The third quarter result (Q3FY22) of Meghmani Finechem Ltd was just fantastic where the revenue grew by 91%, EBITDA grew by 107% and PAT increased by 184%, largely driven by the increase in prices of caustic soda. To add to that, this amazing performance is achieved despite 10 days of complete plant shutdown taken by the company in view of the ongoing capacity expansion during the quarter.
Before I go into the details talking about Q3FY22 performance, I will give a brief overview of the company.
Meghmani Finechem Ltd - Company Profile
Meghmani Finechem Limited (“MFL”), incorporated in 2007, is a leading manufacturer of Chlor-Alkali products and its value-added derivatives. The company has state of the art manufacturing facilities in Gujarat, Dahej. MFL’s Dahej facility is a fully integrated complex with a well-established infrastructure and captive power plants. The company is India’s 4th largest manufacturer of Caustic Soda Lye, Chlorine and Hydrogen and a leading manufacturer of Caustic Potash, Chloromethanes and Hydrogen Peroxide. MFL is now expanding its product base to include products like Epichlorohydrin (ECH), Chlorinated Polyvinyl Chloride (CPVC) and Chlorotoluene & its value chain.
Key strengths of the company:
Meghmani Finechem is backward integrated with its own Captive power plant of 96MW. (Power is the key input cost for the chlor-alkali process which produces Caustic Soda & Chlorine). This acts as an entry barrier as well as improves margin significantly.
Introduce derivative products towards import substitution.
Very efficient manufacturer with state of the art facility.
Plant located strategically at Dahej providing access to the port for exporting its product as well as easy access to raw material.
Able to aggressively expand capacities.
Trying to be the lowest cost manufacturer.
Capacity Expansion
Meghamni Finechem is aggressively expanding capacity to cater to the import substitution of chemicals in the country.
In 9MFY22, the Company has spent ₹ 365 Cr for expansion of all 3 project shown in the image below:
The company is likely to spend another 100cr during Q4FY22 towards completion of these projects.
To meet the capital requirement for the ongoing expansion, Meghmani finechem has added Net long term debt of ₹221cr during the year.
Epichlorohydrin(ECH) & CPVC resin, once operational at peak utilization is estimated to generate ₹1200cr for a full year. In these verticals, the asset turnover is quite high.
ECH demand in India is around 82,000 TPA which is totally imported. Whereas CPVC resin demand in India is 135,000 TPA, of which 5% is manufactured in India and 95% is imported.
For the upcoming plant for Chlorotoluene, the company is going to get the readily available technology in the market. And for the derivative products, they are going to develop the tech inhouse.
The CAPEX for Cholortulene will start from Q1FY23.
Company will be able to achieve peak capacity utilization from its upcoming Caustic Soda capacity in a matter of few months.
Key highlights - Meghmani Finechem Ltd - Q3FY22
1. During the quarter, the company took a planned shutdown of 10 days to make the plant more flexible by interconnecting all pipelines for its ongoing expansion.
2. Future growth of the company will be driven by:
Focus on efficiency
Addition of value added products i.e. derivatives
Strengthening of fully integrated complex
3. Company decide whether to sell in domestic or export market totally on the basis of realization.
4. Caustic Soda which contributes more than 70% of company's revenue, finds application in Alumina & Textile.
5. Raw material price fluctuation during the quarter:
6. Meghmani Finechem Ltd's credit rating improved from A+ to AA- by CRISIL in Dec 2021. This will lead to lowering of borrowing cost.
7. Capacity utilization during the quarter was 79% compared to 78% in last year. While that for 9m stood at 86%.
8. Expect to reach revenue of ₹2000cr in FY23 earlier than its previous target of FY24.
9. Also setting up their own R&D facility which will take about a year to come onstream.
Caustic Soda Pricing
Caustic Soda prices is driven by demand-supply situation. While demand is strong due to the infrastructure activity where Aluminium finds usage whereas supply remains tight. One needs huge amount of caustic soda to purify Alumina to Aluminium. Infrastructure activity is going at full speed across the globe barring China.
In Chlor-Alkali, the maximum capacity utilization that can be reached in 85%.
Meghmani Finechem Ltd - Q3FY22 Financial Analysis
This was the highest ever quarterly revenue for the company. While the revenue increased by 91%, the EBITDA increased by 107%, Profit after tax increased by 184%.
While there was an increase in raw material cost, but the product price realization increase outpaced the cost increase.
With the ongoing expansion projects company has increased its borrowing. Long term debt of the company at the end of the quarter stood at ₹895cr.
According to the management, FY22 will be the year of maximum debt. Once the projects start coming up in FY23 & FY24, the debt of the company will continue to go down.
Corporate Governance
Regarding Meghmani Organics there have been a lot of issues, their plants catching fire every other year, maybe to some extent of corporate governance.
Coming to Meghmani Finechem, the company is started by the next generation of the same family, there could be some doubts. Also, given the short history of the company,(listed only in Aug 2021), it will take a while to say if they are the same or different.
After attending all their concall, they seem not to try to hide anything, willing to answer every question and are trying to break free of the image. You can watch and track.
Future Outlook:
With the kind of CAPEX, the revenue growth is likely to continue. And with the addition of value added products, the margins are likely to stay/improve.
As the debt figure starts coming down next year onwards, the bottom-line could look better.
Key aspect monitorable would be the product prices.
Greenpanel Industries Ltd | Meghmani Finechem Ltd- Q2FY22 Analysis- the power of Operating Leverage : Link