Meghmani Finechem Ltd-Quarterly Results Update

Weak operational performance continues

Meghmani Finechem Ltd. reported a revenue decline of 14.6% YoY / 19.1% QoQ to Rs.4,549 mn, led by a drop-in realizations from all products due to slowdown and destocking at the global level. However, MFL volume grew by 11% YoY in Q1FY24 which was in line with its expansion plans, with volume coming from CPVC, Epichlorohydrin and Hydrogen Peroxide. Revenue contribution from Derivatives & Specialty Chemical segment increased to 38% in Q1FY24 vs 21% in Q1FY23. We further expect revenue contribution from Derivatives & Specialty Chemical segment to keep increasing, as future capex plans are all towards these segments. EBITDA for the quarter declined 49.2% YoY / -38.5% QoQ to Rs. 952 mn, while OPM during the quarter contracted by 1,425bps YoY to 20.9%, owing to a contraction in gross margins by 1,345bps YoY to 39.7% which led by a drop-in realizations and high cost of inventory. Net income stood at Rs. 315 mn, a decrease of 70.8% YoY/ 58.9% QoQ, while PAT margin during the quarter contracted by 1,330bps YoY/ 672bps QoQ to 6.9% led by higher depreciation and interest cost.

Key Concall Highlights

Volume Growth: MFL reported volume growth of 11%, majorly coming from the commissioning of the new capacity of ECH and CPVC. The company expects this volume growth story to continue further as these new projects will further contribute in FY24.

Realizations: The realizations for all the products are down in Q1FY24 on account of the slowdown and destocking at the global level. Realization for Caustic Soda dropped by 40% YoY, but for all products dropped by 26% YoY.

Project Commissioned: MFL has commissioned various projects in FY23 such as CPVC Resin, Epichlorohydrin, and additional capacity of caustic soda. These new additional capacities have contributed marginally for the year as a whole and will contribute further in FY24.

Value Added Products: Derivatives & Specialty Chemical segment touched 38% of total sales in Q1FY24 (compared to 21% for a similar period last year) and plans to improve further as future capex plans are directed towards these segments.

Capex Update: The FY24 Capex of the company towards the R&D center, CPVC Resin, and Chlorotoluene, and its value chain will bring volume growth in FY25. In FY24, MFL aims tospend Rs. 370 crores towards capital expenditures.

Other Key Highlights:

•  Meghmani Finechem board proposed to rename the company to Epigral. The proposal is approved by shareholders and by the Ministry of Corporate Affairs
• The capacity utilization of Hydrogen Peroxide reached 104% and CMS reached 103% in Q1FY24.
• Expansion of CPVC capacity of 45,000 TPA is on schedule and is expected to get commissioned by Q4FY24.
•  Net debt/equity of the company stood at 1.5x in Q1FY24 as against 1.6x in Q1FY23.

Valuation and Outlook

Meghmani Finechem reported weak performance during the quarter led by weak realization. However, the volume that grew annually is in line with expansion plans. Further, revenue from Derivatives & Specialty Chemical segment touched 38% of total sales in Q1FY24, and plan to further improve share from this segment. The company’s volume growth story is expected to continue further as these new projects will further contribute in FY24. The company has announced capex for multiple projects which will be executed over FY23-25 period to cater to the newly launched products, coupled with expanding its chlor-alkali capacity and a captive power plant to strengthen its backward integration. We, thus, believe MFL revenue and operating performance will gradually improve on the back of new product capacities and diversify its business more towards value-added products. Further, stable financial performance, capacity expansion, and timely project completion provides visibility for the long term.