Sunday, April 30, 2017

Business Analysis: Meghmani Organics Ltd.


Meghmani Organics Ltd. (MOL) is diversified pigment, agrochemicals and basic chemical (Caustic- chlorine chemicals) manufacturer based in state of Gujarat. MOL started manufacturing pigments in 1986 and later diversified in agrochemical and basic chemicals. MOL has multiple foreign subsidiaries in Dubai, USA, Indonesia, Europe for marketing and distribution of its products overseas. Company exports to 75 countries servicing 400+ clients. 

Meghmani Finechem Ltd. (MFL) is significant subsidiary of MOL. MOL holds 57% shares in MFL. IFC holds 25%; other 18% is held by the promoters. MFL manufactures Caustic- Chlorine based chemical products.


MOL consolidated Sales was ~Rs. 1360 cr in FY2016. Sales growth rates have remained in single digits over last 6-7 years. 

Operating margins stabilised at 15-17% after FY2010. Recent improvement of margin in caustic-chlorine product line has boosted the margins to 20% levels. It’s only in FY2016 that the net margins improved from low single digits to ~6%, mainly due to reduction in interest expenses. 

MOL has done capital expenditure of Rs. 560 cr in last 5-6 years entering in new products and integrating backwards. This was financed mainly from bank debt. The debt at consolidated levels was around Rs. 486 cr (Rs. 268 cr short term & Rs. 218 cr long term) at FY2016 end. Company expects to pay ~Rs. 190 cr by FY2018 end. Company has paid around Rs. 95 cr in FY2017.

Management is of the view that the existing capacity can ramp up revenue to Rs. 2,000 cr by FY2019.

Company wrote off Rs. 17.5 cr as bad debt in FY2016; the corresponding amount in FY2015 was Rs. 5 lakhs. Company didn’t provide any explanation for this write off. It is important for minority shareholder to understand the reasons for such write offs. 

Operating Performance:

The operating parameters have either improved or remained same since FY2010. The asset turnover ratio dipped significantly in 2010 mainly due to commissioning of new production capacity. Receivable days have significantly come down from 134 days in FY2010 to 97 days.   

MOL’s trade receivables increased by 28% against 5% increase in revenue in FY2016. Company showed negative operating cash flow of Rs. 55.6 cr due to increase in cash stuck in receivables in FY2016. This increase in receivables may indicate MOL’s low bargaining power with its customers. It is also possible that company pushed the business by giving better credit terms to the clients for better top-line growth.


MOL has 3 business lines - pigments, agrochemicals and basic chemicals (Chlorine- Caustic based products). 

Pigment business:

MOL manufactures multiple types of blue & green pigments. The production processes of pigments are vertically integrated. 

Key pointers: 

1. ~15% global market share in Phthalocyanine Pigments pigments
2. ~72% revenue from exports, mainly from North America. 
3. Contributed 33% to net sales in FY16
4. Margins improved to 17% in 9M-2017 with stable capacity utilisation of ~62%. 
5. Management expects pigment margin to remain 16-18% in long term margin. 
6. Customers comprise mainly MNCs, such as Sun-DIC, Flint Group, Akzo Nobel, DuPont, and PPG Industries.  

MOL has three manufacturing facilities for Pigment products:

1. Vatva, Ahmedabad for Pigment Green 7 products (2,940 MTPA)
2. Panoli, Ankleshwar for CPC Blue, Alfa and Beta Blue, Pigment Blue 15 products (17,400 MTPA)
3. Dahej SEZ for CPC Blue, Alfa and Beta Blue products (10,800 MTPA)

Recent capacity expansion:

1. Production of CPC Blue plant situated at Dahej SEZ with installed capacity of 650Mt. started in April 2013. 
2. Commissioning of Plant to manufacture Beta Blue- 250 Mt. and Alpha Blue - 100 Mt per month was completed in FY2014. The Company spent Rs. 120 cr for the expansion.

Future strategy:

Company plans to focus on high-margin paints and plastics market by improving the product-mix and specialty pigment products for the international market. Company will focus on domestic market as well with increased capacity in place. 

Agrochemicals business:

Meghmani is a vertically integrated Agrochemicals player with product offerings encompassing the entire value chain intermediate, technical grade and formulations (bulk and branded). MOL has 183 export registrations (400 registrations are in pipeline), 309 CIB registrations and 27 registered trademarks. Recently, the Company received nod from the US regulatory agency for an amendment in label registration for its Permethrin technical product, expanding the scope of application from households only, to agri too.  

Key pointers: 

1. Contributed 31% to net sales in FY16; capacity utilisation is 69%. 
2. ~69% revenue from exports; mainly from LatAm.
3. Technicals and Formulations form 60% & 40% sales volume respectively. Technicals faced significant pricing pressures in 9M-2017. Formulations include both branded and contract manufacturing. 
4. PanIndia presence for branded formulations with 2370 stockists, agents, distributors, and dealers, plan to increase this to 3500 by FY18. 
5. Branded business is around INR 60 cr; targeting INR 80 cr next year. Plan to increase revenue from branded products to Rs. 250 cr by FY19.
6. Margins dipped to 10% in 9M-2017 due to lower demand for high margin products. Management indicated this was due to inventory built up of high margin products. This product line is linked to weather conditions of export locations. 
7. Management expects mean reversal to margins of ~14-15% going forward.   

MOL has 4 agrochemical manufacturing facilities situated at:

1. Chharodi, Taluka Sanand, 
2. GIDC Ankleshwar, 
3. GIDC Panoli,  Ankleshwar, 
4. GIDC Dahej

Recent capacity expansions: 

1. Facility at Dahej to manufacture 2, 4-D & MCAA in FY2010: 
  • Installed capacity of 9600 MT and 1200 MT for 2, 4-D Acid and MCAA (Monochloroacetic Acid) respectively. MCAA is a major intermediate used in the production of 2, 4-D Acid.
  • MCAA plant generates 2400 MT TCAC (Trichloroacetyle Chloride) 2400 MT. TCAC is a key raw material for one of the existing technical product Chlorpyriphos
2. Facility at Panoli, Ankleshwar in FY2010
  • Agrochemical formulation & agrochemical technical products such as Chlorpyriphos and Cypermethrin etc. are manufactured at Panoli. The Plant commenced its operations in September 2009.
Future Strategy:

Company to continue investing in new registrations in regulated markets, such as the USA, Brazil and European Union. MOL is planning to obtain Good Laboratory Practices (GLP) Certificate, which will reduce the time needed for securing new registrations.)

Basic Chemicals:

MOL has manufacturing capacity for Caustic and Chlorine based product lines with an integrated Captive Power Plant of 60MW. Power cost accounts for 60% of total raw material cost in Caustic Soda production, captive power plant provides power at lower cost resulting in high margins.

Key pointers: 

1. 5-year CAGR of ~18% ; contributing 28% to net sales in FY16
2. High margins ~38%; management expects to matin margins in the range of mid 30s. 
3. 4th largest Caustic-Chlorine capacity in India
4. Strategically located facility at Dahej – proximity to raw material and customers. Caustic soda is mainly used in the manufacture of pulp and paper, newsprint, viscose yarn, staple fibre, aluminium, cotton, textiles, toilet and laundry soaps, detergents, dyestuffs, drugs and pharmaceuticals, petroleum refining, etc.
5. Caustic Potash, Caustic Soda and Chlorine derivatives are key products.
6. Caustic Soda capacity utilisation is near 80%. 

Global demand for caustic soda is estimated at 70 million tons a year. India produces ~3 million tons a year and imports ~700k tons. Govt has levied anti-dumping on imports from China, South Korea and Taiwan supporting the local manufacturers. Another boost to local caustic soda production is expected due to banning of manufacturing of caustic soda using mercury in Europe. Europe's combined output is around 2 million tons - half of this is expected to close down due to environmental concerns. This may help Indian manufacturers like MOL to maintain consistent sales growth at decent margins. 

Recent capacity expansions: 

1. Meghmani Finechem a Limited (MFL) completed capacity expansion of Caustic chlorine manufacturing from 340 TPD to 476 TPD and Captive power plant capacity from 40 MW to 60 MW in FY2014.

2. Caustic Potash facility at Dahej of 60TPD capacity commenced operations in April 2016. The project investment of Rs 65 cr was financed through internal accruals. Avg utilisation is around 45% with EBIDTA margins is 25% for Potash. MOL expects utilization to go up to 60% resulting in INR 70-75 cr revenue for FY2018. 

3. Company changed the membrane of the existing Caustic Soda Plant; this helped increase the capacity to 500 TPD from 400 TPD.

Future strategy: 

1. MFL plans to set up DICHLORO Chlormethane (refrigeration gases) of 40,000 MTPA Project at GIDC Dahej” and is expected to be completed by March 2018 with expected cost of Rs. 140 cr.

2. MFL to set up Hydrogen Peroxide plant (50%) of 150 TPD. MFL to also increase Caustic capacity by 240TPD (50% increase in capacity). Company to also increase the captive power plant capacity from 60MW to 90 MW. The cost of project is expected to be INR 400 cr which is expected to increase turnover by 300 cr by FY2021. 

Brief overview of 3 business lines: 

Around 55% of the revenue is from exports to Europe, South East Asia, Middle East and Americas. All three business contribute equally to the top line. Basic chemicals has the highest margin and highest utilisation levels. Company has announced expansion of Caustic based products and Chlorine derivatives. 

Management Analysis: 


Management compensation has remained same for last 2 years. Compensation decreased  significantly in FY2013. Company’s top-line growth slowed down after FY2012. It is prudent of management to derive compensation in line with the performance of the company. 

Promoter Shareholding: 

The shareholding of Promoter group has come down from 60% in March 2016 to 55% in March 2017. This could be construed as negative by minority shareholders.  

MD & CEO , Mr. Ashish Soparkar, purchased 3.425 lakh shares on 24th March 2017 as per regulatory filings by MOL. Despite this purchase, shareholding of Mr. Ashish Soparkar fell from 11.2% to 10.6%! It seems management is buying / selling on regular intervals to seek benefit from stock price movements.  

Resignation by CFO: 

Mr. Upen Shah was appointed as the CFO of the company in Oct 2016; he resigned in 2017 citing personal reasons. A minority shareholder needs to be careful where top management leaves in such short period. 

Fire accident risks:

There have been multiple fire incidents in MOL’s facilities over last 6 years which has affected the production. 

1. Fire broke out on Tuesday, 1st Feb 2011, in Beta Blue Plant of Pigment Division situated at Panoli, Ankleshwar.

2. A fatal accident took place on Saturday, 2nd March, 2013, at Agrochemical Manufacturing Division situated at Ankleshwar Gujarat, (India), on account of gas leakage. 

3. Fire broke out on 28th July 2016 at Pigment manufacturing plant located at Dahej, Bharuch (Gujarat).

While company has insured all facilities for such accidents; these accidents raises questions on the safety standards which may affect company's reputation.  


Company is currently trading at Rs. 40 per share at PE of ~11.5. Assuming MOL does a Sales of Rs. 2000 cr by FY2019 at current PAT margin of 6% - the price of the stock will be around Rs. 57 by FY2019 if PE remains the same. This is increase of ~42% from current price levels. 

The other scenarios* are captured in below table.  

*Column represents PE levels and row represents the PAT levels. The values in the table are the expected share prices basis PE and PAT of the company assuming promoter doesn’t dilute the shareholding and management achieves Sales of Rs. 2000 cr. 


MOL is a uniquely placed Chemical company with diversified business interests. All businesses are integrated vertically to take benefit of the intermediaries generated during various manufacturing processes. Facilities are close-by reducing the transportation costs fo intermediaries. 

A minority shareholder should find out reasons for decrease in promoter's shareholding and significant increase in receivables. Another drag on the company is high finance costs. Management will do well by managing the working capital efficiently to reduce the short term debt. 


All data has been taken from public sources. I own shares of MOL at the time of writing this article in small quantity. This has not been disclosed as part of portfolio disclosure since the holding is very small (less than 4% of portfolio). This may have led to biases in my analysis. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer’s.

This article is just a collection of my thoughts about the company.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

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