Organics Stock Idea

601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum

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Stock IdeaAugust 6, 2014

Meghmani Organics Ltd.(Meghmani)A classic turnaround story...

Current Previous

CMP : Rs.15

Meghmani Organics Ltd (Meghmani), top 100 global generic agrochemicals player andone of the largest blue pigments producers in the world, is seeing a significant businessturnaround after many years of dismal performance. With uptick in Agrochemical cycle,

Rating : BUY

Target : Rs.34

Rating : NR

Target : NR

following triggers should lead to business turn-around- (1) margin expansion on the backof stabilization of recently commenced facilities, (2) better profitability in absence ofincremental capex, should lead to commencement of debt repayment, (3) With permissionsin place from state level Pollution Control Board, Meghmani is well positioned to ramp-up

(NR-Not Rated)

STOCK INFO

BSE 532865NSE MEGHBloomberg MEGH INReuters MEGH.BOSector Agro ChemicalsEquity Capital (Rs mn) 254Face Value (Rs) 1Mkt Cap (Rs mn) 41152w H/L (Rs) 16.0/3.8Avg Daily Vol (BSE+NSE) 289,969

SHAREHOLDING PATTERN %(as on 30th Jun. 2014)

Institutions 1.0Others, Incl Public 48.3Promoters 50.7Source: BSE

STOCK PERFORMANCE (%) 1m 3m 12mMEGHMANI 9 72 274SENSEX 0 16 35Source: Capitaline, IndiaNivesh Research

MEGHMANI v/s SENSEX400

350

300

250

200

150

100

50

Meghmani Sensex

Source: Capitaline, IndiaNivesh Research

Daljeet S. KohliHead of Research

Mobile: +91 77383 93371, 99205 94087Tel: +91 22 [email protected]

Amar MouryaResearch Analyst

Tel: +91 22 [email protected]

operations to peak capacity, (4) Implementation of stringent Pollutions norms in China,makes Indian Agrochemical and Pigments business attractive, and (5) ability to attractnew order wins from MNC clients given that all safety and Environment certifications arein place. On a/c of industry down cycle and levered balance sheet of the company,Meghmani stock has been trading at lower 1-year forward EV/EBITDA multiple of ~3.9x.With revival in business cycle, we have assigned 5.9x EV/EBITDA multiple (21% discountto global peers) to arrive at FY16E based price target of Rs 34/share. Given the huge upside,we maintain BUY on the stock.

Source: Company, IndiaNivesh Research

Key Investment RationaleChanging global dynamics, positive for pigments industry…The pigment industry suffered heavily in last five years on account of hugecompetition from Chinese players. The key reason for China becoming morecompetitive (v/s India) in global market was as follows: (1) huge governmentincentives for exports, (2) less stringent pollution norms, (3) lower dependence onimport for raw material and intermediates. However, in recent years China is takingstrict legal initiatives to reduce Carbon emissions. This had forced many agrochemicaland dyes companies to close down recently. In our view, this opens tremendousexport opportunity to Indian pigment manufacturers. The stricter environmentalnorms also take away cost advantage of Chinese players; hence it provides equalturf for Indian manufacturer to operate in global market. Additionally, improvedglobal economic condition led to rise in demand for pigments across variousindustries [E.g Textiles, Printing Ink, Plastic, Paints, Leather, Paper and Rubber]. Giventhe company’s established industry position and global presence [250 customers in65 countries] Meghmani remains a major beneficiary of changing industry dynamics.

Agrochemicals, key revenue & margin driver…On back of strong global presence with subsidiaries in USA, Belgium, Mexico,Indonesia and China and warehouses in Germany, Turkey, Russia, and Uruguay, we

IndiaNivesh Research IndiaNivesh Securities Private Limited Chowpatty, Mumbai 400 007. Tel: (022) 66188800

IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.

Stock Idea (contd...)

expect agrochemical segment to report higher revenue and margin going-ahead.The underperformance on revenue and margin in past was due to following reasons:(1) shutdown of Chharodi (Gujarat) plant due to continuous pollution control boardsintervention, (2) Loss of production for three years due to re-location of plant fromChharodi to Dahej, (3) Impact on margin due to high toll manufacturing (sub-contracting), and (4) Instability in newly started 2,4 D plant at Dahej. However, nowall the odds have turned in favour of Meghmani, given that above highlighted issuesare resolved. We forecast revenue growth of 16.2%/14.0% for Agrochemicalssegments in FY15E/FY16E. The key margin tailwind is plant utilization factor, whichis expected to reach ~53% in FY15E from 48% in FY14.

Source: Company; IndiaNivesh Research; NOTE: PBT – Excludes Interest

MFL’s (Basic Chemical) plant has stabilized (57% stake of Meghmani)…Meghmani Finechem Ltd (MFL) Chlor-alkali plant, which got commissioned in FY09-10, in the first 3-4 years, did not earn major profits whereas huge capital costs wereincurred. The total cost of the plant was cRs.5,500 mn (Rs.1,850 mn Equity andRs.3,700 mn debt). Meaning, nearly 70% of the total long-term debt (Rs.5260 mn)on the books was raised to set-up this plant, which resulted in increase in interestexpenditure by ~157% Y/Y in FY10. Commencement of plant led to rise in the revenuebut profitability took a significant hit. Now, with this plant stabilised, uptick inrevenues from this plant should help in debt servicing. In FY15, management expectrevenue of Rs.4,750 mn (V/S Rs.2,624 mn in FY14) and EBIT of Rs.750 mn (V/S Rs.691mn in FY14) from MFL. The caustic-chlorine chemicals are used in number ofindustries such as pigments, plastics, petroleum and natural gas extraction,manufacturing of organic chemicals, industrial solvents, water treatment chemicalsand pharmaceuticals.

Capex cycle coming to an end…All investments either in Agro Division or Pigments division are complete and allnew facilities were commissioned in FY13-14. This will boost the turnover as wellas margins going-ahead. Additionally, no further capital investments are on boardand hence likely to generate huge free cash flow in order to reduce debts going-ahead. Similarly, investments in Pollution related areas are complete and henceplans can go back to full capacity utilization without stoppages from Pollution Board.Most of the plants are ISO 14000/9000 and OSHAs 18000 certified, which will helpin attracting contract manufacturing business from MNCs. The management hasguided for only maintenance capex ranging between Rs100-500 mn from here on.

Recent quarter performance shows a sign of revivalAfter many quarters of sluggish performance in Q1FY15 Meghmani Organics Ltd(Meghmani) reported revenue and EBITDA growth along with turnaround on net

IndiaNivesh Research Meghmani Organics Ltd | Stock Idea August 6, 2014 | 2


profit front. Top line grew by 22% Y/Y to Rs.3,127 mn led by Pigment, Agrochemicals,Basic Chemicals, and Others (See Table Below). EBITDA went up 20% Y/Y to Rs.499mn on account of higher revenue growth, partially offset by rise in material cost. Asa result, EBITDA margin contracted 29bps y/y to 16.0% in Q1FY15. During thequarter, Meghmani reported net profit of Rs.78 mn (v/s net loss of Rs.36 mn inQ1FY14).Quarterly Performance(Rs Mn) Q1FY15 Q4FY14 Q1FY14 Q/Q Ch % Y/Y Ch %

Net Sales 3,078 2,967 2,516 4% 22%Other Operating Income 50 65 44 -24% 12%

Total Income 3,127 3,032 2,560 3% 22%

Raw Material Consumed 1,757 1,894 1,370 -7% 28%

Stock Adjustment 113 256 102 -56% 10%Purchase of Finished Goods -20 -476 108 -96% -118%Employee Expenses 167 160 132 5% 27%Other Expenses 610 719 432 -15% 41%

Total Expenditure 2,628 2,552 2,144 3% 23%

EBITDA 499 480 416 4% 20%

Interest 177 199 152 -11% 17%Other Income 18 20 13 -8% 40%Depreciation 202 198 196 2% 3%

PBT 138 103 81 34% 69%Tax -2 5 115 -139% -102%

Net Profit 140 97 ‐33 43% NMExtra-ordinary Items - -5 - NM NMMinority Interest 62 57 3 9% 2185%

Reported Net Profit 78 46 ‐36 71% NM

EPS 0.3 0.2 -0.1 71% NM

O/shares 254 254 254 0% 0%

Margin % BPS

EBITDA Margin (%) 16.0% 15.8% 16.2% 13 ‐29PAT Margin (%) 2.5% 1.5% -1.4% 99 390 Segment Performance(Rs Mn) Q1FY15 Q4FY14 Q1FY14 Q/Q Ch % Y/Y Ch %

Pigment 1,119 1,098 890 2% 26%Agrochemicals 1,002 1,044 938 -4% 7%Basic Chemicals 855 824 651 4% 31%Other/Unallocated 342 359 245 -5% 39%

Total 3,317 3,326 2,724 0% 22% Source: Company, IndiaNivesh Research

Debt burden to reduce going-forward…On account of consistent capital spending over last six years, the company’s grossdebt increased from Rs.1,466 mn in FY08 to Rs.6,232 mn in FY14. This had alsorestrained the improvement in free cash flow (FCF) despite strong operating cashflow. Given the improving business environment and reduction in capital spendingcycle, we believe that company’s FCF should improve going forward, which wouldhelp in reducing the long-term debt. On a consolidated level the company has thetotal debt of cRs.6,232 mn (Rs.2459 mn – short-term & Rs.3,773 mn – long-term).The management intends to repay ~Rs.1000 mn each in FY15E and FY16E.

Risk & ConcernSignificant rise in input (H-Acid & Dye intermediary) prices…The inputs such as Dyestuff now sell at Rs.550/kg, up from Rs.180 six monthsago. H-Acid, an amorphous dye intermediary, now costs Rs.1,800/kg compared toRs.300 a year ago. The significant rise in input prices is impacting Pigment segmentprofitability. In Q1FY15, the segment reported +26% Y/Y revenue growth butprofitability declined by 129 bps Y/Y to 4.2%. The key reason is domestic rates ofchemicals used for pigments/dye manufacturing (Vinyl Sulphone, Hydraulic Acid &Naphthalene) have zoomed up due to fall in Chinese imports. We see this as a near-term concern over pigments segment margin.



Valuation

At CMP of Rs.15, the stock is trading at EV/EBITDA multiple of 4.4x FY15E and 3.9xFY16E estimates. In our view, the current valuations are significantly below 7.5xglobal peer average. On back of various available triggers (1) debt reduction, (2)margin expansion, (3) higher plant utilization, and (4) favourable business dynamicsthe stock is poised for re-rating. With revival in business cycle, we have assigned5.9x EV/EBITDA multiple (21% discount to global peers) to arrive at FY16E basedprice target of Rs 34/share. Given the huge upside, we maintain BUY on the stock.We intend to come out with Initiating Coverage soon.

FinancialsIncome Statement Balance SheetY E March (Rs m) FY12 FY13 FY14 FY15e FY16e Y E March (Rs m) FY12 FY13 FY14 FY15e FY16e

Net sales 10,622 10,585 11,783 13,367 14,871 Share Capital 254 254 254 254 254

Y/Y Ch % 1.6 0.4‐ 11.3 13.4 11.3 Reserves & Surplus 4,505 4,766 4,927 5,551 6,614

Net Worth 4,760 5,020 5,181 5,805 6,868

COGS 7,020 6,642 7,495 8,519 9,478 Minority 568 797 924 1054 1187

SG&A 2,045 2,091 2,329 2,642 2,939 Long-term loans 4903 4217 3773 2773 1773

EBITDA 1,557 1,852 1,959 2,205 2,454 Others 412 310 431 431 431

Y/Y Ch % 4.7 19.0 5.8 12.6 11.3 Total Liabilities 10,642 10,343 10,308 10,062 10,258

EBITDA Margin % 14.7 17.5 16.6 16.5 16.5

Gross Block 10,343 11,608 12,683 13,195 13,732

Interest 735 643 676 568 459 Less Depreciation 3,085 3,825 4,627 5,642 6,698

Deprecaition 747 753 802 1,015 1,056 Net Block 7,257 7,783 8,056 7,553 7,035

EBIT 75 456 480 623 939 Capital Work in Progress 0 0 0 0 0

EBIT Margin % 0.7 4.3 4.1 4.7 6.3 Investments 196 246 6 0 0

Defered tax (net) 0 0 0 0 0

Other Income (Inc Forex) 126 134 61 59 60 Others 1118 1499 1736 1978 2200

Extra Ordinary Exps/(Income) - - - - -

PBT 201 591 542 683 999 Current Assets 6,849 6,703 7,823 8,086 8,800

Tax 191 299 181 228 300 Sundry Debtors 3,326 3,429 3,523 3,955 4,400

Effective tax rate % 94.8 50.7 33.4 33.4 30.0 Cash & Bank Balance 440 99 373 256 252

Reported PAT 10 291 361 455 699 Loans & advances 1,360 1,363 1,432 1,604 1,784

Y/Y Ch % 96.5‐ 2702.8 23.8 26.1 53.8 Inventories 1,722 1,811 2,496 2,270 2,363

Minority & Exceptional 0 119 133 130 133 Current Liabilities 3,095 3,658 4,196 4,437 4,660

Adj. PAT (APAT) 10 172 228 325 567 Provisions 1,683 2,229 3,117 3,117 3,117

RPAT Margin % 0.1 1.6 1.9 2.4 3.8 Net Current Assets 2,071 816 510 532 1,023

Y/Y Ch % 97.4‐ 1620.2 32.6 42.3 74.6 Total assets 10,642 10,343 10,308 10,062 10,258

Source:Companyfilings;IndiaNivesh Research Source:Companyfilings;IndiaNivesh Research

Cash Flow Key Ratios

Y E March (Rs m) FY12 FY13 FY14 FY15e FY16e Y E March FY12 FY13 FY14 FY15e FY16e

Operaing Profit 810 1,100 1,156 1,191 1,398 Adj.EPS (Rs) 0.0 0.7 0.9 1.3 2.2

Depreciation 747 753 802 1,015 1,056 Cash EPS (Rs) 2.9 3.5 4.1 5.3 6.4

Interest Exp -735 -643 -676 -568 -459 DPS (Rs) 0.1 0.1 0.1 0.1 0.1

Changes in Working Capital -227 189 -541 34 -315 BVPS 18.3 19.3 20.5 22.9 27.1 Cash Flow After Chang in WCapital 594 1,398 742 1,672 1,679 ROCE % 8.4 11.9 12.9 13.9 16.2

Tax -191 -299 -181 -228 -300 ROE % 22.0 29.2 17.8 33.6 33.6

Others 26 343 597 -113 -120 ROIC % -0.1 1.4 2.0 3.0 5.3

Cash flow from operations 429 1,442 1,158 1,331 1,259 EBITDA Margin % 14.7 17.5 16.6 16.5 16.5 Capital expenditure (net) -1,092 -1,278 -1,075 -517 -538 PER (x) 382.7x 22.3x 16.3x 11.5x 6.6x

Free Cash Flow -662 164 83 814 722 P/BV (x) 0.8x 0.8x 0.7x 0.6x 0.5x

Other income 164 -50 240 6 0 P/CEPS (x) 5.1x 4.1x 3.6x 2.8x 2.3x

Investments 0 0 0 0 0 EV/EBITDA (x) 6.2x 5.2x 4.9x 4.4x 3.9x

Cash flow from investments -928 -1,328 -835 -512 -538 Dividend Yield % 0.7 0.7 0.7 0.7 0.7

Long-Term Debt (Decrease) Increase 587 -504 -143 -1,000 -1,000 m cap/sales (x) 3.0x 2.5x 2.2x 1.6x 1.6x

Dividend paid (incl tax) -25 -26 -25 -25 -25 net debt/equity (x) 1.4x 1.3x 1.1x 0.9x 0.6x

Share Issue / Repurchase & Others 123 17 120 89 300 net debt/ebitda (x) 4.1x 3.4x 3.0x 2.3x 1.6x

Cash flow from Financing 685 -513 -49 -936 -725 Debtors (Days) 113 117 108 108 108

Net change in cash 220 -342 274 -117 -4 Creditors (Days) 38 51 53 54 54

Cash at the beginning of the year 220 440 99 373 256 Inventory (Days) 58 62 76 62 58

Cash at the end of the year 440 99 373 256 252 Cash Conversion Cycle (Days) 133 127 131 116 112

Source:Company filings; IndiaNivesh Research Source:Company filings;IndiaNivesh Research



Disclaimer:The projections and the forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significantuncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on whichthe projections are forecasts were based will not materialize or will vary significantly from actual results and such variations will likely increase over the period oftime. All the projections and forecasts described in this report have been prepared solely by authors of this report independently. All the forecasts were not

Disclosure of Interest Statement

1. Analyst ownership of the stock Yes2. Clients/Company Associates ownership of the stock Yes3. Broking relationship with company covered No4. Investment Banking relationship with company covered No

prepared with a view towards compliance with published guidelines or generally accepted accounting principles.This report is for information purpose only and this document / material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase orsubscribe to any securities, and neither this document nor anything contained therein shall form the basis of or be relied upon in connection with any contract orcommitment whatsoever. This document does not solicit any action based on material contained herein. It is for the general information of the clients of INSPL.Though disseminated to the clients simultaneously, not all clients may receive this report at the same time. It does not constitute a personal recommendation ortake into account the particular investment objective, financial situation or needs of individual clients. Persons who may receive this document should consider andindependently evaluate whether it is suitable for its/ his/ her / their particular circumstances and if necessary seek professional / financial advice. Any such personshall be responsible for conducting his / her/ its/ their own investigation and analysis of the information contained or referred to in this document and of evaluatingthe merits and risks involved in securities forming the subject matter of this document. The price and value of the investment referred to in this document / materialand income from them may go up as well as down, and investors may realize profit / loss on their investments. Past performance is not a guide for future performance.Actual results may differ materially from those set forth in the projection. Forward-looking statements are not predictions and may be subjected to change withoutnotice. INSPL accepts no liabilities for any loss or damage of any kind arising out of use of this report.This report / document has been prepared by INSPL based upon the information available to the public and sources believed to be reliable. Though utmost care hasbeen taken to ensure its accuracy, no representation or warranty, express or implied is made that it is accurate. INSPL has reviewed this report and, in so far as itincludes current and historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.Following table contains the disclosure of interest in order to adhere to utmost transparency in the matter;

Trading position of Clients/Company Associates may be different from the recommendation given in this report at any point of time. This information is subject tochange without any prior notice. INSPL reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless,INSPL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specificclient queries.

IndiaNivesh Securities Private Limited601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007.

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IndiaNivesh Research Meghmani Organics Ltd | Stock Idea August 6, 2014 | 5IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.

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