Mangalam Organics - Study

Mangalam Organics - Fire in the mountain, but will the
stock run-run-run?
This is a work-in-progress study of Mangalam Organics Ltd. Date: 13 March 2019

Credits to @phreakv6 for his detailed research on the ValuePickr forum. I have provided due
credits if I have taken data reference from any source.

I am not a SEBI registered advisor or a financial adviser. Any advice or information on this website
is general advice for education purpose only and does not take into account your personal
circumstances, please do not trade or invest based solely on this information. Please consult your
financial advisor before taking any decisions.

Mangalam Organics is a terpene chemicals producer - their major bread-and-butter product is
Camphor. Since they are highly backward integrated, they produce a lot of other related
chemicals in the value chain like Dipentene, Terpene Phenolic Resin, Sodium Acetate, etc. But
more or less, they’re a typical commodity business. Or so we think?

Here’s a look at MOL’s financials over the years:

Particulars Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Q1 Q2 Q3 YTD
INCOME :
Net Sales 209.56 231.66 239.1 169.64 176.51 240.83 87.71 109.09 121.43 318.23
Other Income 1.58 1.17 3.57 31.24 0.68 1.25 0.27 5.75 0.26 6.28
Stock
14.98 -1.55 9.81 -5.64 -14.95 -0.52 3.15 -1.07 2.95 5.0243
Adjustments
Total Income 226.12 231.28 252.48 195.24 162.24 241.56 91.1295 113.7675 124.6373 329.5343
EXPENDITURE :
Raw Materials 179.46 180.23 196.38 147.61 108.77 170.91 61.04 70.67 54.72 186.43
% of sales 85.64% 77.80% 82.13% 87.01% 61.62% 70.97% 69.59% 64.79% 45.06% 58.58%
Power & Fuel

11.04 12.13 14.22 10.76 7.22 12.01
Cost
% of sales 5.27% 5.24% 5.95% 6.34% 4.09% 4.99% 0.00% 0.00% 0.00%
Employee Cost 7.22 8.17 10.88 9.75 8.81 12.48 3.71 4.57 8.52
% of sales 3.45% 3.53% 4.55% 5.75% 4.99% 5.18% 4.23% 4.19% 7.02%
Other
Manufacturing 0.91 2.1 3.23 7.4 4.99 10.38
Expenses
% of sales 0.43% 0.91% 1.35% 4.36% 2.83% 4.31% 0.00% 0.00% 0.00%
Selling and
Administration 5.24 7.95 7.56 7.73 18.52 7.51
Expenses
Work-in-progress study of Mangalam Organics

By: Akshat Jain (Email: aj@akshatjain.com / Tweet: @akshat96jain)
% of sales 2.50% 3.43% 3.16% 4.56% 10.49% 3.12% 0.00% 0.00% 0.00%
Miscellaneous
7.08 0.98 1.38 7.54 1.2 1.81
Expenses
Less:
Pre-operative
0 0 0 0 0 0
Expenses
Capitalised
Total
210.95 211.56 233.65 190.79 149.51 215.1 70.99 89.01 82.74 242.74
Expenditure
Operating Profit 15.16 19.73 18.83 4.43 12.72 26.45 20.14 24.76 41.90 86.79
OPM 7.23% 8.52% 7.88% 2.61% 7.21% 10.98% 22.96% 22.69% 34.50% 27.27%
Interest 5.99 7.9 5.81 6.44 4.46 2.56 0.54 0.84 1.29 2.67
PBDT 9.17 11.83 13.02 -2.01 8.26 23.89 16.44 24.99 37.67 79.1
Depreciation 4.3 4.68 6.17 5.3 5.3 5.5 1.37 1.42 1.4 4.19
Profit Before Tax 4.87 7.15 6.85 -7.31 2.96 18.39 15.07 23.57 36.27 74.91
Tax 0.66 2.15 2.3 0 0.9 7 3 5 10 18
Fringe Benefit tax 0 0 0 0 0 0 0 0 0 0
Deferred Tax 0.73 0.22 0.34 3.03 -2.77 -3.07 0 0 0 0
Reported Net
3.48 4.78 4.2 -10.34 4.83 14.46 12.07 18.57 26.27 56.91
Profit
NPM 1.66% 2.06% 1.76% -6.10% 2.74% 6.00% 13.76% 17.02% 21.63% 17.88%
Earnings Per
3.85 5.29 4.64 0 5.34 15.97 14.1 30.67 21.69 66.46
Share-Unit Curr

The sales growth in 2017-2018

Take a closer look at the row below the sales

The raw material cost as a % of sales has been falling from FY 16-17 onwards. FY 16-17 closed at a
20%+ reduction from the previous year. When average raw material cost as a % of sales
decreases along with an increase in total sales - it means the company has witnessed higher than
before margins and stable volumes.

But how can a commodity product show such significant pricing strength? To understand this, it is
key to understand what the raw material is:


Pardon me if I have anywhere gone wrong in my understanding of this process (aka I’m from a
non-science background!). Please reach out to me if there are discrepancies.

Pine Gum Resin (PGR) is the base material - it is produced by the tapping of Pine trees. PGR is
distilled to primarily produce Gum Rosin (GR). A by product is Gum Turpentine Oil (GTO). Post
distillation - Gum Rosin is produced 6-7 times more in quantity than Gum Turpentine Oil.

Both GR and GTO have different markets and uses.

One of the downstream derivatives of Gum Turpentine Oil is used in the making of Camphor
used in religious occasions. Camphor was 70%-75 of the turnover according to FY17-18 AR.

Pine Gum Resin production is a highly labour intensive task and was predominantly produced by

plantations in China, Indonesia, Vietnam, Brazil, etc with some small quantities in Europe.

Until 2016-2017, the supply demand scene for this was stable. And then a few things changed…

Source:
https://www.bfbenterprises.com/blog/wp-content/uploads/2017/04/China-Rosin-Rides-A-Perfect-S
torm-02-17.pdf


So Pine Gum Resin production in China has been reducing significantly because of labour
shortage, better yields in timber plantations, etc.

When there’s a shortage of raw material, the raw material price must shoot up right? We saw the
exact opposite! This is because unlike other camphor makers who purchase Turpentine (whose
prices have shot up) to make Camphor, Mangalam Organics is more integrated in the value chain
where they import Pine Gum Resin and do the distillation themselves.

As we read above, Pine Gum Resin is distilled to produce primarily Gum Rosin and a by product is
Gum Turpentine Oil.

Gum Rosin has wide uses in Paints, Fragrance, Foodstuff, etc industry - but over the years,
consumers have been shifting to crude based alternatives causing the price of Rosin to fall.

So for producers of Gum Rosin - the falling demand and price for Rosin means Turpentine prices
have to compensate for the loss. Given the weak outlook for Rosin, the prices of Pine Gum Resin
have not been able to increase.


The second major change during this time is that the production of Camphor in China reduced.
There could be 2 reasons - one is probably due to the Chinese crackdown on polluting industries
and two that China is unable to pass on the raw material increase (rise in price of Turpentine)
since their consumers are primarily pharma and chemical manufacturers. On the other hand
Indian producers were able to show pricing power because most of the consumption was for
religious purposes.

I have verified this data from the Export-Import data bank periodically released by the Dept of
Commerce.

AVERAGE IMPORT COST of 29142922 SYNTHETIC CAMPHOR
Source : http://commerce-app.gov.in/eidb/Default.asp
Amount in INR Qty in 1000 KGS / Average
Year
Lacs MT Realisation
2015-2016 6,252.53 2,986.78 209.340159
2016-2017 6,343.78 2,932.61 216.3185695
2017-2018 5,228.59 1,637.06 319.3890267
2018-2019(Apr-Dec) 1,447.12 264.61 546.8878727


COUNTRY WISE IMPORTS of 29142922 SYNTHETIC CAMPHOR
Commodity: 29142922 SYNTHETIC Unit: KGS

S.No. Country Values in Rs. Lacs Qty in thousands
2018-2019(Apr-D 2018-2019(Apr-De
2017-2018 2017-2018
ec) c)
1 CHINA P RP 5,227.92 1,447.05 1,637.05 264.6
2 CANADA 0.04 0.01
3 GERMANY 0.03
4 HONG KONG 0.33 0
5 USA 0.34 0

Imports of Camphor from China have fallen to 10% of what they were 3 years back.

At the same time, Exports from India have grown to an all time high.

AVERAGE EXPORT REALISATIONS of 29142922 SYNTHETIC CAMPHOR
Source : http://commerce-app.gov.in/eidb/Default.asp
Amount in INR Qty in 1000 KGS / Average
Year
Lacs MT Realisation
2015-2016 681.65 118.09 577.2292319
2016-2017 648.37 108.18 599.3436864
2017-2018 2,752.61 455.85 603.8411758
2018-2019(Apr-Dec) 11,825.50 1,316.82 898.0346593

COUNTRY WISE EXPORTS of 29142922 SYNTHETIC CAMPHOR
Commodity: 29142922 SYNTHETIC Unit: KGS

S.No. Country Values in Rs. Lacs Qty in thousands
2018-2019(Apr-D 2018-2019(Apr-De
2017-2018 2017-2018
ec) c)
1 CHINA P RP 393.1 3,256.77 67 366.8
2 SRI LANKA DSR 60.87 1,393.62 11.78 184.29
3 GERMANY 863.68 1,375.31 131.21 112.18
4 PHILIPPINES 1.62 988.35 0.22 101.25

5 SPAIN 728.83 74.25
6 MYANMAR 696.79 83
7 INDONESIA 93.51 547.07 16 60.2
8 USA 367.91 458.83 61.92 54.15

Export sales for the company have gone up from Rs. 8.28 Crore to 12.38 Crore - in absolute
terms, it is not a significant increase and there could be 2 reasons for this:

1. Better domestic prices - Camphor wholesale prices have gone up 2.5x in the last 3 years.
2. Exports being booked via agent and hence not reflecting as export sales

While the last 2 years have been great for the company, it is likely that new capacities may come
up elsewhere in the country or in Indonesia, Vietnam, etc and bring the prices back to normal.

So what’s the play here? One, it could take 2-3 years for the competition to come in. Two, this
gives Mangalam ample time to capitalise. But is it doing that?

The company reveals as little information as possible in the Annual Report, doesn’t conduct
investor calls and the AGM is usually held at the plant.

Absolutely no guidance or qualitative information in the 15-16 AR Director’s Report.



Some basic information in the 16-17 AR.

During this time, the company has sought approval from the Maharashtra Pollution Control Board
for a change in production product-mix. They want to increase capacity on the high margin
Camphor and Terpene Chemicals in exchange of low margin Resin products.



A lot more information and guidance in the FY 17-18 AR. I take it as a good sign that the
management is revealing more information now - maybe they never had good news earlier.

1. As per FY17-18 AR, it has paid down its Rs. 10 Crore worth of long term borrowings.
Receivable and Inventory days have reduced significantly.

2. Terpene Phenolic Resin – This resin has application as a tackifier in the adhesive, tyre
and rubber industries. Your Company is proud to inform you that it has been able to forge
a strategic alliance with M/S Les Derives Resiniques & Terpeniques (DRT), France, where
in, your Company will take lead to manufacture the products under DRT's technical
guidance and DRT will use its global network to market and distribute the product on a
worldwide basis. The initial qualification and approval processes with customers are
lengthy – w e foresee large volumes, revenue and strong profitability from this in the
years to come.

Its a very positive sign - such contracts are sticky and will bring in good revenue and
volume visibility for the company.


3. Your Company has successfully registered for REACH to export its products to the
European Market and also has been awarded an Indian Pharmacopeia certification as it
prepares to apply for GMP certification.

4. Camphor presents a large retail opportunity which enables the Company to forward
integrate and diversify into the FMCG space. Your Company continues to create a
foundation for this journey ahead and has applied for registration three brands which it
intends to sell through Modern Trade, General Trade and E-Commerce.

They are running 3 brands - Mangalam, Campure and Cam+ and this division is where the
management foresees a bright future. They seem to be putting in the right ingredients in
building a niche FMCG portfolio, i.e, innovative products (mosquito repellents, air
freshners, etc), building a B2C network via Amazon, engaging Instagram and Youtube
influencers, hiring a focused team, etc.






5. 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, we see this
product as being a 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 decreasing
agents, as Limonene supply shortages get more acute. Your Company is also in the
process of providing various grades of this material which the market requires and
therefore the customer base and realization will increase.

I have verified this from a friend working for a Japanese Fragrance and Flavor company.
Basic internet search confirms this too:

6. Going forward, your Company will work to increase its production quantities of camphor
and related products, explore opportunities in intermediate products and their derivatives
(fragrance and flavor Industry), improve its quality to compete in the international market,
and invest further in its retail initiative.

7. In 2017, the company attended the Adhesive and Sealant Expo for the first time.



8. As pointed out by @phreakv6 in the ValuePickr post, during 17-18, the management
probably spotted the trend early and went in for a buyback at Rs. 230 (CMP Rs. 450+)
without promoter participation. It increased their stake by 2.67% to 49.58%.


Key Risks to watch out for would be:

1. How long will camphor prices remain at this rate?
2. Seeing the abnormal profits - Domestic and Global capacity/competition will soon kick in
3. FMCG Foray - They have put the right ingredients in the cooker, but will they have the
patience to wait till the whistle blows?

What is attractive about this is that the market is treating Mangalam Organics on par with peers
like Kanchi Karpooram - both the stocks have had a good run up no doubt, but they have been
equally volatile. When Kanchi Karpooram declares a flat quarter, Mangalam falls and vice versa. It
is important for investors to know the difference. Kanchi Karpooram imports and processes
Turpentine to produce Camphor whereas Mangalam produces the Turpentine themselves.

From the AR of Kanchi Karpooram. That’s why Kanchi Karpooram’s Raw Material cost as a % of
sales are still in the 70-75% range compared to 50-60% for Mangalam Organics.

For Mangalam, every rupee of sales adds much more to the bottomline than for Kanchi. Add to
that, growing OCFs, low global capacity levels, the foundation being built for FMCG and a sticky
export tie-ups available at a P/E of 6.
Valuation

CMP: Rs. 480
MCap: Rs 420 Crores (co-incidence? Hope not!)
P/E: 6

Worst case scenario, if camphor prices fall from currently Rs. 1200/kg (wholesale) to Rs. 800, and
if the company operates at only 60% utilisation (550MT/month of camphor capacity), they will do
a cumulative Rs. 300 Crore turnover with a 6% PAT = Rs. 18 Crore. At a bear case P/E of 5, the
MCap would be Rs. 90 Crore, translating to a nothing-can-get-worse price of Rs. 105 per share.


Compare this with an optimistic scenario, where the share price can improve subject to the
following:
1. Higher realisations - it is doubtful if the camphor or other derivative prices can really go
higher from these levels. It’s safer to assume that future growth in the camphor segment
can only come from volume growth.

2. Higher volume - this seems possible - however, it is crucial to monitor 1) Import-export
data of Camphor and 2) how well the company is able to tap opportunities in derivatives
like resins, dipentene, etc arising out of the Chinese shortage. For example - further
pharma, F&F tie-ups, etc. It is also crucial for the company to release segment data for
each product to get a better picture - this is currently unavailable.

If prices remain stable and volumes improve, they can do a Rs. 500-600 Crore topline
and because of operating leverage at a 15% PAT, they can achieve an EPS of Rs. 90-100.
At a P/E of 10, that’ll translate to a price of Rs. 900-1000

3. P/E Re-rating - the EPS from June to December 3 quarters is at about Rs. 70 and
expected EPS for FY18-19 is at 90 - if the eps is sustained throughout next year, can the
market re-rate it to 12-15 range? If that happens, the stock can trade at Rs. 1300-1500 - 3x
from the CMP.

The recent bull run has pushed the stock from 300 levels to 480+ - however I’ll only be
accumulating at below 300 levels. I think 200-250 would be a good risk-reward deal. Rs. 100
downside for a Rs. 750-1000 upside.


Mangalam Organics - Study

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Mangalam Organics - Fire in the mountain, but will the

Power & Fuel

Work-in-progress study of Mangalam Organics

Tax 0.66 2.15 2.3 0 0.9 7 3 5 10 18

Fringe Benefit tax 0 0 0 0 0 0 0 0 0 0

Deferred Tax 0.73 0.22 0.34 3.03 -2.77 -3.07 0 0 0 0

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Commodity: 29142922 SYNTHETIC Unit: KGS

COUNTRY WISE EXPORTS of 29142922 SYNTHETIC CAMPHOR

Commodity: 29142922 SYNTHETIC Unit: KGS

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

Work-in-progress study of Mangalam Organics

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