Wednesday, October 29, 2014

>Meghmani Organics Ltd. (IndiaNivesh)

CMP Rs.17 | EV/EBITDA (FY15E) 5.4x | (FY16E) 4.8x Target Rs.34 (5.9x FY16E P/E)

Investment Rationale
 Absence of incremental growth capex from here on could lead to higher free cash flow generation, repayment of debt (paid Rs.500 mn in Oct-2014) and better net profit margin.

 Investments in pollution control equipment and permissions in place from state level pollution control board. This could result in higher plant utilization and margin expansion.

 Given that all safety and environment certifications are in place, MOL could attract new order wins and also remain eligible for contract manufacturing order from MNCs .

 All newly commenced facilities both in Pigments & Agrochemical segments are stabilized and ready to deliver higher revenue growth going ahead. 

At CMP of Rs.17, the stock is trading at EV/EBITDA multiple of 5.4x FY15E and 4.8x FY16E estimates. In our view, the current valuations are significantly below 7.5x global peer average. On back of various triggers like: (1) debt reduction, (2) margin expansion, and (3) higher plant utilization the stock is poised for re-rating. We have assigned 5.9x EV/EBITDA multiple (21% discount to global peers) to arrive at FY16E based price target of Rs. 34/share with BUY rating.