Meghmani Organics Ltd 24th Aug 2017 BUY

BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY MERCHANT BANKING Meghmani Organics Ltd 24th Aug 2017 BUY CMP Rs. 72.65 Target Price Rs 95.00 BSE Code 532865 NSE Code MEGH Market Cap (Rs crore) Rs. 1847.49 52 Week High/Low 78.10/34.10 Industry Chemicals Face Value Rs 1 Shares O/S 25.43 (Cr) EPS* 4.00 Book Value 28.25 P/E 18.45 P/B 2.62 Note *: On TTM basis Shareholding Pattern as on June 2017 Co has posted strong numbers in Q1FY18 with whopping jump of 17% in topline as compare to Q1FY17 while bottomline of company has witnessed stellar rise of more than 74% on YoY basis in Q1FY18. On margin front also, company has shown growth of 4% in operating profit margin at 19.78% in Q1FY18 while consolidated net profit margin of co has witnessed rise of 48% at 7.11% during the same qtr as compare to Q1FY17. The company has grown at strong CAGR of more than 55% in its bottomline from FY14 to FY17 while net profit margin of co was expanded at CAGR of more than 30% during the same period. The size of the global Pigments market is expected to rise to $32 bn by 2023, growing at a CAGR of 3.8%. The global paints & coatings market is projected to grow at a CAGR of 5.5% during the period of 2017-2022. This is expected to give a strong boost to the global pigments market & thus pave the way for increased opportunity in pigment segment for company present in this segment as co has 8% global market share & is among top 3 Capacity wise global pigments players. In Agrochemical segment, company has 227 export registrations, 496 registrations in pipeline, 354 CIB registrations, and 35 registered trademarks. The Company has a strong global client base.the Company exports technical as well as branded products to Africa, Brazil, LatAm, the US, and European countries. Co has already spent Rs 6.5bn over last 5 years to increase capacity. Company has strong capex plan involving Rs 5.4 bn of investments over the next 2-3 years. The project will be a major growth-driver, going ahead. In three-four years, all of co s divisions : pigment, agrochemicals and basic chemicals will touch Rs 1,000 crore of revenue individually, according to management. PUBLIC, 46.17% Research Analyst :Astha Jain Shah PROMOT ERS, 53.83% Valuation Co has shown strong financial performance during Q1FY18 & going forward all segments of company are expected to progress. Agrochemicals segment will be driven by better industry demand due to good monsoon in FY18 along with the proposed key reforms and increased funds in Budget FY17. Pigments Segment of company will perform with increasing share of higher-value-added products as the Beta Blue plant is fully ramped up and Basic Chemicals Segment of co will show growth with increased utilisation of Caustic Potash.This gives strong revenue visibility going forward. The company is currently trading at 18.16x of TTM eps of Rs 4.00 while it is trading at 14.86x of FY18E eps of Rs 4.89 & 12.21x of FY19E eps of Rs 5.95. Looking at strong future growth, huge capex plan & margin expansion, we recommend Buy on the stock with price target of Rs 95(appreciation of almost 30%) for medium to long term investment. For Private Circulation Only 1 Hem Research

Business Segments: Pigment: Meghmani Organics is one of the largest manufacturers of Phthalocyanine-based pigments with a global market share of approx 8% in volume terms. The Company has vertically integrated facilities manufacturing CPC Blue (an upstream product which too is sold to other pigment manufacturers) and end products Pigment Green and Pigment Blue. These pigment products are used in multiple applications, including paints, plastics and printing inks. The Company s pigments business enjoys strong global presence with exports accounting for almost 68% of net sales. Customers comprise mainly MNCs, such as Sun-DIC, Flint Group, Akzo Nobel, DuPont, and PPG Industries. The Company s relationship with its clients is sticky, with 90% business arising from repeat customers. The Company has a global distribution network of 70 overseas distributors. Its direct presence (with subsidiaries in the US, Europe, Indonesia, and Dubai) helps it to maintain a front-end presence and the ability to work closely with end - user customers. The Company also has warehouses in Belgium, Turkey, Russia, USA, and Uruguay. Meghmani Organics has three dedicated manufacturing facilities to manufacture Pigment products. These are located at: GIDC Vatva, Ahmedabad, (2,940 MTPA) where Pigment Green 7 products are manufactured GIDC Panoli, near Ankleshwar, (17,400 MTPA), where CPC Blue, Alfa and Beta Blue, Pigment Blue 15 products are manufactured Dahej SEZ Ltd, (10,800 MTPA) where CPC Blue, Alfa and Beta Blue are manufactured. Going forward, the Company expects the share of value-added products to increase, led by its fully ramped up Beta Blue plant. The Company is also focusing on the high-margin paints and plastics market by improving the product-mix and developing specialty pigment products for international markets to maintain the growth in exports. Agrochemical: Meghmani Organics is a leading vertically-integrated Agrochemicals player with product offerings encompassing the entire value chain intermediate, technical grade and formulations (bulk and branded). The Company s vertical integration of business allows it to effectively manage raw material costs and assure a constant supply of consistent quality. The agrochemicals industry is highly regulated and the Company enjoys competitive advantage via 227 export registrations, 496 registrations in pipeline, 354 CIB registrations, and 35 registered trademarks. The Company has a strong global client base with exports accounting for 69% of its agrochemical sales. The Company exports technical as well as branded products to Africa, Brazil, LatAm, the US, and European countries. Meghmani Organics produces commonly-used pesticides for crop and non-crop applications, such as for public health, insect control in wood preservation and foodgrain storage. Major products include 2, 4-D, Cypermethrin, Permethrin, Metaphenoxy, Benzaldehyde, Chlorpyrifos and Profenophos. In branded formulations, the Company has established a strong pan-india presence with about 2807 stockists, agents, distributors, and dealers spread across 17 states. Key brands include Megastar, Megacyper, Megaban, Synergy, and Courage. The Company has three state-of-the-art manufacturing facilities where capacities have been increased via debottlenecking. These are located at: = GIDC Ankleshwar, (6,240 MTPA) = GIDC Panoli, (7,200 MTPAup from 3,600 MTPAin FY16) = GIDC Dahej, (13,740 MTPAup from 10,260 MTPAin FY16), Basic Chemical: The Company entered the Basic Chemicals segment in 2009 with capacity of 119,000 MTPA at Dahej. It expanded capacity by 40% in FY15 to 166,600 MTPA, and became the fourth-largest Caustic Soda Flakes producer in India. The current product portfolio includes Caustic and Hydrogen. Since power cost accounts for almost 60% of total raw material cost in Caustic production, captive power plant provides power at lower cost resulting in high margins. The Dahej facility is strategically located due to its proximity to the port, providing ease of importing coal and proximity to chemical manufacturers. The Company is supplying Caustic and Chlorine via pipeline to select buyers, thus substantially reducing its logistics costs. The Company has recently changed the membrane of its existing Caustic Soda Plant. The Company s new Caustic Potash facility at Dahej of 60 TPD capacity which commenced production at the beginning of the year is ramping up slowly due to technical issues, which have now been sorted out. Caustic Potash is one of the very few chemicals that find universal application with makers of Soaps, Detergents, Fertilizers and Chemicals. For Private Circulation Only 2 Hem Research

Strong Capex Plan 0 Meghmani Organics Ltd holds 57% stake in Meghmani Finechem Ltd, which is planning the Capex of Rs 5.4 bn.the Company s planned capex of Rs 5.4 bn involving 3 projects over the next 2-3 years is in-line with its strategic intent of expanding the chemicals business. The first Project is the CMS Project of 40,000 MTPAwhich will produce MDC (which mainly used by Pharma and Agro Chemical Industries and India is currently a net importer of same) Chloroform and Carbon Tetra Chloride (CTC). This is expected to be commissioned by March 2018 and add Rs.4 bn of revenue in the full year of operations. The second Project involves 50% capacity expansion of the Company s Caustic Soda plant to 2,40,000 MTPA using Zero Gap Membrane Cell technology and increase the Captive Power Plant capacity to 90MW from 60 MW now. The third Project is to set up a Hydrogen Peroxide (50%) project of 25,000 MTPAcapacity which also used in Pharma and Agro Chemical Industries. Expansion of the Caustic Soda and Hydrogen Peroxide projects will involve Rs 4 bn investments, and are expected to be commissioned by June 2019. Rs 1.4 Bn Rs 4 Bn Dichloro Chloromethane (CMS Project) Hydrogen Peroxide Project Caustic Soda Expansion Setting up a Chloromethane plant of 40,000 MTPA Will cater to captive consumption of chlorine & produce MDC ( for which India is currently a net importer), Chloroform & Carbon Tetra Chloride. Expected to be commissioned by Apr 18. Setting up a Hydrogen Peroxide project of 25,000 MTPA Increasing capacity by 250 TPD (50% increase) using Zero gap Membrane Technology Increasing Captive Power Plant capacity from 60 MW to 90 MW Expected to add Rs 1.2 bn of revenue post full year of operation Expected to be commissioned by June 19 Expected to add Rs 3 bn of revenue in full year of operation FY21 For Private Circulation Only 3 Hem Research

Healthy Financial Performance in Q1FY18 During Q1 FY18, topline of co was up 17% at Rs 415 Cr driven by strong exports growth of 26% and domestic revenue growth of 8% as exports contributes to 54% to revenue.during the quarter, EBITDA was up 22% as raw material cost as percentage of revenue declined from 56.9% to 52.9% while other cost as a percentage of revenue increased from 19.2% to 22.5%. Bottomline of company during Q1FY18 grew whopping 75% to Rs 32.9 Cr from Rs 18.85 Cr. Domestic business grew by 8% led by strong growth in Basic Chemicals, marginally offset by lower revenues in Agrochemicals, while Pigments business had stable revenue. On Segmental front, Pigment Segment is expected to continue with the momentum with its increasing share of value-added products, led by fully ramped-up Beta Blue plant. Co is also focusing on the high-margin paints and plastics market by improving the product-mix and developing specialty pigment products for international markets to maintain the growth in exports.in Agrochemicals Segment, the domestic market of co will further grow in FY18, driven by a better monsoon following the channel inventory drying up after 2 years of drought, and lower imports due to reduced production in China on account of pollution issues. The Company has focused its efforts on strengthening its distribution network which was earlier not being pursued very aggressively due to subdued market conditions. The Company s export markets are already reviving and co is witnessing increasing demand for its higher-value products which will result in higher realisations and better margins. Co s Caustic Potash plant, which is now getting ramped up, coupled with continued strong performance by Caustic Soda, will be the key drivers for profitable growth of the Basic Chemicals segment. Overall, FY18 looks to be more promising with all segments expected to progress: Agrochemicals with better industry demand, Pigments with increasing share of higher-value-added products and Basic Chemicals with increased utilisation of caustic potash. For Private Circulation Only 4 Hem Research

P& L Statement (Rs Cr) Particulars FY15 FY16 FY17 FY18E FY19E Total Revenue 1294.21 1453.02 1546.28 1700.91 1956.04 12.27% 6.42% 10.00% 15.00% Growth(%) Expenditure 1091.09 1192.21 1257.51 1369.23 1574.62 EBITDA 203.12 260.81 288.77 331.68 381.43 Growth (%) -- 28.40% 10.72% 14.86% 15.00% EBITDA Margin(%) 15.69% 17.95% 18.68% 19.50% 19.50% Other income 6.41 25.47 12.42 13.60 15.71 Depreciation & Amortization 74.74 76.76 90.72 99.79 114.76 EBIT 134.79 209.52 210.47 245.49 282.37 EBIT Margin(%) 10.41% 14.42% 13.61% 14.43% 14.44% Interest 74.63 63.11 50.89 10.00 10.00 Exceptional Item (0.20) 0.00 (3.81) 0.00 0.00 PBT 59.96 146.41 155.77 235.49 272.37 Tax 13.99 35.12 39.55 70.65 81.71 PAT 45.97 111.29 116.22 164.84 190.66 Minority Interest (2.09) (28.78) (28.51) (39.00) (41.00) Consolidated PAT 43.88 82.51 87.71 125.84 149.66 Growth (%) --- 88.04% 6.30% 43.47% 18.93% NPM (%) 3.39% 5.68% 5.67% 7.40% 7.65% Equity Capital 25.43 25.43 25.43 25.43 25.43 Equity Shares 25.43 25.43 25.43 25.43 25.43 EPS 1.73 3.24 3.45 4.95 5.89 Ratios Particulars FY15 FY16 FY17 FY18E FY19E Return on Equity (%) 7.96 13.07 12.21 15.08 15.37 Return on Capital Employed (%) 15.59 24.71 25.05 26.28 26.29 Current Ratio 1.31 1.27 1.39 1.33 1.33 Book value per share 21.69 24.82 28.25 32.81 38.30 For Private Circulation Only 5 Hem Research

Balance Sheet Rs. Crore Particulars FY15 FY16 FY17 FY18E FY19E Share Capital 25.43 25.43 25.43 25.43 25.43 Reserves & Surplus 526.10 605.81 693.02 808.86 948.53 Minority Interest 94.35 126.30 154.74 183.54 200.00 Secured Loan 312.93 216.77 121.77 100.00 100.00 Other Long Term Liabilities & provisions 4.36 4.81 4.55 4.76 5.73 Net Deferred tax Liability 47.10 26.70 28.51 33.37 37.98 Sources of funds 1010.27 1005.82 1027.92 1155.96 1317.67 Net Fixed Assets 793.55 820.17 787.79 907.64 1032.77 Non Current Investments 6.56 0.59 0.59 0.59 0.59 Intangible Asset under dev 10.72 7.18 9.45 9.68 14.67 Other Non Current Assets 32.16 19.66 15.78 18.18 20.72 Inventories 215.78 312.58 241.68 271.30 308.69 Sundry debtors 316.70 326.93 330.91 379.12 431.39 Cash and bank balance 15.59 11.02 10.19 19.66 22.37 Other current assets 19.84 20.51 63.99 70.53 80.26 Loans and advances 113.39 74.88 89.96 105.80 120.39 Current Investment 17.34 0.00 28.53 35.27 40.13 Total current assets 698.64 745.92 765.26 881.68 1003.23 Current liabilities and provisions 531.35 587.75 550.90 661.81 754.31 Net current assets (Ex Cash) 151.70 147.15 204.17 200.21 226.55 Uses of funds 1010.28 1005.77 1027.97 1155.96 1317.67 For Private Circulation Only 6 Hem Research

Quarterly Financial Highlights Rs. Crore Particulars Q1FY18 Q1FY17 Q4FY17 YoY% QoQ% 461.06 392.68 386.96 17.41 19.15 Revenues 369.85 317.79 313.18 16.38 18.10 Expenditures 91.21 74.90 73.77 21.78 23.64 Operating Profit Consolidated Net 32.78 18.85 23.42 73.90 39.97 Profit 19.78 19.07 19.06 3.72 3.77 PBIDTM% (ex OI) 7.11 4.80 6.05 48.11 17.47 NPM % 1.29 0.74 0.92 74.32 39.97 EPS* *Calculated on Net Profit/Total Comprehensive Income Past Price movement of the stock 33000 32500 32000 31500 31000 30500 30000 29500 29000 28500 28000 27500 27000 26500 26000 25500 MEGHMANI (72.6500, 73.4500, 70.8500, 72.0500, -0.20000), SENSEX (31,407.47, 31,593.39, 31,379.25, 31,568.01, +276.160) 80 75 70 65 60 55 50 45 40 35 50000 50000 45000 45000 40000 40000 35000 35000 30000 30000 25000 25000 20000 20000 15000 15000 10000 10000 x100 5000 5000 12 19 26 2 9 ember 2017 16 23 30 6 13 February 20 27 6 March 14 20 27 3 10 17 24 2 8 April May x100 15 22 29 5 12 19 27 3 10 17 24 31 7 14 21 28 4 June July August Sept For Private Circulation Only 7 Hem Research

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