Meghmani Organics Ltd.

Transcription

1 Meghmani Organics Ltd. Company Update October 12, 218

2 Company Update STRONG BUY * October 12, 218 Meghmani Organics Ltd. Caustic soda capacity expansion to drive the earnings growth We initiate coverage on Meghmani Organics(MOL) Ltd with a buy rating and target price of INR 11, implying ~5.8% upside potential from current levels. Our view stems from the fact that the company has a diversified business model, robust product portfolio, strong clientele base and wide distribution network. The company is embarking on mega expansion plans at a capex of INR 64 crore to expand its basic chemicals business and set up dedicated production facility for chloromethane which will drive the trajectory of earnings going ahead. Hence, we expect EPS CAGR of 16.8% from FY18-21E. Expansion of caustic soda capacity to drive the earnings going ahead Domestic consumption of caustic soda and chlorine is expected to post 5-8% growth over the medium term. With healthy performance in recent years and expectations of an increase in demand by key consuming sectors, the industry is likely to witness some capacity additions. Demand growth from aluminum and textiles could be robust over the medium term, while segments like soaps and detergents, organic and inorganic chemicals may report moderate and steady growth in caustic soda consumption. Thus, to capitalize on the opportunity MOL has planned to increase the caustic soda capacity by 63% from 1,66,6 MTPA to 2,71,6 MTPA. The project is set to operationalize by June 219. We expect the plant to generate revenue of approx. INR 3-35 crore at peak utilization levels of 85-9%. Installing dedicated Chloromethane plant to sustain growth momentum The company is setting up chloromethane plant of 4, MTPA at a capex of INR 14 crore. The plant is set to operationalize by December 218. At peak utilization the chloromethane plant can generate revenues of INR crore. The chloromethane plant will produce MDC, Chloroform & Carbon tetrachloride(ctc). The end user are pharma and agro-chemical industries. The expansion will be margin accretive at company level due to higher EBITDA margins in the basic chemicals business. EBITDA margin of chloromethane will be around 2%-22%. Strategically diversifying into high margin products The company is looking to diversify itself into high margin pigments business which is eventually used in paints & plastics to improve the realizations. Also, ramp up of beta blue plant will provide significant operating leverage and visibility. In Agrochemicals business, the company is planning B2B/B2C to be around 75%/25% by FY2E. We believe this will improve the margins by around 4-5%. The company is also looking to expand its distributor reach thereby, improving its presence in global markets which will improve the margins going ahead. Downside Scenario Industry Current Price 73 Price Target % Stock Details Sensex Nifty 1348 Bloomberg Code Eq. Cap. (INR Crores) 25.4 Face Value (INR.) 1 Upside Scenario Speciality chemicals MEGH:IN 52-w H/L 129/69 Market Cap (INR Crores) Valuation Data FY18 FY19E FY2E P/E (x) P/B (x) EV/EBITDA(x) Meghmani Organics Ltd Vs SENSEX Shareholding Pattern (in %) Jun 18 Mar 18 Jun 17 Promoters FIIs DIIs Retail Total % Meghmani 19% BSE Sensex 17% Strong capex to generate sufficient cash flow The company is planning to incur a capex of INR 64 crore in its subsidary MFL over the next 2 years to strategically expand its basic chemicals business. The INR 64 crore capex plan provides a solid revenue growth visibility over coming years. The company believes the subsidary Meghmani Finechem Ltd. (MFL) will be the growth driver going ahead. We expect INR 64 crore capex to generate asset turn of.8x and thereby, report INR 5-55 crore of incremental revenues by FY21E. Total Revenue CAGR FY18-21E Total EBITDA CAGR FY18-21E Total PAT CAGR FY18-21E * Read last page for disclaimer & rating rationale Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

3 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 INR Crores Meghmani Organics Ltd Company Update Page 3 Valuation We expect the company to notch re-rating in its valuations on the back of: Expansion of caustic soda capacity 1,5, MTPA by FY2E to lead increased volume offtake. Focussing on high margin products to improve the margins going ahead. Strong demand from key end user industries like Agro-chemicals & pharma to drive growth momentum. Expansion of captive power plant to 96 MW from 6 MW to keep a control on power cost going ahead. Meghmani Organics (MOL) Ltd is vertically integrated in the manufacturing of pigments, agrochemicals & basic chemicals. We believe strong demand of caustic soda will lead to strong revenue generation and we expect the company to capture the imports market in India. At CMP of INR 73 the stock is trading at 3.5x FY2E EBITDA and 8.1x FY2E EPS of INR 9.. We value using average of DCF & EV/EBITDA and arrive at a target price of INR 11 per share, thereby, representing a potential upside of 5.8% from current valuations. Financial Snapshot Particulars (INR Crores) FY16 FY17 FY18 FY19E FY2E FY21E Net Sales Growth 7% 27% 29% 1% 12% EBITDA Growth 11% 49% 31% 12% 14% PAT Growth 4% 15% 24% 8% 2% EBITDA Margin(%) 19.6% 2.3% 23.9% 24.2% 24.8% 25.2% PAT Margin(%) 8.4% 8.2% 13.2% 12.7% 12.4% 13.3% EPS P/E EV/EBITDA Band chart EV 3.67x 4.79x 5.91x 7.2x 8.14x 9.26x Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

4 In INR Crores 1,332 1,42 1,83 2,323 2,552 2,862 In INR Crore In % Meghmani Organics Ltd Company Update Page 4 Investment Rationale Segmental breakup of revenue 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % % 5% 3% 3% 3% 4% 29% 27% 31% 27% 3% 35% 33% 34% 35% 32% 33% 32% 31% 34% 3% 38% 33% 3% FY16 FY17 FY18 FY19E FY2E FY21E Pigments Agrochemicals Basic Chemicals Others Strong revenue growth expected going ahead FY16 FY17 FY18 FY19E FY2E FY21E Revenue trajectory to be robust going ahead Historically from FY16-18, the pigments segment revenue contribution is in the range of 3-31%. Going ahead, we expect the business to grow at a CAGR of 15.8% from FY18-21E and to contribute around 3% by FY21E. The growth from the pigments business will be on the back of improved realizations by focussing on high margin pigments. The agrochemicals segment revenue contribution is in the range of 33-35%. Going ahead, we expect the business to grow at a CAGR of 12.3% from FY18-21E and to contribute around 34% by FY21E. Agrochemicals business to see strong growth on the back of improvement in utilization, focussing on B2C, expanding distributor reach and increasing registrations in the pipeline. The basic chemicals segment revenue contribution is in the range of 3-31%. Going ahead, we expect the business to grow at a CAGR of 19.3% from FY18-21E and to contribute around 35% by FY21E. Expansion of caustic soda capacity, Setting up dedicated production facility for chloromethane and installing hydrogen peroxide for captive use of hydrogen will drive the growth in basic chemicals. Improved demand from end user industries like pharma, agro, paints and coatings, detergents etc. will drive the growth momentum. We expect overall revenues to grow at a CAGR of 16.6% to INR 2862 crore from FY18-21E Mega capex plan to boost sales growth The overall capex outlay for the next 2 years is approx. INR 64 crore excluding the maintenance capex. The capex of INR 64 crore is divided into: (A) INR 3 crore for caustic soda expansion (B) INR 14 crore for chloromethane (C) INR 1 crore for hydrogen peroxide (D) INR 1 crore for power plant The company plans to expand the capacity of caustic soda from 1,66,6 MTPA in FY18 to 2,71,6 MTPA by FY2E to capture the strong demand of caustic soda and improve its visibility in the domestic markets. The company also plans to set up dedicated production block for chloromethane plant at a capacity of 4, MTPA. This is expected to be operationalize by December 218. FY16 FY17 FY18 FY19E FY2E FY21E Hydrogen peroxide is used for captive consumption and increase in power plant capacity to support the caustic soda expansion. Huge capex plans provides strong footing of future growth potential Project Planned Expansion Commissioning Status Comments Caustic Soda 1,5, MTPA Q2FY2 Ongoing To capture strong demand of caustic soda in the domestic market Chloromethane 4, MTPA Q4FY19 Ongoing To produce MDC, Chloroform & Carbon Tetrachloride(CTC) for which India is a net importer Hydrogen Peroxide 3, MTPA Q2FY2 Ongoing Captive consumption of Hydrogen Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

5 In INR crore In MTPA % In INR per Kg Meghmani Organics Ltd Company Update Page 5 Pigments business to gain on the back of improved realizations Realization to improve on the back of rise in crude prices % 4% 4% 3% 2% 3% 1% 1% -5% -4% % -1% FY16 FY17 FY18 FY19E FY2E FY21E Realization Growth In FY18, realization were around INR 365 per kg. We believe finished product prices to rise on the back of rise in crude prices. Also, exports/domestic breakup in the pigment business is around 78%/22%, hence rupee depreciation will help the realizations at higher levels, thereby, benefitting the top-line. Pigment realizations are solely denominated by the Indian market, china market has no involvement in the price determination. Hence, we expect the prices to remain firm if the demand from the end user persists going ahead. Margins from the pigment business has seen a dip from FY16-18 from 16.2% to 14.4% respectively. Going ahead, with improvement in realizations backed by strong demand we expect the margins to improve by 26 bps to 17% by FY21E. As on FY18, the company has an installed capacity of 31,89 MTPA in the pigments business and utilization stood around 81%. Management guided the optimum utilization to be around 85%. Pigments revenue growth to be robust going ahead Utilization to hover around 85% by FY21E % 66% 81% 82% 83% 85% 9% 8% 7% 6% 5% 4% 3% 2% 1 FY16 FY17 FY18 FY19E FY2E FY21E 2 FY16 FY17 FY18 FY19E FY2E FY21E Volumes Utilization 1% % We believe pigment prices to increase going ahead on the back of recent surge in crude prices which will lead to increase in revenues. The company is not entering into long term price contracts because of the unexpected price movement of crude oil. Hence, whenever there is increase in input cost within a short period, the company can pass it to their customers. We do not anticipate volume growth to be much higher and should be in the range of only 2-3% BY FY21E, since already the plant is running at near optimum levels and de-bottlenecking to not add much sense to the volumes further. Therefore, we expect the company pigment revenue to grow at a CAGR of 15.8% from FY18-21E. Pigment value Chain Phthalic Anhydride Ammonia Urea Cuprous Chloride CPC Blue CPC Green CPC blue is the raw material required to produce pigment blue & pigment green. The company gets 7-8% of orders from the regular customer, hence the company is insulated to any major disruptions in demand, if it happens, in near future. The company s major customer s in the pigment business are MNC s like Sun-DIC, Flint Group, Akzo-Nobel, DuPont etc Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

6 In INR Crore In MTPA % In INR per Kg % Meghmani Organics Ltd Company Update Page 6 Strengthening distributor network & widening presence in export market will be the growth driver in agrochemicals business Agrochemicals margins to improve going ahead 13% 9% 15% 17% 17% 18.% FY16 FY17 FY18 FY19E FY2E FY21E EBITDA per kg EBITDA Margins The company has improved the margins in the agrochemicals business from 13% in FY16 to 15% in FY18. We expect margins to improve further by 27 bps to 18% by FY21E on the back of increasing product pipeline, widening distributor reach, increasing export presence etc. EBITDA per kg stood at INR 57 per kg in FY18. We expect EBITDA per kg to be around INR 7 per kg by FY21E on the back of improvement in utilization and strong demand from key molecules. The agrochemical business is highly dependent on monsoon, food grain output etc. In FY18, kharif season is likely to surpass last year record of 138 million tonnes due to higher acreage and good monsoon for the second straight year, which bodes very well for the agrochemicals business. As on FY18, the company has an installed capacity of 28,26 MTPA in the agrochemicals business and utilization stood at ~ 65%. We expect utilization to be around 85% by FY21E, thereby reporting volume growth of 9-1% by FY21E. 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % Agrochemicals revenue to post growth trajectory Utilization to hover around 85% by FY21E % 57% 65% 75% 8% 85% 9% 85% 8% 75% 7% 65% 6% 55% 5% 45% FY16 FY17 FY18 FY19E FY2E FY21E FY16 FY17 FY18 FY19E FY2E FY21E 4% Production Utilization In FY18, the company has 567 registrations, 333 registrations in pipeline, 35 registered trademarks. The major agrochemical products are 2,4-D, Cypermethrin, Permethrin, Chlorpyrifos and Profenophos. Also, the company has well-recognized formulation brands like Megastar, Megacyper, Megaban, Synergy, Courage etc. The company could not sell higher margin products in last two quarters because of the merger of Meghmani Agrochemicals Ltd with MFL and now these high margin products are back in the basket again so this will augur well for the margins going ahead. Hence, we expect the margins to improve by 27 bps to 18% by FY21E from 15.3% in FY18. Therefore, we expect the company agrochemical revenue to grow at a CAGR of 12.3% from FY18-21E. Agrochemicals value chain Intermediate Technical Grade Formulations The above figure indicates that the company is vertically integrated in the agrochemicals value chain and, hence, the company reported margin improvement of 2 bps from 13% to 15% from FY16-18 respectively. The company exports 65-7% of revenue from agrochemicals. Hence, rupee depreciation will augur well going ahead. At current levels of rupee averaging around 7 is a positive sign for the company exports Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

7 In INR Crores In MTPA % In INR Crores % 148 Meghmani Organics Ltd Company Update Page 7 Chloromethane(CMS) plant is a high margin business; add significant value to the company The company is in the process of installing dedicated production block for chloromethane plant at a capacity of 4, MTPA by December 218 at a capex of INR 14 crore. The chloromethane plant will produce MDC, Chloroform & Carbon Tetrachloride(CTC) for which India is a net importer. We expect at peak utilization the plant will generate revenue of INR crore. Also, management guided EBITDA margins from the chloromethane plant would be around 2-22%. We expect the EBITDA per kg to be around INR 9.7 per kg in FY19E. Realizations of chloromethane are around INR per kg and expect it to be same till FY2E. The end user of chloromethane are pharmaceutical & agrochemical industries which constitute majority of the demand. Pharma cycle being bottomed out and US market revival in terms of pricing will drive the pharma market and near normal monsoon with record food-grains output in FY18 to drive the agrochemical market. Utilization to remain strong Revenue growth to be strong going ahead % 55% 8% FY19E FY2E FY21E Production Utilization 9% 8% 7% 6% 5% 4% 3% 2% Chloromethane is manufactured using two raw materials namely methanol and chlorine. Chlorine constitutes major portion of the raw materials. The company produces caustic-chlorine and hydrogen at Dahej plant so chlorine is available through pipeline. Hence, chlorine is reasonably available to the company to set up a chloromethane plant. The CMS plant will also enable Meghmani Finechem(MFL) to meet demand for raw material of refrigerant gases % FY19E FY2E FY21E Revenues Growth 53% 85% 8% 75% 7% 65% 6% 55% 5% EBITDA to see an upward trajectory backed by strong demand FY19E FY2E FY21E EBITDA EBITDA per kg In INR per Kg The basic advantage to set up CMS plant at the Dahej is availability of ready infrastructure and usage of 41 MTPA of chlorine. This will help MFL in reducing the cost of production of CMS plant and improving the profitability of the company EBITDA to remain strong on the back of strong demand from key end user industries. Hence, we expect the margins to improve by 1 bps to 23% by FY21E. We expect the EBITDA per kg to be around INR 1.6 per kg by FY21E from INR 9.7 per kg in FY18 on the back of improving margins and operating leverage. We expect EBITDA to be around INR 34 crore by FY21E. Chloromethane value chain Methylene Dichloride(MDC) Chloromethane (CMS) Chloroform Carbon Tetra-chloride(CTC) Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

8 In INR Crores In MTPA 234 % In MTPA Meghmani Organics Ltd Company Update Page 8 Expansion in caustic soda capacity to be the prime growth driver in the earnings going ahead Capacity expansion of caustic soda 1666 FY FY2E The company is planning expansion in caustic soda capacity by 1,5, MTPA taking the caustic soda capacity to 2,71,6 MTPA from 1,66,6 MTPA excluding caustic potash capacity. We believe this expansion to provide significant operating leverage and coupled with strong demand will lift the margins going ahead. The capacity of 1,87,6 MTPA is divided into 2 parts: (A) Caustic chlorine capacity of 1,66,6 MTPA. (B) Caustic potash capacity of 21, MTPA. Caustic soda is used in multiple user industries like soap & detergents, pulp & paper, textiles processing, organic & inorganic chloro solvents etc. The company is the 4th largest (by capacity) causticchlorine producer in India and strategically located in close proximity to the port (importing coal) and customers leading to lower logistics costs. In FY18, utilization stood around 86%. We expect post expansion the utilization to hover around 85% by FY21E. Thereby, we expect the volume growth to be around 15-16% by FY21E. We believe at peak utilization the caustic soda plant to generate incremental revenues of INR 3-35 crore per annum. The realizations of caustic soda are in the range of INR per kg. Going ahead, we expect the demand supply to remain tight and, thereby, realizations to remain atthe same levels or might even increase going ahead. Caustic soda revenues to see sharp uptick post FY2E Volume growth to be robust going ahead % 86% 9% 85% 95% 9% 85% % 8% % % 7% FY16 FY17 FY18 FY19E FY2E FY21E FY16 FY17 FY18 FY19E FY2E FY21E 65% Production Utilization Strong demand from key end user industries will help the capacity to operate at optimum utilization, thereby, reporting strong growth in revenues. The company is also planning to set up hydrogen peroxide plant of 3, MTPA which is to be operational by June 219. This will be used as captive consumption to generate hydrogen and post this expansion company will be self sufficient to meet the hydrogen asan input to its existing facility. Caustic soda margins are in the range of 3-33% and hydrogen peroxide margins are in the range of 2-25%. We believe the company to report CAGR of 18.1% from FY18-21E for caustic soda segment. Caustic Soda Industry Snapshot Source: Japan Soda Industry Association, NSPL Research Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

9 In INR Crores In % Meghmani Organics Ltd Company Update Page 9 EBITDA margins to improve going ahead Margin trajectory to remain strong 26.% 25.2% 24.8% 25.% 24.2% 23.9% 24.% 23.% 22.% 21.% 2.3% 2.% 19.6% 19.% FY16 FY17 FY18 FY19E FY2E FY21E Cash profit generation to help in capex funding Strong cash PAT generation augur well The company has consistently improved the EBITDA margins from 19.6% in FY16 to 23.9% in FY18. This was on the back of strong control on cost front and subsequently passing on price hike of inherent materials to the end consumer with a lag effect. We believe upcoming mega expansion of INR 64 crore of expanding the caustic soda capacity, setting up dedicated production for chloromethane plant & hydrogen peroxide unit for captive consumption will lead to expansion of EBITDA margins. Also, steady or falling crude oil prices will help in maintaining the margins of the company in the long run. However, current prices of crude oil at $83 per barrel might impact the margins temporary, however, company can subsequently increase the prices of finished products and protect themselves. We expect EBITDA margins to be around 25.2% by FY21E In FY18, the company generated cash profit of INR 32 crore on the back of strong realization of caustic soda and pigment prices hovering at above average levels. The company is planning to fund the expansion partly through internal accruals and strong cash PAT generation to support well going ahead. The cash profit margins stood at 18.4% in FY18 and we expect the company to report cash profit margin of 19.5% by FY21E. We expect the cash profit to grow at a CAGR of 19.1% from FY18-21E. FY16 FY17 FY18 FY19E FY2E FY21E Debt to equity to remain in control D/E to be around.6x by FY21E FY16 FY17 FY18 FY19E FY2E FY21E The company s total debt excluding current maturities stood at INR 3 crore in FY18. The D/E has fallen from.77x in FY16 peak to.34x in FY18. We expect debt/equity to hover around.4x from FY19E-21E. The company plans to incur an capex of INR 65 crore out of which INR 4-5 crore will be from debt and remaining through internal accruals. We expect the total debt of the company to be around INR7-75 crore by FY2E. Going ahead we expect that the company will take additional debt which will increase the D/E to.57x by FY2E, post capex completion D/E to be ~.42x by FY21E Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

10 3,134 2,541 3,39 2,617 3,39 2,763 3,37 2,871 3,662 3,21 In Thousands MTPA % Meghmani Organics Ltd Company Update Page 1 Industry Caustic soda industry dynamics indicate strong growth in domestic market by curbing imports Caustic soda industry dynamics % % % 81.5% % 1 5 FY13 FY14 FY15 FY16 FY17 Installed Capacity Production Utilization 86% 85% 84% 83% 82% 81% 8% 79% 78% 77% 76% Chlor-alkali industry manufactures caustic soda, hydrogen and soda ash. While these are the main inorganic chemicals there are many other products coming within the realm of this industry either as by products and derivatives of chlorine. These chemicals include sodium hypochlorite and calcium hypochlorite, hydrochloric acid and many other chemicals. A major product from this industry is Polyvinyl Chloride(PVC) which has multiple applications. Caustic soda realizations are affected by international demand and supply dynamics. Recently in the last 2 quarters, strong demand coupled with increased volume offtake has led to sudden spike in prices of caustic soda. We expect industry prices to stabilize around INR 4-45 per kg going ahead. The present global capacity of caustic soda is estimated at 94 million MTPA while India s capacity is only 3.66 million MTPA i.e market share of mere 3.9%. China has a capacity of 38.7 million tonnes i.e. almost 4-41% of the world s capacity. According to Alkali Manufacturers Association, Indian industry is facing challenges due to high power costs, cheaper imports and higher taxes. However, imports in FY17 have seen a dip of 18%, thereby, getting a boost to the domestic industry. The decline in imports was on the back of government imposing anti-dumping duty. Production over the last 5 years has been growing consistently by 4-5% on the back of strong demand from end user industries. Production & Consumption dynamics of caustic soda from FY13-17 In Thousand MT FY13 FY14 FY15 FY16 FY17 Opening Stock Production Growth 3% 5% 4% 5% Imports Growth 9% 28% 12% -18% Domestic Availability Domestic Consumption Consumption to Availability 96% 97% 98% 97% 97% Closing Stock Source: Pressreader.com NSPL Research The demand for caustic soda and many chlorinated products is expected to go up on the back of increased usage in the end user industries. We believe if the issues of high power cost and efficient chlorine availability is resolved then chlor-alkali industry would see much better than anticipated growth going ahead. According to industry sources, power cost constitutes 6% of caustic-chlor production. Government is also taking steps to curb imports by increasing the custom duties on imports of caustic soda, soda ash and PVC from 7.5% to 1.% so as to make imports competitive from countries such as Middle East and SE Asia. We believe Indian industry is on a sound footing to overcome the challenges faced by caustic-chlor players and we believe as demand picks up globally, prices in the international market to remain firm. Global end market uses of caustic soda Indian end market uses of caustic soda Source: IHS Markit Conference, NSPL Research Source: IHS Markit Conference, NSPL Research Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

11 In INR per Kg In MTPA In US $ billion Meghmani Organics Ltd Company Update Page 11 Strong demand from key end user industries to boost Indian pigments demand Domestic CPC pigments industry size FY11 FY16 FY21E Indian pigments industry contributes around 7-8% of global pigments market comprising of ~ US$ 14.5bn and clocked a CAGR of 13.4% during FY9-16. We expect the pigments industry to grow at double digit of 14.5% over FY16-21E on the back of: (A) strong growth in key end-user industries like paints & coating and plastic, inks etc (B) Shift to high-value specialty pigments having high margins to gain demand in near future. Phthalocyanine (CPC) pigments are comparatively less and more expensive than Azo pigments. China dominates the Azo pigment market and India has emerged as a hub for CPC pigments. CPC is produced by reacting Phthalic acid derivative with copper salt and nitrogen sourced compound (Urea, Ammonium molybdate) in high-boiling solvents such as Nitrotoluene, Trichlorobenzene or Alkyl benzenes. High Performance Pigments (HPP) are characterized by superior properties as compared to toxic Azo pigments. These include high resistance to heat and light, high fastness and longer life. Specialty pigment prices are much higher and are primarily used in automobile coating and high-grade paints/plastics/inks/cosmetics. India dominates the CPC pigments market with 8% global market share and the remaining 2% is with China. Indian domestic market prices are independent of China and generally command a premium over China. Margins in the domestic market are in the range of 15-16% and pigment prices are in the range of INR per kg. CPC pigments end user breakup Global CPC pigments production 11% 25 9% 18% 4% % 5 Inks Paints Plastics Rubber Others FY11 FY16 FY21E The pigments end users are generally the inks, paints, plastics, rubbers etc. Inks & Plastics constitute over 6% of the pigments demand. The domestic CPC industry has almost doubled to US$ 1.12 billion in FY16 and we further expect it to grow at a CAGR of 16.4% from FY16-21E. The end user industries like the paints & coating are expected to grow at a CAGR of 15-16% from FY16-21E which will drive the pigments demand growth going ahead. Market share of Indian pigments industry Average realization of pigment players 14% 12% 13% 6 5 1% 8% 8% % 5% 1 4% FY11 FY16 FY21E FY11 FY16 FY21E Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

12 Meghmani Organics Ltd Company Update Page 12 Management Team Shareholding Pattern Name Designation Jayanti M Patel Executive Chairman 11.55%.56% Natwarlal M Patel Anand I Patel Managing Director Executive Director 34.7% Chander Kumar Sabharwal Independent Director 47.73% A L Radhakrishnan Bhaskar Rao Ashish N Soparkar Director Independent Director Managing Director 6.9% FII DII Promoters Non Promoter corporate holding Retail About the Company Incorporated in 1986, Meghmani Organics Ltd is in the speciality chemicals business having diversified business model. The company is mainly engaged in the manufacture of pigments and agrochemicals. Its subsidary Meghmani Finechem(MFL) produces basic chemicals like caustic potash, caustic soda etc. The company is among the top 3 players in the world in Blue pigment and has global market share of 13% in terms of volumes. The pigments division manufactures CPC, Alpha blue, Beta blue etc. The agrochemicals division manufactures pesticides for basic crop protection. It is present in the entire value chain of agrochemicals which includes Intermediates, Technical grade and formulations. The basic chemical division manufactures caustic potash and caustic soda and have an installed capacity of 1,87,6 MTPA. Business Model Breakup Revenue Breakup FY18 3% Meghmani Organics Ltd 31% 3% Pigments Agrochemicals Basic Chemicals 35% Pigments Agrochemicals Basic Chemicals Others Key Milestones of Meghmani Organics Source: Company Investor Presentation, NSPL Research Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

13 Meghmani Organics Ltd Company Update Page 13 Profit & Loss (INR Crores) FY16 FY17 FY18 FY19E FY2E FY21E Net sales COGS Employee Expenses Other Expenses EBITDA D&A Other income EBIT Interest Expense PBT Tax PAT Non-Controlling Interest PAT attributable to owners EPSin INR Balance Sheet (INR Crores) FY16 FY17 FY18 FY19E FY2E FY21E Share Capital Reserves & Surplus Shareholder's Funds Non-Controlling Interest Long term borrowings Other financial liabilities 1 Provisions Deferred tax liabilities(net) Total Non-current liabilities Short term borrowings Trade payables Other financial liabilities Other current liabilities Short-term provisions Current Tax Liabilities(Net) Total Current liabilities Total Equity and Liabilities Fixed Assets Capital work in progress Other intangible assets Intangible assets under develop Non current Investments Other financial assets Deferred tax assets Income Tax assets Other non current assets Total Non-current Assets Current Investments Inventories Trade receivables Cash and cash equivalents Short term loans & advances Other financial assets Other current assets Current Tax Assets(Net) 17 Total Current Assets Total Assets Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

14 Meghmani Organics Ltd Company Update Page 14 Cash Flow (INR Crores) FY16 FY17 FY18 FY19E FY2E FY21E PBT Operating profit before working capital changes Operating profit after working capital changes Less income tax paid Cash Flow from Operating (Incr)/ Decr in Gross PP&E Cash Flow from Investing (Decr)/Incr in Debt Finance costs Dividend Paid Cash Flow from Financing Incr/(Decr) in Balance Sheet Cash Cash at the Start of the Year Cash at the End of the Year RATIOS FY16 FY17 FY18 FY19E FY2E FY21E Profitability Return on Capital (%) 19% 19% 31% 3% 25% 27% Return on Equity (%) 18% 16% 27% 27% 25% 25% Margin Trend EBITDA Margin (%) 19.6% 2.3% 23.9% 24.2% 24.8% 25.2% PBT Margin (%) 11.% 11.2% 18.1% 17.3% 17.% 18.1% Net profit Margin (%) 8.4% 8.2% 13.2% 12.7% 12.4% 13.3% Gross Margin (%) 46.9% 44.1% 49.5% 49.6% 49.7% 5.5% Solvency Debt / Equity Debt / Assets Interest Coverage Valuation Ratios P/E P/B EV/EBITDA Hubtown Solaris, NS Phadke Marg, Opp Teli Gali, Andheri East, Mumbai research@nalandasecurities.com

15 Meghmani Organics Ltd Company Update Page 15 Meghmani Organics Ltd Date CMP (INR) Target Price (INR) Recommendation October 12, Strong Buy Rating Legend Strong Buy More than 15% Buy 5% - 15% Disclaimer: This report has been prepared by Nalanda Securities Pvt. Ltd( NSPL ) and published in accordance with the provisions of Regulation 18 of the Securities and Exchange Board of India (Research Analysts) Regulations, 214, for use by the recipient as information only and is not for circulation or public distribution. NSPL includes subsidiaries, group and associate companies, promoters, directors, employees and affiliates. This report is not to be altered, transmitted, reproduced, copied, redistributed, uploaded, published or made available to others, in any form, in whole or in part, for any purpose without prior written permission from NSPL. 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