This small cap company posted more than 250% yoy growth in net profit in Q2FY18
Mangalam Organics is a micro-cap company with the market capitalization of Rs.133cr. Over the last few quarters company is showing consistent improvement in business performance in terms of growth as wells as margins improvement. The market also rewarded the company by boosting its share price over the last one year. In its latest declared quarterly results, company posted stellar performance and we believe there is more steam left in the stock price to move sharply.
Mangalam Organics is a chemical manufacturer and has Synthetic Resin and Terpenes as primary segments. Company did a turnover of Rs.197cr during FY17, approximately 10 % of revenue came from Synthetic Resin and 90 % from Terpenes.
Company manufactures a range of products under the Terpene segment, namely Camphor, Dipentine and Sodium Acetate. Camphor is our primary product in this segment, contributing 80% of Terpene sales. As it is a naturally derived product that completely burns off with no residue, it finds its widest application in religious use in the domestic market, as it imparts a sense of complete purity to the religious devotee.
Company will work to increase its production quantities of camphor and its related products, explore opportunities in derivates of intermediate products (fragrance and flavor Industry), improve its quality to compete with China in the international market. In domestic market, Company is increasing its presence with distributors and retail outlets, in which it is now present with its own brand, “Mangalam”. It is also pursuing contract manufacturing and private labeling opportunities, as suitable going forward.
Dipentene, a by-product in the manufacturing is used as a solvent in the paint industry. Demand for Dipentene grows in line with the demand for paint. Therefore, this product is a key contributor to growth for the foreseeable future in India. Dipentene is also gaining interest in the export market as a substitute for “Limonene” (obtained from orange oil). Dipentene is a ready substitute in formulations of cleaning and degreasing agents, as Limonene supply shortages get more acute.
Sodium Acetate, a by-product manufactured is used as a dye intermediate to increase alkaline content by Dye manufacturers. It has wide range of application in the leather tanning industries and is being exported to Europe. Company is exploring opportunities to increase this export business.
The segment performance impacted due to fire incident in June 2015. Company has now been able to selectively restart the production of few high margin synthetic resins. These are non-commodity products, where company has a competitive edge and a cost advantage by way of its chemistry process capabilities. These products are used in the Adhesives, Rubber, Tyre industries. Our goal is to grow this business steadily in the coming years.
Going forward, Company is increasing its investment in R&D and is working closely with technology consultants to provide superior products to the Adhesives, Rubber and Inks industries. Its main goal is to capture market share by substituting imports by providing higher quality products at competitive prices.
Mangalam Organics – Q2FY18 & H1FY18 performance:
In the latest declared results company has posted good set of numbers. The revenues have grown by 37% yoy in Q2FY18 and the operating profit has increased by 70.9% yoy. The EBITDA margin has improved from 7.7% in Q2FY17 to 9.6% in Q2FY18. With reduced interest cost, the PAT has grown by 273% from Rs.1.37cr to Rs.5.12 cr. The PAT margin has improved from 2.6% to 7.2% yoy.
For Half year ended Sep, 30 2017, the revenues have grown by nearly 7%. The EBITDA has grown by 46.9% with the better product mix. The operating margin has increased significantly from 7.6% in H1FY17 to 10.4% in H1FY18. This is mainly due to increased business contribution from high margin products. The PAT seen a growth of 238% yoy and PAT margin has improved from 2.2% in H1FY17 to 7% in H1FH18. Company’s long term debt has come down to nearly zero at the end of H1FY18, from Rs.11cr at end of FY17 and Rs.23.3cr at the end of FY16.
Considering the Q2FY18 performance, we believe that the company’s share price can move significantly. Company at the price Rs.147 is trading at 13x its TTM earnings. We expect further 25% appreciation in the stock price in the short term from current levels. Investors can consider buying this stock with small allocation for three months period.