Meghmani Organics Ltd: A Value Buy or Value Trap?

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The world loves an underdog and investors love to give an indeliberate large attention to a stock that is undervalued.

One such stock is Meghmani Organics Ltd.

Interestingly, the investor’s interest increases manyfold if the stock lies under the sweet spot of strong sectoral tailwinds from all sides.

Meghmani Organics Ltd: Complete Stock Analysis

This short video analyses the stock of Meghmani Organics Ltd.

But Why Meghmani Organics Ltd?

Agrochemical Sector is doing pretty well. It’s being supported by:

(a) Low input cost of key raw material i.e. Crude

(b) A healthy demand

(c) No adverse or bad impact of Covid -19. Rather, it helped in labor availability in the farms when the migrants moved from the cities to villages during the lockdown.

Thus, if you narrow the sector’s stock top-down with an eye on valuation then you will find yourself somewhere here:

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Meghmani Organics Ltd - Agrochemical Stocks Screener

Meghmani with a meager below 8 PE stands out as an “Undervalued Stock”.

The Business of Meghmani Organics Ltd

Meghmani (MOL) is an established player in the Agrochemical & Pigment industry with the 4th  largest Chloro Alkali & its derivatives complex in India.

It has a diversified revenue portfolio with a higher export revenue:

Meghmani Organics Ltd - Revenue Break Up

The other way to look at the revenue is here:

Meghmani Organics Ltd - Revenue Break Up

Agrochemical Business Segment

Meghmani Organics Ltd - Agrochemical Segment
Meghmani Organics Ltd - Agrochemical Segment
MOL is present in all 3 stages of the pesticide value chain, giving it a vantage point over the whole sector

Pigment Business Segment

Meghmani Organics Ltd - Pigment Business

It is a sticky business with 90% of business coming from repeated clients.

Basic Chemicals Business Segment

Meghmani Organics Ltd - Basic Chemicals Business Segment
Meghmani Organics Ltd - Basic Chemicals Business Segment

This business is housed under a subsidiary (57% owned by MOL) named Meghmani Finechem Limited (MFL) where the company is planning a CAPEX of Rs 700 cr in the next 3 years.

The CAPEX is for Forwarding Integration of Chloro Alkali & Increase value-added products via derivatives.

The key point to note is that Meghmani Organics is vertically integrated into most of its business segments.

This results in high margins in:

  1. Commodity Business of Soda Ash
  2. Agro Chemicals as they make Intermediates, Technical & Formulation

3 Key Business Risks

My experience tells me that a low PE is not always due to investor’s neglect of value but due to hyperbolic discounting on account of Poor Corporate Governance and bad management quality.

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So we fathomed and found 3 red flags in the Management of the company.

3 Red Flags in the Company

Red Flags in Meghmani Organics Ltd
Red Flags in Meghmani Organics Ltd
Red Flags in Meghmani Organics Ltd

Conclusion

Without getting into the financial analysis of the stock, it can be safely said that with a questionable management quality, the PE of 8 for a cyclical stock is not unduly placed.

And the counter can be called a ‘Value Trap’ where the elusive value never converts into a return for minority shareholders.

Read the analysis on Indian Companies here.

Also Watch: Analysis of Chambal Fertilisers

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Amitabh Vatsya

Amitabh Vatsya

Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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