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:
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:
The other way to look at the revenue is here:
Agrochemical Business Segment
Pigment Business Segment
It is a sticky business with 90% of business coming from repeated clients.
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:
- Commodity Business of Soda Ash
- 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.
So we fathomed and found 3 red flags in the Management of the company.
3 Red Flags in the Company
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