Meghmani Organics Is A “Classic Turnaround Story” With “Huge Upside”: Daljeet Kohli

Daljeet Kohli & Amar Mourya have given solid and convincing reasons in support of their bullish stand on Meghmani Organics. Let’s straightaway note those reasons:

“Meghmani Organics Ltd (Meghmani), top 100 global generic agrochemicals player and one of the largest blue pigments producers in the world, is seeing a significant business turnaround after many years of dismal performance. With uptick in Agrochemical cycle, following triggers should lead to business turn-around- (1) margin expansion on the back of stabilization of recently commenced facilities, (2) better profitability in absence of incremental capex, should lead to commencement of debt repayment, (3) With permissions in place from state level Pollution Control Board, Meghmani is well positioned to ramp-up operations to peak capacity, (4) Implementation of stringent Pollutions norms in China, makes Indian Agrochemical and Pigments business attractive, and (5) ability to attract new order wins from MNC clients given that all safety and Environment certifications are in place. On a/c of industry down cycle and levered balance sheet of the company, Meghmani stock has been trading at lower 1-year forward EV/EBITDA multiple of ~3.9x. With revival in business cycle, we have assigned 5.9x EV/EBITDA multiple (21% discount to global peers) to arrive at FY16E based price target of Rs 34/share. Given the huge upside, we maintain BUY on the stock.

At CMP of Rs.15, the stock is trading at EV/EBITDA multiple of 4.4x FY15E and 3.9x FY16E estimates. In our view, the current valuations are significantly below 7.5x global peer average. On back of various available triggers (1) debt reduction, (2) margin expansion, (3) higher plant utilization, and (4) favourable business dynamics the stock is poised for re-rating. With revival in business cycle, we have assigned 5.9x EV/EBITDA multiple (21% discount to global peers) to arrive at FY16E based price target of Rs 34/share. Given the huge upside, we maintain BUY on the stock.”