Meghmani Organics Ltd

(Mayank Narula) #154

Exactly my thoughts. I bought stock around 75 in August last year, just before it rallied to 120. Then, took me a while to understand the cyclical play involve here, by reading various threads here on chlor-alkali cycle. Exited around 95 just after Q3 results, when almost all the questions in con-call was around caustic soda pricing. Not much profits for me, but good learning.
Best time to get into chemical stocks was 2013-15, now the sector is almost at peak. There are some pockets of value left where China is banning production (like NOCIL or Bodal), but overall sector may be peaking. These are strictly my thoughts and I reserve the rights to be wrong.

Disclosure: no holding as on date

(duranvskp) #155
  1. Could you please provide a reference (screenshot/link) for your point 1, I would like to take a look at that
  2. Please provide some evidence on your point 2 as well
  3. When Capex in cyclical industry is commissioned it typically is the time for you to book the profit. It is simple supply/demand theory.
  4. Regarding your calculation of EPS - the management itself has clearly mentioned that EPS for the year 2017-18 is 6.74, that too EPS during the peak cycle
  5. There are no marque investors in Meghmani, only one HNI investor Gadia Naveen Vishwanath regarding whom at least I have never heard much. There is once company VLS finance which has invested in this, but I have no idea how reputed are they in the area of investing.

(Raj A A) #156

All the info is taken from their concall. Pls go through again.
For FY18 EPS is 237/25+=9.32. pls do ur own math.
IMHO I am of the opinion that they hv not reached the peak earning cycle in view of CapEx and expansion planned and also a new product line expected to be announced in few days ( Agn concall info).

It is individual risk / reward assessment that dictated their buy/ sell decision.
Good luck.

(Raj A A) #157

I forgot to add Dolly Khanna is having stake for the past few yrs (AR 17)

(duranvskp) #158

Regarding EPS the following screenshot is taken from the below link which is audited Financial results for the year 2017-18

Regarding revenue guidance they have only guided for 20% revenue growth in basic chemicals, 15% growth in Pigments in terms of absolute volumes. In agrochemicals they mentioned that the present 67% capacity utilization could be expanded to 85% in next 2-3 years.

This is the portfolio of Dolly Khanna as divulged to BSE and no where is Meghmani to be found:

(Raj A A) #159

Sorry to drag the dialogue.
In the company results, Net profit is shown as 237+ crores. With equity capital of 25.43 Cr, EPS works out 9.32. I fail to comprehend how the company has arrived at 6.74. If you hv any other calc, pls enlighten me.
Pls go thro AR 17. Qtrly shareholder info contains only those investors holding above 1%.


(duranvskp) #160

It does not matter how much total profit the company reports in Balance sheet. What matters is how much of that profit is allocated to the promoters/owners of the company. We also have to account for non-controlling interests in the company which has to be deducted from the profit reported by the company. The promoters will have the authority to distribute the profits to share holders only from the profits that are attributable to them. In this case the profit that is attributable to owners of the company is 171.32 crores which has to be divided by equity share capital of 25.43 crores which leaves us with 6.74 per share.

I hope this explanation could be of some help to you. Kindly revert if you need further clarification in this or anything else in general. I would be happy to help if it is with in my reach.

Thank you

(Raj A A) #161

Thank you for the clarification.
I stand corrected.

(PE_Ratio) #162

Earlier the stake in MFL was just 57% and hence there was a significant amount of profit attributed to non-controlling interest. Now MOL has raised stake in MFL. Now it stands at 82%. The profit attributed to owners will increase significantly from next quarter. So, whatever numbers that you see from the past is not comparable. The numbers from the future quarters will definitely be high.

EPS will be definitely greater than 6.74 rs.

(Manohar T. Patil) #163

Very informative discussion folks!

Net net, the story of euphoria is tightly associated with caustic soda prices which has seen as huge upside in recent months. Can someone help with the url/website thru which we can get to know the prevailing caustic soda prices. Thank you!

(duranvskp) #164

This is a common misconception amongst retail share holders like us -

  • If the EPS increases that would lead to increase in share price which is not the case.

  • The EPS increase should be consistent with growth in revenue (not a sudden spurt in revenue as is the case with cyclical companies) which should proportionally increase the profits then only market rewards such companies with PE expansion.

Divergent and rational views are welcome.

(duranvskp) #165

I don’t think this information will be offered for free, especially commodity prices. My experience until now has shown, anything that is valuable requires money.

(ragsingh0305) #166

I couldn’t have agreed more with duranvskp…I too raise this in one of my post a few days back.

Here is my two cents on the company

Meghmani plans to achieve 3000 cr revenue (currently 1800 cr) target by next couple of years and has line up 250-300 crore capex, which is likely to be funded through internal accruals. The caustic soda is helping them to generate incremental cash flow at least in near term.

Average EBITDA margin

  • Peak Margin (2018): 25%
  • Trough Margin (2008): 11%
  • Average Margin: 16%-17%

In commodities two aspects are very important one is scale of operations to achieve economies of scale and secondly the vertical integration to mitigate the volatility of input costs.

Meghmani has done some good work on both the above parameters in the recent past and plans to do in next couple of years.

This led to third aspects, the quality of management in managing the business, especially if its a commodity…some benefit can be given there as well

Now coming to projected average margin, I can conservatively assume 15% (the trough margin of 11% in 2008 + increased scale of operations+ vertical integration)

Hence assuming 3000 cr revenue and average EBITDA margin of 15% leading to EBITDA of 450 crores.

Assuming average debt of about 400 crores, Mcap of 2000 crore, the EV comes out to be 2400

As an analyst i have covered broad set of commodities chemical and from that experience i can approximate an 8x-9x EBITDA multiple to commodities companies like MOL.

Hence, the fair value of the company could be - 450*8.5 = 3825 EV
Withe current EV of 2400, there is significant upside from here on.

(PE_Ratio) #167

I too agree with this. In case of a commodity company, low PE doesn’t necessarily mean that the share price will go up. It all depends on demand/supply scenario.
My comment was for your comment where you said how the overall profit shouldn’t be taken, but the profit attributable to the owners should be taken. I just pointed out that the profit attributable to owners will be more from next quarter.

(Mayank Narula) #168

You have missed minority share of profit of around 65-70 Crs.

(duranvskp) #169

Are the EBITDA margins that you have mentioned for the whole company or for any particular segment? From where did you get this info a link to the source would be appreciated?

(ragsingh0305) #170

yes it is for the whole company on consolidated basis…source is money control

(Manohar T. Patil) #171

This is a 10 days old news - Atleast until then the prices for caustic soda are firming up…Hope for a good Q1, however a close watch is necessary on the prices

(duranvskp) #172

Meghmani has expanded into Caustic soda in July 2009 (refer to Crisil link) and caustic potash in April 2016 (refer to Hindu Business line and Investor presentation - page 19) in a full fledged form.

Now coming to comparison of 2008 margins when they had no business in Basic chemicals with 2018 margins when most of their revenues and profits come from Basic chemicals doesn’t augur well.

I think the capacity expansions that they have made in Dahej Chloro Alkali process specifically with caustic chlorine in FY15 and caustic potash in FY16 just before the cyclical uptick has aided them.

(ragsingh0305) #173

I think they are expanding in all three verticals and targeting revenue of 1000 crore each from all three segments, thereby reaching to 3000 cr
In FY 2018, about 55% or about 250 cr of profit has been derived from basic chemical business, and since they are vertically integrated in that business, they could sustain 15%-16% margin in the segment as well. A good part of capacity in china has permanently shut down for caustic soda.

It v difficult to forecast the trough or peak margin in the commodity business, but in my opinion, if the management keeps healthy B/S and a blended consolidated margin of 15% for the whole business, on a sustained basis, the intrinsic value of the business has some more legs to travel.

Also I am wondering Is the caustic potash is more value added product…??.