Meghmani Organics - Well-positioned to become the Future Industry Leader

A fully integrated and diversified player in the Indian Chemical sector
A wide range of products and backward integration
Capex's commitment of Rs.750 Crores spread over the next three years

Meghmani Organics (NSE:MOL) is a leading agrochemicals and pigments company in India. The company has three pigment manufacturing facilities (~33,180 TPA total capacity) and three multifunctional production facilities for agrochemicals (~51,060 TPA total capacity), located in Gujarat. It has three patents, more than 650 product registrations, and over 36 brands of various pesticide formulations in India.

Meghmani Organics ranks among the top 10 producers of pesticides in India having a presence across the entire value chain and one of the top three global Phthalocyanine based pigment players. 

Business Segments 

Meghmani Organics operates through two business segments - Pigments (~30% of FY22 revenues) and Agrochemicals (~70%). The company is known for its green and blue pigments that have extensive usage in printing inks, paints and coatings, and plastics industries. Meghmani’s wide range of Pigment products includes Phthalocyanine Pigments, Azo Pigments, and High Performance. It manufactures three broad categories of Agrochemical products, namely, pesticide intermediates, technical and formulations that have applications in Crop Protection, Veterinary, Public Health, and Wood Protection.

The company has agrochemical products across the entire value chain which helps it to remain cost competitive and a recognized consistent supplier. Its backward integration also ensures lower dependency on raw materials from China.

Meghmani has a worldwide presence. More than 80% of Meghmani’s revenues are derived from exports. The company accounts for 14% of the global Pigment market share. In its agrochemicals business, the company has a strong customer base comprising prominent MNCs and several crop protection majors in over 75+ countries globally. Its large presence across geographies, both in domestic and international markets helps it mitigate the risk of unfavorable weather conditions to which the agrochemical industry is highly prone. In India, the company operates through over 3,000 distributors and dealers.

Future Growth Potential

The agrochemical industry is expected to grow at a 9.3% CAGR until 2025. The worldwide dyes and pigments market is expected to grow at a 4.9% CAGR from 2016-2026 valuing $54.64 billion. Meghmani is looking at potential opportunities to expand into new geographies and explore new pigments. The company also aspires to increase its domestic presence by 16%-18% in the next 3 to 4 years. It has ventured into developing the new white pigment titanium dioxide (TiO2), which is estimated to contribute Rs. 700 to 750 Crores to the top line.

For this, Meghmani is commissioning a new facility with 16,500 TPA and a capital outlay of Rs. 275 Cr by FY23 and another 33,000 TPA with an additional capital investment of Rs. 325 Cr by FY24. Meghmani Organics is expected to earn Rs.~4000 Cr. in revenues and Rs. ~675 Cr of EBITDA by FY2025. The company’s revenues have grown at 19% CAGR over FY18-22, with a higher contribution from the Agrochemical business

Aggressive Capex plans 

To meet the growing demand Meghmani doubled its capacity of 2,4-D to 21.6K TPA and commissioned a new formulation unit. A new multipurpose facility at Dahej is also expected to be commissioned in FY23 with a capital outlay of Rs.350 Cr which is projected to contribute a total revenue of Rs. 600 Cr annually once operational. The company continues to successfully discover newer molecules, undertake process development, and enhance its technical capacities while remaining cost-effective. Meghmani Organics acquired Kilburn Chemicals Limited in December'21 which is set to fortify the company’s position in titanium dioxide manufacturing.

Focus on a Sustainable lifestyle - Significant Tailwind

Post the pandemic, there has been a shift to healthier and sustainable lifestyles as well as environmental conservation. People worldwide have become more conscious of what they eat. A majority of the population is also turning toward vegetarian eating habits which have led to a renewed interest in food security and sustainable agricultural production. As a result, there is an increased focus on agricultural yields and agrochemical businesses.

The Reorganization

Meghmani Organics had demerged its agrochemical and pigment businesses into a separate subsidiary, Meghmani Organochem, and transferred its chloro-alkali and derivatives businesses to Meghmani Finechem. Later, Meghmani Organochem was renamed Meghmani Organics Ltd. The restructuring was expected to unlock value for its shareholders and potential for ‘Chloro Alkali and Derivatives’ business.

Financials

Despite the company facing operational material and supply issues, Meghmani performed well in the last financial year given higher capacity utilization as well as improving volumes and realizations. As a result, profitability improved. The company’s revenue grew by an impressive 53.6% Y/Y with revenues from the agrochemicals segment growing at ~66% Y/Y and the Pigments segment at ~30%. It registered a PAT growth of 66% in FY22. The debt-equity ratio also improved due to a lower debt balance as a result of strong free cash flow generation. Meghmani registered a better working capital cycle to 76 days in 2022 from 113 days in the last financial year. It ended FY’22 with cash equivalents of Rs. 906.33 lakhs compared with Rs.2,033.87 lakhs at the end of the previous year.

The BoD recommended a final dividend of Rs.1.40 per equity share for FY 2021-22. Meghmani has been consistently raising its dividends for the past few years despite huge capital outlays planned for future growth. 

Data Source: Meghmani Organics AR FY 22

Historical Financials and Valuation

Source: MOL Investor Presentation

Meghmani Organics has a market capitalization value of Rs.3,320 crores and is trading at ~9.6x its earnings. Its ROE and ROCE metrics stand strong near the ~23 and ~24 mark. The company’s shares are currently trading near Rs.130, just 14% shy of its 52-week high price of Rs.~152. Shares of Meghmani Organics have gained by more than 30% since it got listed in August’21. Promoter holding currently stands at ~49%. Meghmani has a healthy financial risk profile and the capital structure should further improve on the back of the company’s strong Capex investments.

Meghmani Stock Performance

Challenges

• Supply and Raw Material issues - Like other manufacturing companies, Meghmani continued to face raw material price fluctuations, commodity inflation, and supply chain disruptions. First, the pandemic and then the Russia-Ukraine war led to a spike in oil prices and resulted in overall supply chain disruption. The company’s backward integration has somewhat reduced its reliance on external sources for major raw materials.
• High Competition - Meghmani is a leading global player and faces intense competition from the likes of large multinational companies, national players, traders, and exporters. It also faces strong competition from China. Some leading chemical companies in India include Pidilite, Aarti Industries, Deepak Nitrite, Tata Chemicals, etc.

Conclusion

Strong backward integration, focus on future growth, meaningful synergies, and growing global footprint act as strong tailwinds for Meghmani Organics. The Indian government’s policies like ‘Make in India’ and ‘Atmanirbhar Bharat’ further support research and innovation to develop new generation compounds, manufacturing processes, as well as green products. The company is well-positioned to unlock the growth potential of the Indian chemical industry with a strong product portfolio, large customer base, and competent R&D facilities.

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