MANGALAM ORGANICS LIMITED : IN DEPTH FUNDAMENTAL ANALYSIS

Overview of Business

Mangalam Organics Limited is a leading pine chemicals manufacturer in India. The Company produces Terpenes from Pine chemicals, from which a number of sub products like Camphor, Dipentene and Sodium Acetate are manufactured. 

It also produces synthetic Resins under a single segment of chemicals. It is engaged in the manufacturing and selling of Camphor and by-products and various Synthetic Resins in India and abroad. 

The strength of its pine chemical products lies in the fact that they are extracted from natural resources and are devoid of the side effects of synthetic chemicals. The market performance of these products is not dependent on crude oil and the volatility of its prices. 

Business operations are led by an experienced management team, with over five decades of experience in the pine chemicals industry. 

Turpentine, this business principal raw material to manufacture Camphor, is procured from across the globe: Brazil, Argentina, Chile, USA, Russia, Indonesia, Vietnam, China, Portugal, and Spain, among other countries. 

Domestic sale of Camphor and Synthetic Resins takes place through our network of 8 offices across India. 

Mangalam Organics Limited products are also exported to Europe, USA, African, Middle Eastern and South East Asian countries. 

Product-wise revenue of Mangalam Organics Limited

Terpene Chemistry -

Camphor, Dipentene, Sodium Acetate 

Synthetic Resins -

Terpene Phenolic, Alkyl Phenolic, Rosin-based Resins. 

Revenue break-up 

Products and Application Areas 

The Company’s products have applications in a number of sectors such as religion and worship, pharmaceuticals, flavor and fragrance, rubber & tyre chemicals, paints and varnishes, among others. 

The Company caters to both domestic and the international market. In addition to having a wide reach and strong footprint in the domestic market, it is expanding its global operations. As its products have a variety of industrial applications, it has established a strong B2B presence, despite facing competition from domestic and international players. 

I have a frame of analysis, learnt from my mentors, which covers the following important analysis points as mentioned below. 

Financial Analysis 

Operating Efficiency Analysis 

Margin of safety i.e. Self sustainability in the Business 

Business Analysis 

Size of opportunity 

Fund flow analysis 

Financial Analysis of Mangalam Organics Limited

Let us analyze the financial performance of Mangalam Organics Limited over the last 10 years. While analyzing the financial reports and available public documents of Mangalam Organics Limited, it is very much clear that Mangalam Organics Limited has started to report consolidated financial reports from FY2020. 

As we are trying to analyze the financial reports of Mangalam Organics Limited for the previous 10 years and hence we will analyze here the standalone financial reports from FY2012 to FY2019 and further we will analyze here the consolidated financial reports from FY2020 to FY2021. 

Sales Growth 

Over the last 10 years, the sales of the company have increased at a growth rate of 5% from ₹220 Cr in FY2012 to ₹338 Cr in FY2021. Further, the company reported higher sales too i.e. ₹462 Cr in its last 4 quarters ending Dec-2021. 

While, if we analyze the trend in sales growth of the company, then we will notice here that the journey of the company was not smooth over the last ten years. There are four financial years where the company has reported decline in sales i.e. FY13, FY16, FY20 and FY21. 

Out of the previous 10 years, there are four years where the company has reported a drop in sales. So, we can say that the company is not able to maintain the consistent sales growth over the years. 

There is a sudden increase in sales of the company i.e. ₹425 Cr in FY19 from ₹241 Cr in FY18.

However, we will try to understand here the reason for the drop and increase in sales of the company. We will find out here the key parameters that will affect the sales of the company. 

Operating profit and Operating profit margin 

Over the last 10 years, the operating profit of the company has increased at a growth rate of 28.93 % from ₹13 Cr in FY2012 to ₹128 Cr in FY2021. Further, the company reported a slight increase in its operating profit i.e. ₹129 Cr in its last 4 quarters ending Dec-2021. 

Company had reported a loss of ₹27 Cr in FY16. Further, the company reported operating profits again in FY17 and FY18. There is a sudden increase in operating profit of the company i.e. ₹109 Cr in FY19. 

However, the company could not sustain its operating profit up to the FY19 level and its operating profits declined to ₹86 Cr in FY20. Further, there is a sudden increase in operating profit reported by the company i.e. ₹128 Cr in FY21. 

Therefore, we can see here that the operating profit of the company is not consistent but also it is fluctuating from operating losses in one year to peak operating profits in one year and again operating profits dropped and further it crossed its previous peak. 

Similarly, if we see the operating profit margin of the company over the previous 10 years, the operating profit margin of the company is in the range of 6 % to 10% till FY18. But, the operating profit margin of the company increased to 26 % in FY19 and 38% in FY21 and it is again contracted to 28% in the previous 4 quarters ending Dec-21. 

Now, we will also figure out the reason for the drop and sudden increase in operating profit and operating profit margin of the company during the mentioned period and this reason will help me to understand the key variables that are affecting the operating profit and operating profit margin of the company. 

Key parameters that affect revenue, operating profit and operating profit margin of the company 

Price of the finished goods manufactured by the company

Management has mentioned the reason for the sales drop in its annual report of FY20. Management is saying that decrease in revenue was due to global reduction in the price of the finished goods manufactured by the company. 

It indicates that reduction in the price of the finished goods will negatively affect the sales or revenue of the company. 

Now , we will see here the operating profit and operating profit margin of the company for the similar period. Operating profits declined to ₹86 Cr and operating profit margin contracted to 23% in FY20 as compared to ₹109 Cr and 26% respectively in FY19.  

Management explained the reason behind the drop in operating profit and operating profit margin as the inventories procured at high prevailing price earlier which is usually required by manufacturing industries to run the operations smoothly. As the company has procured the inventories at higher price while the price of the final product manufactured by the company got dropped and hence the company faced the decline in operating profit and operating profit margin. 

Further, there is a sudden increase in operating profit and operating profit margin reported by the company i.e. ₹128 Cr and 38% in FY21. The substantially increased operating profit was largely on account of higher selling price of finished goods vs lower priced, well stocked raw material situation. 

So, one very important parameter that we have noted here is the final price of the finished goods manufactured by the company. Decline in the final price of the finished products manufactured by the company will result in a drop in sales, operating profit and operating profit margin of the company. 

While if the selling price of finished products gets increased, it will result in an increase in operating profit of the company for that period as the inventories procured at lower price earlier which is usually required by manufacturing industries to run the operations smoothly. 

Utilization of resources 

Sales of the Company have shown a considerate increase due to operational efficiency brought about through better and optimum utilization of resources. Therefore, we can say here that if a company will utilize its resources efficiently then we will see its results in sales of the company. But again in order to utilize the resources effectively, there must be optimum demand for the finished products too. So, we must observe the demand of the finished product of the company in order to predict the utilization level of the resources and sales of the company in its future business. 

Susceptibility to volatility in raw material and camphor prices 

Operating margin is susceptible to fluctuations in raw materials prices and camphor prices.  Alpha Pain And gum turpentine, which account for 60-70% of total raw material, are largely imported from Indonesia, Brazil, Russia, and Europe, and their availability and prices are subject to demand and supply situation. Camphor prices are also volatile and impact realization and profitability. Business risk profile will continue to be susceptible to changes in input and camphor prices. 

 

Intense competition from domestic manufacturers as well as revival of import from China

The camphor industry is an intensely competitive business, with presence of many domestic players as well as foreign players. Due to favorable market conditions, players are expanding capacity, thereby increasing supply and intensifying competition, which will likely moderate realization. Revival of imports from China may also have an adverse impact on the domestic industry. 

Concentration of customers risk 

Dependency on a few large clients also poses a risk to revenue as any fall in the order book number can impact the business negatively.

Interest coverage ratio 

While I prefer a company that has interest coverage of at least 3. If we see the interest coverage ratio of the company over the last 10 years, it has increased from 2.5 in FY13 to 47.8 in FY21. However, the interest coverage ratio of the company was dropped to -3.3 in FY16 as Company had reported a loss of ₹27 Cr in FY16. But since FY17, the interest coverage ratio of the company is continuously increasing and as of FY21 it is 47.8. 

So, the company is very much in a comfortable position to pay its debt. The company is able to maintain its interest coverage ratio on a healthy side and even very much comfortably in FY21, the operating profit of the company has increased at a growth rate of 28.93 % from ₹13 Cr in FY2012 to ₹128 Cr in FY2021. Therefore, we can think that the company would not find it difficult to service its debt even in tough times. 

Debt to equity ratio 

While I prefer a company that has a debt to equity ratio less than 1. If we see the debt to equity ratio of the company over the last 10 years, it has improved from 1.2 in FY2012 to 0.1 in FY2021. 

Debt to equity ratio is improved basically due to increase in the equity of the company and reduction in the debt of the company. 

Operating Efficiency Analysis of Mangalam Organics Limited 

Net fixed asset turnover (NFAT)

Let us analyze the Net fixed asset turnover (NFAT) of the company in the last 10 years. We will notice here that Net fixed asset turnover of the company was continuously in the range of 4 to 5 till FY17. 

Net fixed asset turnover (NFAT) of the company increased to 7.40 and 10.14 in the FY18 and FY19 respectively.  While analyzing the reason for higher NFAT during FY18 and FY19, it was noted that there is an increase in sales of the company i.e. ₹241 Cr in FY18 and ₹425 Cr in FY19.  

Inventory turnover ratio 

Let us analyze the inventory turnover ratio (ITR) of the company in the last 10 years. We will note here that most of the time the inventory turnover ratio (ITR) of the company was above 4 and even much better in FY18, FY19 and FY20 i.e. 6.7, 8.5 and 5.7 respectively. So, the company is able to maintain its inventory effectively. 

Analysis of receivable days 

Let us analyze the receivable days of the company in the last 10 years. We will note here the receivable days of the company is continuously decreasing from 48 in FY13 to 35 in FY21. It is a good sign that the company is able to collect its receivables effectively. 

Cumulative cash flow from operation (CFO) vs Cumulative profit growth (PAT)

We can note here that cash flow from operation for the last 10 years is ₹225 Cr and cumulative profit after tax for the last 10 years is ₹230 Cr. So, we can note here that the company is able to convert its profits into cash flow from operation. 

Margin of safety in the business of Mangalam Organics Limited  

Self sustainable growth rate 

The self sustainable growth rate of the company was continuously negative till FY18. But, it has improved since FY19. As of FY21 it is 98 %. 

But if we see the sales growth of the company, we can note here that the company is growing at a much lower rate as compared with its self sustainable growth rate. In other words, we can say that the company is very much comfortable to grow with the pace as it was growing by using its own funds. 

The company's self sustainable growth rate is much higher i.e. 98 % in FY2021 as compared with its 10 years sales growth (CAGR) which is 5 %. It indicates that the company will be very much able to meet its growth plan with its internal resources. Hence, the company will not have to be dependent on the outsource funds like debt and equity dilution. 

Same could be seen by observing the debt on the company over the previous 10 years. If we see the debt to equity ratio of the company over the last 10 years, it has improved from 1.2 in FY2012 to 0.1 in FY2021. Debt to equity ratio is improved basically due to increase in the equity of the company and reduction in the debt of the company. 

Dividend payout 

During the period FY12 to FY21, The company has paid dividend ₹4 Cr and retained the earning by ₹226 Cr.  

Free cash flow 

During the period of FY2012 to FY2021, the company has generated cash flow from operation ₹225 Cr. During the same period, the company has executed CAPEX of 133 Cr. So, if we determine here the free cash flow for the same period, it will be  ₹92 Cr. 

Fund Flow Analysis 

I have tried to summarize the flow of funds with the help of the following table. Fund coming to the company is indicated here in positive sign and fund going out from the company is indicated here in negative sign. 

I have also given here the color codes for ease in understanding. Fund coming to the company is indicated here in green color and fund going out from the company is indicated here in red color. 

Assumption : Let us focus here the major fund flow 

So, let us see here from where the company is securing or generating the fund in FY2021

1. Company’s Equity has been increased by  ₹ 83.8 Cr. 

2. Company has taken funds from borrowing (short term & long term) ₹ 6.5 Cr  

3. Trade Payable is increased by ₹12.7 Cr. That means the company is using  ₹12.7 Cr rupees more from its creditors as compared to previous year. This fund is also coming to the company in terms of trade payable. 

Therefore, the company is approximately securing a fund of ₹ 103 Cr. I have left the small fund flow here for ease in understanding. 

Now, let us see here how the company is utilizing this fund in FY2021

1. Company has utilized ₹15.3 Cr fund in procuring the assets like property, plant, equipment. . 

2. Inventory piled up and ₹41.4 Cr of more funds stuck here. 

3. Fund stuck in trade receivable is increased by ₹ 3.1 Cr. 

4. Cash and cash equivalent increased by ₹ 33.7 Cr 

Therefore, the company is approximately utilizing or expending a fund of ₹94 Cr. I have left the small fund outflow here for ease in understanding the major fund outflow. 

Conclusion of Fund flow analysis

So, now here, I am trying to make some sense that the company is utilizing the funds in purchasing assets and raising the bank balance. These are the good utilization of funds. 

It will be interesting to see here that there is some utilization of funds, like stucking of funds in trade receivable and especially in inventories, which is indicating the lack in operating efficiency of the company. 

When we see the sources of funds, there is a major source of ₹ 83.8 Cr fund inflow to the company through equity and ₹ 12.7 Cr funds inflow in terms of trade payable. These sources of funds look good. 

Funds are also coming to the company through borrowing of approximate ₹ 6.5 Cr which is not a very big amount. 

Therefore, the company's sources of funds and utilization of funds in FY21 looks quite good. 

Comparison of Mangalam organics Limited growth with its peers 

Mangalam organics Limited is a small company as compared with its mentioned peers as per market cap. Sales Growth rate of the company for the previous 10 years as compared with its peers is on the lower side and it is also not beating the country inflation rate. 

However, PAT growth rate of the company for the previous 10 years is on a higher side as compared with its peers except Deepak Nitrite which is having 54% PAT growth rate. 

So, we need to see here the future plan of the company to increase its sales growth rate in coming years. 

Size of opportunity 

Overview of Indian chemical Industry 

The Indian Chemical Industry has a structural and locational advantage to rapidly grow from its current size of US$ 178 billion to US$ 300 billion over the next 5 to 7 years. In addition to its demographic dividends, India has one of the lowest per capita consumption of chemicals, offering adequate headroom for the sector to grow. Its vantage location provides opportunities in servicing export demand.

Pine Chemicals 

Pine chemicals are recovered from the pine tree (genus Pinus) through three different methods of craft pulping, tree tapping and wood stumps. The biomass is extracted in the form of crude sulphate turpentine, gum turpentine and wood turpentine. They are processed in a biorefinery into a spectrum of marketable products used in a wide array of applications such as paints, inks, adhesives, perfumes, edible flavours, fragrances, food additives, vitamins, automobile tires etc. Because of its multiple uses and organic properties, the pine chemical market is on a high growth trajectory. 

According to a report of ‘IndustryArc’, the global pine-derived chemicals market is projected to reach USD 5.91 Billion by 2025, after growing at a CAGR of 4.20% during 2020-2025. 

Terpenes 

Terpenes are aromatic compounds found in many plants, especially conifers. The term ‘terpenes’ originates from turpentine, which is a pine chemical and it contains resin acid and hydrocarbons. Because of its strong odor and high resistance capabilities it is widely used in various applications like essential oil, fragrance, and flavouring agent in industrial uses. Demand for terpenes is being driven by its growing use in industries such as cosmetics, food & beverages, paints & coatings, rubber, and pharmaceuticals. 

However, fluctuation in supply of terpenes and high cost extraction processes are creating market challenges. Despite the challenges, with growing market applications and increasing investment, more players are expected to enter the terpenes industry. 

The global Terpenes Market was valued at USD 665.15 MN in 2020 and is projected to grow at a CAGR of 14.29% between 2021 and 2027 according to a New Research study by 360 Research Reports. 

Synthetic Resins

Synthetic resin is an artificial polymer, which has similar physical properties like natural resins, but is different chemically. Synthetic resins are not clearly differentiated from plastics. Different types of plastics are therefore named after the name of the synthetic resin it is made from. 

According to a report from Procurement IQ, the synthetic resins will grow at a CAGR of 5.09% during 2021-2025. Prices will increase by 5%-7% during the forecast period and suppliers will have a moderate bargaining in this market. 

Due to its properties like light weight, durability, rigidity, and the ability to act as an excellent barrier, synthetic resins are used as a flexible packaging material. The growth of the e-commerce sector is creating a substantial demand for flexible packaging and synthetic resins. Asia Pacific region is dominating the global synthetic resins market and is expected to contribute significantly in the global spend. 

Aroma Chemicals 

Aroma chemicals are cyclic compounds that find application in additives and fragrances. They can be either synthetic aroma chemicals, or natural aroma chemicals. Key factor driving demand for aroma chemicals is its increasing application in Flavour & Fragrance (F&F) and nutraceutical sector. 

Being a leading producer of natural base ingredients like spices and herbs, India plays a dominant role in the natural aroma chemical market because of the availability of natural raw materials. India is an important global supplier, with 70%+ of the Indian production being exported to global markets. Demand for these products is increasing globally, with natural ingredients getting preference across the F&B, FMCG and nutraceutical space. 

Growth drivers for the company

Lets see the following points which will give us a sense of growth drivers for the company. 

1. Demand for Pine chemicals is growing because of its organic and environment friendly properties and numerous benefits. 

2. India has an abundance of natural ingredients like spice and herb used for making aroma chemicals. 

3. The growth of population in India will lead to more demand and consumption of Camphor for religious purposes. 

4. Apart from religious use, Camphor is also being used by the young generation as car freshener and room freshener for its numerous benefits related to air purification. 

5. Demand for synthetic resin is growing fast due to its applications in flexible packaging and automotive sectors. 

6. Growth of Flavor & Fragrance (F&F) and nutraceutical sector is driving demand for aroma chemicals significantly. 

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