the dyes and pigments industry, comparable companies such as Atul and Sudarshan Chemicals are trading at P/E of around 9, while comparable agrochemical companies such as Excel Cropcare and Nagarjuna Agrochemicals are trading in the P/E range of 7 to 9.