Meghmani Organics Ltd

Stock Opportunities Untested - but worth a good look
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Disclaimer: 1. Meghmani is currently ~10% of my Direct stocks PF.
2. My understanding of accounting is limited and i am still trying to gather the acumen necessary to verify first hand whatever i’m sharing.

Wanted to add my thoughts on the management integrity:

  1. Regarding the promoters getting shares at 30 rupees in MFL when IFC exited, I would suggest interested investors to watch this three part videos on YouTube: Part1, Part2, Part3. Another disclaimer (also present in the video) is that this YouTuber is also a shareholder of Meghmani. In general I have found his videos to be quite honest and this is why I trust his judgement. Investors that do not trust him should definitely not be looking to hold or buy this company. The TL;DR of the videos is that when MFL was setup (in 2007-08), the contract between IFC, MOL and promoters promised 50L share warrants to the promoters at the prevailing rate of 30 rupees. In Ravinder’s opinion, this is not unethical, and I agree with him.
  2. Regarding the fires, I find it unfortunate that we would try to make fun of the a chemical company’s factories catching. We should try to go through other threads about Transpek, Sirca, Syngene and several others as well. We should definitely question management about measures being taken to prevent future accidents.

Although the management quality is suspect in the mind of the investors, as per my own limited deep dive, most concerns are unwarranted. A company with 1 third of its profits coming from agrochemicals and 1 third coming from pigments is trading at a P/E of 5 and growing its earnings and sales is an attractive buy.

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The videos that you are referring to is quite a bias. I must say, be careful, the days in investing world are going such that don’t believe in anyone’s recommendation. Believe in your own theses.

When MOL announced demerger and reorganization of the business, he uploaded one more video in the same evening claiming that this is the big reform in the company and will result in great value unlocking. He even claimed that in the next few trading sessions the stock will hit the upper circuit !!, later he deleted the video when he was deadly wrong. I saved that video in my watch later list on youtube which is below:

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video is not available now.

My purpose is that just be careful of recommendations.

Disc: MOL is my 3rd largest holding

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https://www.outlookindia.com/newsscroll/amp/govt-extends-antidumping-duty-for-3-months-on-caustic-soda-from-china-korea/1917684

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I checked 2008 Anual Report but could not find any mention of warrant or agreement for 50 lakh shares. the share distribution mentioned was as below -
AR 2008
• International Finance Corporation (IFC), a member of the World Bank Group, invested 46.1 cr and also provided a long term loan (ECB) of 80 cr. to MFL for this plant.
• IFC has agreed to subscribe 1.54cr Equity shares of Rs. 10/- each at a premium of Rs. 20/- per share
• Meghmani Organics Limited (the sponsor) has agreed to subscribe 3.51cr Equity shares of Rs. 10/- each at a premium of Rs. 20/- per share
• The Individual Promoters have agreed to subscribe 1.1 cr. Equity shares of Rs. 10/- each at a premium of Rs. 20/- per share
Promoters paid only 2 rs per share that year.
This seems a clear violation of SEBI rules as there are no warrants or agreement mentioned for 50 lacs shares to be bought by promoters at 30 Rs later and suddenly they buy it 10 years later in 2018 at the rate at which they invested in 2008. If we take just book value its a fraud of 35 rs per share.
The other fraud is more on ethical side is to take loan from MOL @ 8% for increasing the promoters stake in MFL from 18 to 43% by buying back shares from IFC. So minority share holders need to monitor all these 10 years for this loan to be properly paid back. That increases risks for more frauds in coming years as now the trust in management has gone down with this dubious deal.
Further 2018-19 Annual report shows following Related Party transaction

  1. Promoter Success Fees 15 Cr., ( What is this?)
  2. Issue of Equity Shares of MFL 15 Cr ( Issue of 50 lac MFL shares @ 30 rs/share)
  3. Remuneration of 45.8 Cr. for 2019 and 34.2 cr for 2018. (??)
  4. 19.5 Cr for relatives of KMP in 2019 and 12.9 Cr. in 2018.
    All this adds up to 96 cr and 47 cr. out going in 2019 and 18 respectively excluding dividends. Please note this includes normal KMP annual key managerial salary of 10 cr and 8 Cr in 2019 and 18 resp.
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Would like to add following on gains by MOL from the Amalgamation -

  • Amalgamation – of MACPL into MFL were done on March 2019. Consequent upon Scheme of Amalgamation, MFL issued the Preference shares as under:
    • Rs. 211 Cr in the form of 8% Optionally Convertible Redeemable Preference Shares (‘OCRPS’) against equity investment. ( Gain is 101 Cr on initial investment of 110 cr in MACPL)
    • Rs. 222 Cr. in the form of 8% Non-Convertible Compulsorily Redeemable Preference Shares (NCRPS). The said NCRPS has been redeemed by MOL on March 2019 along with 15.35 cr. dividend. The OCRPS are valued at original cost of investment in shares of MFL plus gain on sale of investment at Rs. 110 cr.
  • The exceptional gain for year 2019 is of Rs. 59.15 cr. pertains to gain on sale of 24% stake of MFL to MACPL.
    Total Gain is 59.15 +15.35 = 74.5 Cr. Plus 101 Cr on initial investment
    If we see IFC gain on their investment is around 221- 54= 167 cr. If we assume since MOL is not increasing stack, it should get proportionate profit 167*0.57=96 cr. So basically MOL too gained like IFC. But promoters gained the most definitely as they did not put any money to buy IFC shares and got their stakes increased by 25% so their gain is 221 cr. Am I correct…
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Shares are being dumped to retailers. These are generally warning signs. For a company with 1800Cr Mcap and having 0 mutual fund and FII holdings seems something fishy.

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Capex plans

Incurring capex to build capacity

Currently Meghmani Organics(MGMO) is operating at 80% of its capacity. MGMO’s long term plan is to achieve agrochemicals segment top line of Rs2,000 crore by FY23. To meet its objection, the company is also expanding its chemical production capacity such as 1) planned commencement of 10,000 TPA agrochemicals capacity in Q3FY21 and invest Rs250 mn in formulation plant which is expected to commence in Q3FY21. MGMO also planned a capex of Rs3,100 mn for set up multi purpose plant (new molecules) with a revenue generation capacity of Rs6,000 mn/PA. Multi purpose plant is expected to complete by Q4FY22. Besides this, Meghmani Finechem, MGMO’s subsidiary, has commenced commercial production of hydrogen peroxide project with capacity of 60,000 MTP.

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what be its eps after all expansion programs in FY 23 24. ANY FIGURE ???

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High risk ratio but recent developments are rather interesting to observe for those with risk appetite. Please note that this is not a recommendation and boarders like me may be invested from very low levels. Hence, please be careful and thorough in your research.

Meghmani Organics became famous for the wrong reasons some time back with promoters under the scanner. Since then, the company has come a long way and as stated above, recent developments have restored much of retail investor confidence. Last week, MOL met up to 44 investors. Sharing recent news items:

https://www.business-standard.com/article/news-cm/meghmani-organics-gains-on-plans-to-set-up-multipurpose-plant-120112600384_1.html

Important: https://themarketfeed.com/2020/11/24/phthalocyanine-pigments-market-study-for-2020-to-2026-providing-information-on-key-players-growth-drivers-and-industry-challenges/

Highlights:

Over 90 customers, including leading pesticides manufacturers in North America, Europe, Latin America, Asia and end users in the domestic Indian market

Over 200 customers from across the globe - North America, Europe, Central and Latin America, and Asia-Pacific.

  • Warehouses in Belgium, Uruguay, China, Russia, Germany, the U.S. Columbia.
  • Overseas offices in Belgium, China and the U.S.
  • Marketing via direct sales teams and distributors / agents
  • An extensive network of 20 overseas distributors worldwide
  • Over 1,000 stockists, agents, distributors, and dealers in India
  • Warehouses in Belgium and Uruguay

MOL
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Company is under CAPEX mode.

In the Chloro-Alkali segment it will spend 695 crores towards

  • Epichlorohydrin (ECH) project of 50,000 MTPA (operational by Q4 FY22). Capex outlay of Rs. 275 Cr
  • Chlorinated Polyvinyl Chloride Resin (CPVC) Project of 30,000 MTPA (Operational by Q1 FY23) Capex outlay Rs. 190 Cr.
  • Caustic Soda expansion from 2,94,000 to 4,00,000 MTPA and CPP expansion from 96 MW to 132 MW. Capex outlay Rs. 230 Cr. (Operational by Q1 FY23). Company expects 250 crores revenue potential from this expansion.

Epichlorohydrin is an import substitute. Domestic imports at ~ 70 KTA and growing @ 14.5%
So company will replace atleast 70% of the import demand.
Thailand is the biggest player catering to ~73% of the Indian demand in 2019.
Application: It is used across industries as Feed Stock in Epoxy Resins in corrosion protection coatings in industries automobile & packaging and Resins in composites used in Aerospace, windmill & Automobile industries.
Company will have the 1st Largest Plant in India based on 100% Renewable sources with Forward integration of Chlor Alkali.
Expected Revenues: 475 crores
Current prices for Epichlorohydrin is 114/Kg

CPVC Resin is an import substitute. Domestic imports at ~ 116 KTA and growing @ 13%. Industry Wide Application as Key raw material for pipe and fittings with excellent heat and Chemical resistance properties. CPCV project will be the largest Plant in India with liquid phase technology with Forward integration of Chlor Alkali.
Expected Revenues: 300 crores
Current prices for CPVC resins are around 100/kg

Capex in Agrochemical space:
Company is undergoing capex in 2 phases:
Phase 1 Capex: Doubling 2,4-D Capacity by addition of 10,800 MTPA with capex of Rs 127 crore (Operational by Q3 FY21) and Rs. 25 crore on Formulation Plant (Operational by Q3 FY21)

Major products – 2,4-D, Cypermethrin, Permethrin, Bifenthrin, Lambda cyhalothrin , Profenophos and Chlorpyrifos

2.4 Dichlorophenoxyacetic acid is a selective herbicide which kills many terrestrial and aquatic broadleaf weeds, but not grasses.

Cypermethrin (CP) is a synthetic pyrethroid used as an insecticide in large-scale commercial agricultural applications as well as in consumer products for domestic purposes. It behaves as a fast-acting neurotoxin in insects.
Permethrin, Lambda cyhalothrin are used as Insecticides.
Bifenthrin is a pyrethroid insecticide. It is widely used against ant infestations, including the invasive red fire ant, by influencing its nervous system.
Profenophos is an insecticide/miticide, is a restricted use pesticide solely on cotton, to control the tobacco budworm, cotton bollworm, armyworm, cotton aphid, whiteflies, spider mites, plant bugs, and fleahoppers.
Chlorpyrifos is used a pesticide

Phase 2 Capex: New Multipurpose plant ( MPP) at Dahej with capex of Rs 310 crores(Q4 FY22)

Revenue expectation of 950 crores from the agrochemical capex.

Demerger: Company is in the process of demerger of standalone business MOL (i.e) agrochem and pigments into a separate subsidiary, Meghmani Organochem Limited (MOCL); followed by amalgamation of other Business of MOL (Trading and Equity investment in MFL) with its 57% subsidiary, Meghmani Finechem Limited is yet to get required approvals. Upon receipt of approval both entities will be listed as two separate entities. MOCL will be renamed as Meghmani Organics Limited. Demerger will result in limited financial fungibility between the two entities. However, critical operational synergies, common branding and common promoters between the two entities will remain post demerger also.
Process is expected to be completed by Q4 21.

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Meghmani Organics CFO: Restructuring The Biz Will Unlock Value For Shareholders,Provide Tax Benefits->

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Share down more than 7% today, seems to coincide with this news. Can anybody who understands restructuring comment on if this restructuring treating minority shareholders in fair way or another legarlly right but unfair restructuring from minority view point?

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Could see lot of insiders bought in last two months. it indicated that something is going to happen… since the majority of shareholding is with promotors only and promoters may reduce the stake post demerger in new entity. Personally, I do not think any value unlocking…

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It’s a simple demerger of subsidiary and separate listing. Their could be some value unlocking due to

  1. reduction in holding company discount
  2. Parent company will be left with agrochemical and dyes business which get higher valuation.
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I feel PE re-rating can happen and that might not be because of demerger, but due to the capex they are doing which will raise the revenue/profit in coming years. I see some big investors are talking about meghmani capex cycles which could be a positive sign in near future.

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DCM Shriram is also investing 400-450 crores for setting up Epichlorohydrin (ECH) with a capacity of 51,000 TPA along with glycerine purification facility. Ebitda to be in the range of 25-30%.
ECH plant will be based on Glycerin unlike other plants which are based on hydrogen peroxide or polypropylene oxidation processes. Glycerin technology is relatively new.
Probably, difference in technology might be the reason for higher capex relative to Meghmani. Need to find out whether Meghmani will go through hydrogen peroxide route(which it produces currently) or through glycerin??

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Meghmani is also going through the same glycerin route.

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The role of agrochemicals: Achieving the vision of a USD 5 trillion economy by 2025
http://ficci.in/spdocument/23379/Knowledge-Report-Agrochemicals-Conference-20.pdf

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One can watch this video for demerger information.
For every 1000 shares of Meghmani organics 90 shares of Meghmani Finechem will be given. After demerger promoter holding will be 70% in Meghmani Finechem and 30% public shareholders.
In meghmani organics, promoter holding will be 48.19% and public - 46.74%

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it a simple demeger?? We do have history of meghmami promoters being a bit of greedy one should take every news with a pitch of salt the alkali business is not being demerged into a new entity nor is it being demerged and thn amalgamated into A FULLY owned subsidiary of the company infcat it’s being merged into a subsidiary in wch the promoters already hold 45% if this isn’t day light loot I dnt know wht is wht should the promoters stake go up from 49% to 70.5% in the demerged company (meghmani finechem). …

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