Meghmani Organics: Buy

Over the past year, stocks of agri-business companies have seen their valuations soar, with rising farm product prices contributing to strong demand for these companies, amid recessionary times.

The stock of Meghmani Organics, a mid-sized player , is a good investment option in this context.

At the current market price of Rs 17.4 (face value Re 1), the stock offers good value, trading at just over eight times its trailing 12-month consolidated earnings.

This is at a steep discount to agrochemical majors such as United Phosphorus (16 times) and Rallis India (14 times). Meghmani Organics’ current valuation does not reflect its solid growth record, its large roster of product registrations and diversified client and geographical base that moderates risk.

Originally listed in the Singapore Stock Exchange, the company made its India debut through an Initial Public Offer (IPO) at Rs 19 in May 2007.

Though the stock now trades almost at offer price, the company’s earnings have expanded strongly in the three years since, with net sales more than doubling to Rs 795 crore between 2005-06 and 2008-09 and net profits (consolidated) growing at 24 per cent annually, excluding forex losses.

Between March 2006 and 2009, the company scaled up its pigment capacities by 70 per cent to 25,520 tonnes and agrochem (technical) capacities nearly three-fold to 12,040 tonnes.

Meghmani Organics makes a wide spectrum of generic agrochemicals and intermediates for use in crop protection as well as public health and foodgrain storage.

It also manufactures green and blue pigments which find application in printing, plastics, paints and textile businesses.

Exports account for about 76 per cent of the total sales, with the agrochemicals business contributing about 55 per cent of revenues in 2008-09.

India’s rising reputation as a low-cost manufacturing base for specialty chemicals has led to more global majors looking to outsource manufacture of intermediates to players such as Meghmani.

In the pigments business, the company’s large roster of clients (over 300), backward integration and its ability to customise help it hold its own against other global suppliers.

Upbeat trends in global farm product prices, pressure to lift farm yields and increasing offtake from the growing Asian economies have spurred stronger global demand for agrochemicals with double-digit growth rates forecast over the next five years.

Players such as Meghmani appear well-placed to capitalise on this expansion. The company’s established presence in 56 countries and the fact that it holds registrations for over 140 products across these markets present formidable entry barriers against competition.

Both the agrochem and pigments business are subject to pricing pressures as the pace of new formulation/product launches is quite high; reflected in the moderation in the company’s operating profit margins over the past three years.

Over the next year or so, Meghmani can expect some relief on this front, due to declining costs of packaging materials and freight, the two key items of cost. Margins could also benefit from the company’s substantial backward integration measures to manufacture intermediates along with end-products.

Another of Meghmani’s key advantages lies in its diversified revenue streams, which help reduce agri-related as well as client related risks to its business. For one, the company’s presence in the Indian and overseas markets has helped it offset weakness in one market with more aggressive sales in another.

In 2008-09, a lacklustre year for global pigment sales, the company managed a 24 per cent growth in the Indian market to compensate for the sluggish 5 per cent growth in exports. In the June quarter of 2009-10, a 68 per cent expansion in exports of agrochemicals made up for weak domestic sales owing to the poor monsoon.

Two, with the company’s revenues well-spread-out over geographies, poor offtake in one region can often be offset by better performance in the others.

From the time of the IPO, Meghmani has more than doubled the revenue contribution from promising markets such as Asia (from 8 to 18 per cent) and South America (from 6.5 to 15 per cent), even while managing impressive growth in traditional markets such as North America.

The number of product registrations it holds has increased to 140, with over 400 more in the pipeline.