Recommendation from Chemicals company

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

MEGHMANI ORGANICS: SELF-SUFFICIENCY IS THE KEY TO GROWTH

HERE IS WHY
✓Strong financial position
✓Available at attractive valuation
✓Better business prospects

The pandemic has had a silver lining also. It sparked renewed interest in food security and sustainable agricultural production. There is also a shift in consumer preferences toward vegetarian foods, which demanded higher agricultural yields and boosted the agrochemical business. The agrochemical industry is expected to sustain its steady growth at a CAGR of 9.3 per cent until 2025. According to Fortune Business Insights, the worldwide dyes and pigments market is expected to grow at a CAGR of 4.9 per cent from 2016 to 2026, reaching USD 54.64 billion.

Meghmani Organics Limited is one such company that is likely to join this growth story. It is into the manufacturing of pigments and agrochemicals and in fact is a leading agrochemical manufacturing company with significant presence worldwide. Its strong customer base includes prominent MNCs and extends to more than 75 countries globally. Within pigments it specialises in green and blue pigments, which have varied end-use applications in printing inks, paints and coatings and plastics. The company reported net sales of ₹2,498 crore in FY22, up from ₹1,637 crore in FY21. This is an almost 53 per cent increase. Its EBIDTA excluding other income was ₹379 crore in FY22, up from ₹283 crore the previous year. That represents an increase of more than 34 per cent. In addition, PAT increased 63 per cent from ₹186 crore in FY21 to ₹304 crore in FY22. This was as a result of higher capacity utilisation along with improvement in volume and realisation from the pigment and agrochemical business. There was a substantial improvement in cash conversion cycle over the last fiscal. In FY21, the cash conversion cycle was 106 days while in FY22 it stood at 96 days. This was primarily due to reduction in receivable days and increment in payable days.

Its EBITDA excluding other income was ₹132 crore in Q1FY22, representing a miniscule de-growth of 1 per cent on a QoQ basis but a 50 per cent increase YoY. Looking at its net profit, it stood at ₹109 crore, a 7 per cent rise on a QoQ basis and 58 per cent increase on a YoY basis. The company has diversified into new white pigment titanium dioxide (TiO2) by acquiring Kilburn Chemicals Ltd., which provides significant scope for its growth aspirations in the pigment segment, the capacity of which will be doubled to 33,000 TPA by FY24 and is likely to contribute ₹700-750 crore to the top-line on full year of operations.

In the agro segment, the company continues to stick to backward integration that ensures lower dependency on raw materials from China. A new multipurpose facility at Dahej is expected to be commissioned in FY23. This facility is likely to contribute total revenue of around ₹600 crore on full year of operations. As regards returns to shareholders, the ROE and ROCE of the company stands at 22.6 per cent and 22.4 per cent, respectively. Lately this company was on high capital expansion. However, despite this the company was able to maintain its debt-to-equity ratio below 0.5 times. With lower dependency on China for raw materials, commissioning of TiO2 and availability at attractive valuations, we advise our readers to BUY this stock.