INSTITUTIONAL EQUITY RESEARCH Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Meghmani Organics Ltd (MEGH IN) Ignored so far, but not for long INDIA | SPECIALTY CHEMICALS | Initiating Coverage 29 March 2016 One of the leading manufacturers of caustic soda in India through recent expansion MEGH entered caustic soda manufacturing through a 57% JV (Meghmani Finechem Ltd) with International Finance Corporation (IFC) in 2009 with an investment of Rs 5.5bn, for a capacity of 119,000 MTPA at Dahej. In FY15, it expanded capacity by 40% to 167,000 MTPA, making it the fourth‐largest caustic‐chlorine‐flakes capacity in India (after Grasim Industry, Gujarat Alkali, and DCM Shriram). Expansion in the high‐margin caustic soda business to drive value growth MEGH is already one of the most efficient manufacturers of caustic soda with margins in the 31‐35% range led by its strategic location (in the middle of India’s highest‐consuming region ‐ Gujarat), captive power plant, and its usage of latest ‘membrane‐cell technology’ from Asahi Kasei Chemical Corporation, Japan. It has recently undertaken a brownfield expansion of caustic potash (21,000 tonnes) with a minimal investment of Rs 650mn (internal accruals). The new project is ready to commission in April 2016. With this, we estimate FY15‐18 sale/profits CAGR for its caustic operations (30% of sales) at 16%/27%. Pigment: Stable price and operating leverage to lead profitable growth MEGH is one of the largest phthalocyanine‐based pigment manufacturers in the world with a global volume market share of ~7%. Its vertically integrated facilities for CPC blue and end products such as pigment green and pigment blue give it a competitive advantage – the pigments are crude derivatives and their prices are relatively stable despite sharp correction in crude. Steady improvement in volumes and improving asset utilisation supplements value growth. We estimate 14% sales CAGR over FY16‐18, which will improve its plant utilisation to 54% (from current 36%) and lead profitable growth. Agrochemicals: Rising focus on branded business is the key MEGH has vertical integration in its agrochemicals business, which is largely dominated by intermediates and technical‐grade products (these constitute 65% of agrochemical sales). Exports of both technical and branded products in Africa, Brazil, LatAm, US, and European countries account for 70% of these sales. We expect healthy growth in its branded business based on (1) likely recovery in the global agro market, (2) anticipated favourable monsoon in India, and (3) its rapid domestic penetration in difficult times (plans to gain pan‐India presence by expanding its branded distribution chain – at 2,370 stockists and distributors YTD FY16 from 1,000 in FY15). Therefore, we build in 14% revenue CAGR over FY16‐18 to Rs 5.30bn. With lower crude prices, MEGH’s vertically integrated operation and improving asset utilisation will lead to profitable growth in agrochemicals. No incremental capex; 30% EPS CAGR over FY16‐18 Aggressive capex over the last five years (>Rs 5bn to fund its greenfield agrochemical and pigment plant in Dahej and to expand its caustic plant) has increased its leverage position to 1.2x of equity in FY15 (1.5x in FY14). However, it has no visible capex over the next two years. This, along with improving asset utilisation across all its segments and planned debt repayment (already repaid Rs 1.5bn since FY14 and plans to cut debt by >Rs 2bn), should lead to 30% earnings CAGR over FY15‐18 to Rs 1.01bn in FY18. Initiate coverage with a BUY and TP of Rs 40, implying upside of 100% Considering its diverse business profile, we value the company on SOTP. Taking into account its strategic positioning, expansion, and superior margin profile of over 30%, we value its caustic operation at 5x FY18 EV/EBITDA and the other two segments at 4x – arriving at a valuation of Rs 40. BUY (Maintain) CMP RS 20 TARGET RS 40 (+100%) COMPANY DATA O/S SHARES (MN) : 254 MARKET CAP (RSBN) : 5 MARKET CAP (USDBN) : 0.1 52 ‐ WK HI/LO (RS) : 28 / 14 LIQUIDITY 3M (USDMN) : 0.4 PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jun 14 PROMOTERS : 59.6 50.9 50.4 FII / NRI : 1.0 0.9 0.9 FI / MF : 0.2 0.1 0.1 NON PRO : 12.1 6.4 4.8 PUBLIC & OTHERS : 27.1 26.7 28.0 PRICE PERFORMANCE, % 1MTH 3MTH 1YR ABS 6.3 ‐12.9 33.2 REL TO BSE ‐2.0 ‐10.9 43.4 PRICE VS. SENSEX Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18E Net Sales 12,605 14,363 15,725 EBIDTA 2,710 2,944 3,145 Net Profit 733 850 1,013 EPS, Rs 2.9 3.3 4.0 PER, x 6.9 6.0 5.0 EV/EBIDTA, x 4.0 3.5 3.1 P/BV, x 0.8 0.8 0.7 ROE, % 12.2 13.0 14.0 Debt/Equity (%) 99.6 87.2 68.8 Source: PhillipCapital India Research Est. Surya Patra (+ 9122 6667 9968) [email protected]Mehul Sheth (+ 9122 6667 9996) [email protected]0 50 100 150 200 250 300 350 400 Apr/14 Oct/14 Apr/15 Oct/15 Meghmani BSE Sensex
17
Embed
INSTITUTIONAL EQUITY RESEARCH Meghmani Organics Ltdbackoffice.phillipcapital.in/Backoffice/Researchfiles/.../PC_-_Meghma… · meghmani organics ltd initiating coverage India contributes
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
INSTITUTIONAL EQUITY RESEARCH
Page | 1 | PHILLIPCAPITAL INDIA RESEARCH
Meghmani Organics Ltd (MEGH IN)
Ignored so far, but not for long INDIA | SPECIALTY CHEMICALS | Initiating Coverage
29 March 2016
One of the leading manufacturers of caustic soda in India through recent expansion MEGH entered caustic soda manufacturing through a 57% JV (Meghmani Finechem Ltd) with International Finance Corporation (IFC) in 2009 with an investment of Rs 5.5bn, for a capacity of 119,000 MTPA at Dahej. In FY15, it expanded capacity by 40% to 167,000 MTPA, making it the fourth‐largest caustic‐chlorine‐flakes capacity in India (after Grasim Industry, Gujarat Alkali, and DCM Shriram). Expansion in the high‐margin caustic soda business to drive value growth MEGH is already one of the most efficient manufacturers of caustic soda with margins in the 31‐35% range led by its strategic location (in the middle of India’s highest‐consuming region ‐ Gujarat), captive power plant, and its usage of latest ‘membrane‐cell technology’ from Asahi Kasei Chemical Corporation, Japan. It has recently undertaken a brownfield expansion of caustic potash (21,000 tonnes) with a minimal investment of Rs 650mn (internal accruals). The new project is ready to commission in April 2016. With this, we estimate FY15‐18 sale/profits CAGR for its caustic operations (30% of sales) at 16%/27%. Pigment: Stable price and operating leverage to lead profitable growth MEGH is one of the largest phthalocyanine‐based pigment manufacturers in the world with a global volume market share of ~7%. Its vertically integrated facilities for CPC blue and end products such as pigment green and pigment blue give it a competitive advantage – the pigments are crude derivatives and their prices are relatively stable despite sharp correction in crude. Steady improvement in volumes and improving asset utilisation supplements value growth. We estimate 14% sales CAGR over FY16‐18, which will improve its plant utilisation to 54% (from current 36%) and lead profitable growth. Agrochemicals: Rising focus on branded business is the key MEGH has vertical integration in its agrochemicals business, which is largely dominated by intermediates and technical‐grade products (these constitute 65% of agrochemical sales). Exports of both technical and branded products in Africa, Brazil, LatAm, US, and European countries account for 70% of these sales. We expect healthy growth in its branded business based on (1) likely recovery in the global agro market, (2) anticipated favourable monsoon in India, and (3) its rapid domestic penetration in difficult times (plans to gain pan‐India presence by expanding its branded distribution chain – at 2,370 stockists and distributors YTD FY16 from 1,000 in FY15). Therefore, we build in 14% revenue CAGR over FY16‐18 to Rs 5.30bn. With lower crude prices, MEGH’s vertically integrated operation and improving asset utilisation will lead to profitable growth in agrochemicals. No incremental capex; 30% EPS CAGR over FY16‐18 Aggressive capex over the last five years (>Rs 5bn to fund its greenfield agrochemical and pigment plant in Dahej and to expand its caustic plant) has increased its leverage position to 1.2x of equity in FY15 (1.5x in FY14). However, it has no visible capex over the next two years. This, along with improving asset utilisation across all its segments and planned debt repayment (already repaid Rs 1.5bn since FY14 and plans to cut debt by >Rs 2bn), should lead to 30% earnings CAGR over FY15‐18 to Rs 1.01bn in FY18. Initiate coverage with a BUY and TP of Rs 40, implying upside of 100% Considering its diverse business profile, we value the company on SOTP. Taking into account its strategic positioning, expansion, and superior margin profile of over 30%, we value its caustic operation at 5x FY18 EV/EBITDA and the other two segments at 4x – arriving at a valuation of Rs 40.
BUY (Maintain) CMP RS 20 TARGET RS 40 (+100%) COMPANY DATA O/S SHARES (MN) : 254MARKET CAP (RSBN) : 5MARKET CAP (USDBN) : 0.152 ‐ WK HI/LO (RS) : 28 / 14LIQUIDITY 3M (USDMN) : 0.4PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jun 14PROMOTERS : 59.6 50.9 50.4FII / NRI : 1.0 0.9 0.9FI / MF : 0.2 0.1 0.1NON PRO : 12.1 6.4 4.8PUBLIC & OTHERS : 27.1 26.7 28.0 PRICE PERFORMANCE, %
1MTH 3MTH 1YRABS 6.3 ‐12.9 33.2REL TO BSE ‐2.0 ‐10.9 43.4 PRICE VS. SENSEX
Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18ENet Sales 12,605 14,363 15,725EBIDTA 2,710 2,944 3,145Net Profit 733 850 1,013EPS, Rs 2.9 3.3 4.0PER, x 6.9 6.0 5.0EV/EBIDTA, x 4.0 3.5 3.1P/BV, x 0.8 0.8 0.7ROE, % 12.2 13.0 14.0Debt/Equity (%) 99.6 87.2 68.8
Source: PhillipCapital India Research Est. Surya Patra (+ 9122 6667 9968) [email protected] Mehul Sheth (+ 9122 6667 9996) [email protected]
050100150200250300350400
Apr/14 Oct/14 Apr/15 Oct/15
Meghmani BSE Sensex
Page | 2 | PHILLIPCAPITAL INDIA RESEARCH
MEGHMANI ORGANICS LTD INITIATING COVERAGE
About Meghmani • Almost 30 years old. MEGH began operations in 1986. • It is a leading manufacturer of pigments and pesticides in India. • One of the largest producers of pigment blue in the world, leading producer of
pigment green, and one of the largest producers of pesticides in India. • Proven management team – founders have +100 years collective experience in
pigments and pesticides. • More than 80% of its pigment products and +50% of pesticides are exported. • Four multifunctional production facilities in Gujarat (India) – of which three are
Net Sales (Rs mn) PriceConverted into a Public Ltd. Co. in 1995
First Agro plant setup in 1995
Private Equity investment in MOL in 1997
Started Blue Pigment production at Panoli plant in 1996
Acquired Agro assets from Rallis in 2004
Got listed in Singapore in 2004
Got listed in India in 2007
Established MFL with IFC participation in 2007
Started production in MFL in 2009
Two new sites for Agrochem at Panoli and Dahej in 2009
New Pigment plant at Dahej SEZ in 2013
Expansion of CausticChlorine facility in 2014
Diversification into Caustic Potash in 2015
MEGH started operations in 1986
New Pigment plant setup at Panoli in 1996
Meghmani organics
Pigment (35% of sales)CPC blue, pigment green, pigment blue
Agrochemicals (33% of sales)Leading products Cypermethrin , 2,4‐D
Acid, Permethrin Tech, MPB
Basic Chemicals (30% of sales)Caustic soda, chlorine and caustic
potash
• Expanded caustic‐chlorine capacity to 476 TPD from 340 TPD • Uses fourth generation membrane cell Technology from AKCC (Japan)• Fourth largest caustic chlorine flakes capacity in India• 34% sales CAGR over last the last five
• Global client base with ~70% business from exports• Well known brands such as Megastar, Megacyper, Megaban, Synergy, Courage• Muted 1% sales CAGR over the last five years
• Market Leadership in blue pigment with ~7% global market share• Global presence with ~80% of pigment revenue from exports• Long‐term client relationships with 90% business from repeat clients • Muted 9% sales CAGR over the last five years
Page | 3 | PHILLIPCAPITAL INDIA RESEARCH
MEGHMANI ORGANICS LTD INITIATING COVERAGE
Investment rationale
Basic chems: High margin + expansion = value growth One of the leading manufacturers of caustic soda in India MEGH entered the caustic soda manufacturing through a 57% JV (Meghmani Finechem Ltd) with International Finance Corporation (IFC) in 2009 with an investment of Rs 5.5bn for a capacity of 119,000 MTPA at Dahej. It expanded capacity by 40% in FY15 to 167,000 MTPA, making it the fourth largest caustic‐chlorine‐flakes capacity in India (after Grasim Industries, Gujarat Alkali, and DCM Shriram). As a result, its current product portfolio includes caustic soda, chlorine, and hydrogen. Basic chemicals has been the fastest growing segment for MEGH, delivering 34% sales CAGR over the last five years (primarily led by capacity expansion) to touch Rs 3.31bn in FY15; 10% yoy growth YTD FY16. Caustic soda sees expansion led growth MEGH has one of top four caustic capacities in India
Source: Company, PhillipCapital India Research Estimates Conducive industry scenario supplements growth Caustic soda has a wide range of industrial applications – in pharmaceuticals, soaps and detergents, PVC, chemicals, and textile manufacturing. Steady growth in end‐user industries ensures demand growth for caustic soda. With 4mn tonnes of caustic soda capacity, India accounts for just ~5% of the world market. With domestic capacity remaining static, domestic demand has been fed by imports (that saw 15% CAGR over the last five years). Imports of caustic soda account for 12% of domestic demand. The price of caustic soda has stayed comfortably stable over the last few years –international and domestic market prices move in tandem. Caustic soda price is not linked to crude prices.
60
65
70
75
80
85
90
95
100
0
25000
50000
75000
100000
125000
150000
175000
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Caustic Soda TPA Caustic Soda Utilisation Level (%) (rhs)
0
200000
400000
600000
800000
Grasim Gujarat Alkali DCM Shriram Ltd.
Meghmani
Basic chemicals has been the fastest growing segment for MEGH
Page | 4 | PHILLIPCAPITAL INDIA RESEARCH
MEGHMANI ORGANICS LTD INITIATING COVERAGE
India contributes 4% of world capacity Indian caustic soda capacity is optimally utilised already
Import dependancy of caustic soda is increaseing Domestic/global prices of causitc soda are comfortably stable
Casustic soda application in different end‐user industries
Source: chemicals.nic.in, PhillipCapital India Research
High margin due to backward integration and better technology It is one of the most efficient manufacturers of caustic soda with an integrated captive power plant that uses the latest fourth‐generation ‘membrane cell technology’ from Asahi Kasei Chemical Corporation, Japan (one of the most established technology providers for chlor‐alkali products). Strategic location is a big advantage MEGH’ Dahej facility is strategically located within an industrial area that is close to the Dahej port; this eases imports of coal, and more importantly, provides proximity to customers (i.e., chemicals manufacturers). Capability of supplying caustic and chlorine by pipeline to selected buyers helped MEGH to reduce logistics costs substantially. MEGH’s Dahej plant strategically located within an industrial area
Source: PhillipCapital India Research Capacity expansion to drive value growth Considering the flourishing chemical industry in Gujarat led by the most successful petroleum, chemical and petrochemicals investment region (PCPIR) and rising demand for caustic soda there, MEGH is in the middle of a brownfield caustic potash expansion in Dahej. It has set up a plant with 21,000 tonnes capacity with a minimal investment of Rs 650mn (internal accrual) in FY16. Its captive power plant will meet the electricity requirement. We believe the expansion in this highest‐margin segment would lead to optimal utilisation of existing resources and drive value growth. We estimate basic chemical sales CAGR of 18% over FY15‐18 that would raise its revenue contribution to 30% and would drive value growth for MEGH.
Page | 6 | PHILLIPCAPITAL INDIA RESEARCH
MEGHMANI ORGANICS LTD INITIATING COVERAGE
Enhanced capacity will reach optimum level on strong demand of caustic soda
Sees capex led sales growth Causitc soda enjoys operating profit margin >30%
Source: Company, PhillipCapital India Research Estimates
60
65
70
75
80
85
90
95
100
0
25000
50000
75000
100000
125000
150000
175000
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Caustic Soda TPA Caustic Soda Utilisation Level (%) (rhs)
‐20
0
20
40
60
80
100
120
0
1000
2000
3000
4000
5000
6000
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Sales (Rs mn) YoY growth (%) (rhs)
0
5
10
15
20
25
30
35
40
45
50
0
200
400
600
800
1000
1200
1400
1600
1800
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
EBITDA (Rs mn) EBITDA margin (%) (rhs)
Page | 7 | PHILLIPCAPITAL INDIA RESEARCH
MEGHMANI ORGANICS LTD INITIATING COVERAGE
Pigment: An established global business Leading global player in phthalocyanine pigments industry MEGH is one of the largest phthalocyanine‐based pigment manufacturers in India and among the top‐three players in the world, with a global market share of ~7% in terms of volume. The global phthlocyanine pigments market is estimated at ~US$ 1‐1.25bn –20% of the total organic pigment market – and it is expected to maintain steady growth. MEGH’s pigment business is vertically integrated and manufactures and markets various grades of pigment green, pigment blue, and CPC blue – an upstream product sold to other pigment manufacturers. US leads the export market for its pigments business Beta and CPC are MEGH’s leading products
Source: Company, PhillipCapital India Research These pigment products are used in multiple applications including paints, plastics, and printing inks. Thanks to the steady growth in these sectors (which together account for 90% of end use), pigments is a steady play for MEGH – it has delivered 9% sales CAGR over the last five years to touch Rs 3.68bn in FY15; 6% yoy growth YTD FY16. The pigment division derives ~80% of its net sales from exports with leading customers including Sun‐DIC, Flint Group, Akzo Nobel, DuPont, and PPG Industries. MEGH’s expertise and high‐degree customisation has helped it to develop long‐term client relationships resulting in 90% business from repeat clients. It has a global network with ~70 distributors. Its direct presence (with subsidiaries in the US, Europe, Indonesia, Dubai and representative office in China) helps it to have a front‐end presence and ability to work closely with end‐user customers. MEGH also has warehouses in Belgium, Turkey, Russia, USA, and Uruguay. Stable price and operating leverage to lead profitable growth Pigments are crude derivatives and pigment prices are relatively stable despite sharp correction in crude prices. Additionally, steady improvement in volumes as well as improving asset utilisation supplements value growth. MEGH has three dedicated manufacturing facilities with a consolidated capacity of 311,000 tonnes in Gujarat, which operated at a utilisation of 33% in FY15 and ~37% in FY16. We see 14% sales CAGR over FY16‐18, which should improve utilisation to 54%, leading to profitable growth.
US 32%
India 18%Asia 17%
South America 14%
Europe 11%
Others 8%
Pigment Net sales by country mix (%) as FY15
Beta 39%
CPC 28%
Pigment Green 7 20%
Alpha 11%
Others 2%
Pigment Net sales by product mix (%) as FY15
Largest phthalocyanine‐based pigment manufacturers in India and among the top‐three players in the world
Page | 8 | PHILLIPCAPITAL INDIA RESEARCH
MEGHMANI ORGANICS LTD INITIATING COVERAGE
MEGH’s leading product phthalocyanine maintained its prices despite crude fall
Source: PhillipCapital India Research Pigment capacity utiliation to see gradual ramp‐up Pigment sales growth to remain stable over FY15‐18
Source: Company, PhillipCapital India Research Estimates
0
20
40
60
80
100
120Phthalocyanine Blue price (Rs/Kg) Crude oil price
Agrochemicals: Integrated; seeing rising branded play MEGH is one of the leading vertically‐integrated agrochemicals players in India, with product offerings covering the entire value chain – intermediate, technical grade, and formulation (bulk and branded). Its integration allows it to effectively manage raw materials costs and assures a constant and consistent quality supply. Largely dominated by intermediates and technical‐grade products MEGH’s agrochemical business is largely dominated by intermediates and technical‐grade products – 65% of its agrochemical sales. It produces commonly used pesticides for crop‐ and non‐crop applications such as public health and in insect control in wood preservation and food‐grain storage. In branded formulations, it has a strong pan‐India presence with about 2,370 stockists, agents, distributors, and dealers (major expansion from 1,000 in 17 states in India in FY15). India still the largest market for MEGH Branded portfolio will drive growth ahead
Source: Company, PhillipCapital India Research It has a strong global clientele base with exports contributing to about 70% of its agro‐chemical sales. It exports technicals as well as branded products to Africa, Brazil, LatAm, US, and European countries. Rising focus on branded business to drive growth MEGH’s agrochemical sales saw moderation in FY16, both domestic and exports. While the on‐going global slowdown impacted international sales, unfavourable climate in India slowed domestic sales. We expect healthy growth in its branded business based on (1) likely recovery in the global agro market, (2) anticipated favourable monsoon in India, and (3) its rapid domestic penetration in difficult times (plans to gain pan‐India presence by expanding its branded distribution chain – at 2,370 stockiest and distributors YTDFY16 from 1,000 in FY15). Therefore, we build in 14% revenue CAGR over FY16‐18 to Rs 5.3bn. With lower crude prices, MEGH’s vertically integrated operation and improving asset utilisation will lead to profitable growth in agrochemicals.
India 30%
Europe 7%Africa 6%
South America 6%
Others 51%
Agrochemicals Net sales by country mix (%) as FY15
Branded 27%
Cypermethrin Tech‐Z 20%
2,4‐D 8%Bulk 8%
Others 37%
Agrochemicals Net sales by product mix (%) as FY15
Intermediates and technical‐grade products constitute 65% of its agrochemical sales. Major products include 2,4‐D, cypermethrin, permethrin, metaphenoxy benzaldehyde, chlorpyrifos, and profenophos. Key brands include Megastar, Megacyper, Megaban, Synergy, Courag
Page | 10 | PHILLIPCAPITAL INDIA RESEARCH
MEGHMANI ORGANICS LTD INITIATING COVERAGE
Focus on branded portfolio will drive value growth EBITDA margin to remain at 18‐19%
Source: Company, PhillipCapital India Research Estimates
No major capex over FY16‐18; 30% EPS CAGR MEGH has continuously added capacities across all business verticals in the last five years – it has invested >Rs 5bn (to fund its greenfield agrochemical and pigment plant in Dahej and in expanding its caustic plant), which has increased its leverage position to 1.2x of equity in FY15 (was 1.5x in FY14). With no visible capex over next two years, improving asset utilisation across all its segments, and planned debt repayment (already repaid Rs 1.5bn since FY14 and targets to cut debt by >Rs 2bn), we estimate 30% earning CAGR over FY15‐18 to Rs 1.01bn in FY18. Visible sweating of assets Financial deleveraging to improve earnings performance
Source: Company, PhillipCapital India Research Estimates
Valuations and outlook Over FY15‐18, we estimate MEGH to deliver revenue CAGR of 7% to touch Rs 15.7bn in FY18 (primarily due to lower crude) and profit CAGR of 30% to touch Rs 1.13bn. Margins should see an expansion of over 400bps to around 20%. While expansion in the higher‐margin caustic operation will boost efficiency, improving asset utilisation in agrochemicals and pigments will lead earning growth. Considering diverse business profile of MEGH’s segments, we value the company on an SOTP basis. Looking at the strategic positioning, expansion, and superior margin profile of over 30%, we value its caustic operations at 5x FY18 EV/EBITDA. We value agrochemicals and pigments at 4x FY18 EV/EBITDA, considering likely recovery in agrochemicals and steady growth profile coupled with its global positioning in pigments. We arrive at a value of Rs 40 and initiate coverage with a BUY rating. Particulars (Rs mn) FY18 EBITDA Target Multiple (x) ValuePigment EBITDA 834 4 3337Agrochemicals EBITDA 795 4 3181Basic chemicals EBITDA 1581 5 7904Enterprise Value (RS mn) 14421Net debt (Rs mn) 4695Mcap (Rs mn) 9727No of shares (mn) 254Target Price (Rs) 40CMP (Rs) 20Upside 100%
Source: Company, PhillipCapital India Research Estimates One‐year forward PE band One‐year forward EV/EBITDA band
Source: Bloomberg, PhillipCapital India Research Estimates
3x
6x
9x
12x
0
5
10
15
20
25
30
35
40
45
Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15
RsP/E
2x
4x
6x
8x
0
5000
10000
15000
20000
25000
Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15
Rs mnEV/EBITDA
Page | 13 | PHILLIPCAPITAL INDIA RESEARCH
MEGHMANI ORGANICS LTD INITIATING COVERAGE
Operating leverage to strengthen ROCE Financial deleveraging powers earnings
Source: Company, PhillipCapital India Research Estimates Downside risk to valuation:
• Increase in Chinese competition (particularly in agrochemicals and pigments) led by yuan devaluation can hurt growth.
• Further extension of weak agricultural environment in India as well as globally impact growth as well as profitability
• Any price competition in caustic soda either due to new capacity or cheaper imports could hit profitability
Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%
SELL <= ‐15% Target price is less than or equal to ‐15%.
Contact Information (Regional Member Companies)
SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,
Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.
This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.
This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.
Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.
Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.
Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in
this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the
company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this
research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for
any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for
the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in
connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No
1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL
No
2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of thecompany(ies) covered in the Research report
No
3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the
company(ies) covered in the Research report No
5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months
No
Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.
Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.
Page | 17 | PHILLIPCAPITAL INDIA RESEARCH
INITIATING COVERAGE MEGHMANI ORGANICS LTD
Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.
Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.
Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. The recipient should carefully consider whether trading/investment is appropriate for the recipient in light of the recipient’s experience, objectives, financial resources and other relevant circumstances. PCIPL and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by the recipient. The recipient is further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek trading/investment advice before investing. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PCIPL and any of its employees, directors, associates, group entities, affiliates are not inducing the recipient for trading/investing in the financial market(s). Trading/Investment decision is the sole responsibility of the recipient.
For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.‐regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.
This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Decker & Co, LLC. Transactions in securities discussed in this research report should be effected through Decker & Co, LLC or another U.S. registered broker dealer PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013