Piety and health are priceless. Paradoxically, companies addressing these two areas of life sometimes quote at cheaper valuations as compared to those selling sin goods such as liquor and tobacco.
Take the example of Mangalam Organics, a Mumbai-headquartered company. It’s listed only on BSE and has a tiny market cap of ~ Rs 370 crore. It quotes at merely 8 times its FY20 earnings.
It is one of the largest Indian players in terpene chemistry and 80% of the segmental revenue come from Camphor. Mangalam Organics derives 90% of its revenue from B2B terpene business. B2C operations account for 5% while another 5% comes from Synthetic resin verticals.
The company’s manufacturing facility is situated in the Raigad district of Maharashtra and is just 60 Kms away from Jawaharlal Nehru Port Trust (JNPT). The plant location is on the Mumbai-Pune express way and it enjoys logistical advantage.
Mangalam Organics serves some marquee customers, including the likes of Dabur, Himalaya, Vicco, ITC, Emami, Amrutanjan, Pidilite, Berger, Asian Paints and Kansai Nerolac among others.
The commoditized nature of Mangalam’s business and overdependence on the pious market makes it vulnerable to the vagaries of commodity cycles. Mangalam Organics has been trying to reduce its overreliance on camphor and insulate the business from unforeseen fluctuations.
Nowadays, pine chemicals have been gaining popularity since they are extracted from natural resources and are considered environmentally safer than synthetic chemicals. To capitalize on this opportunity, Mangalam Organics is aiming to develop niche and more complex products by unlocking the value of pine intermediates. For instance, camphene used in paints, resins and fragrances and Iso Bornyl Acetate and Isoborneol, which find applications in the fragrance industry, are amongst others.
(Source: Company records)
Going forward, the company aims to improve its market share in India as well as overseas by developing new products, expanding the contribution of B2C business and attaining higher production efficiencies.
The spread of COVID-19 has reinstated the belief of many in Ayurveda. It won’t be unreasonable to say that coronavirus got camphor, which is otherwise used in rituals and for spiritual purposes, back in the limelight for its medicinal properties. As per Ayurveda, camphor helps in alleviating kapha dosha, thanks to its expectorant qualities. It is also known for its antibacterial and antifungal properties.
Moreover, camphor seems to be substituting naphthalene and para dichloro benzene in the western countries. Globally, the use of camphor in pharmaceuticals and cosmetics is on the rise. The pharmaceutical industry consumes nearly 35% of camphor. The Asia Pacific region is the largest consumer and accounts for 40% of the global camphor market. US FDA-approved nature of camphor has given it a wider acceptance.
Mangalam Organics, which has two retail brands—Mangalam and CamPure and offers camphor tablets in the pious market, has been in the process of improving the quality of its camphor.
CamPure is a 100% owned subsidiary of Mangalam Organics established in April 2020. It has a brief portfolio of homecare products such as camphor cones, camphor soaps, camphor air purifiers and camphor sticks. The company is expanding its retail reach through various distribution channels, including e-commerce.
Over the last 6 quarters, the company paid off a majority of its debt. As on September 30, 2020, the company had a net worth of Rs 189 crore. In FY20, it opted to settle a tax litigation case it was fighting for the last 15 years by paying Rs 10.24 crore under the Sabka Saath, Sabka Vikas, Sabka Vishwas scheme.
Notably, the promoter group has increased its stake from 51.87% to 54.91% between December 2019 and September 2020.
The calculation of P/E and RoE excludes Q1FY21 profit to smoothen out the lockdown impact.
(Source: ACE Equity)
A combination various factors such as experienced management, unleveraged balance sheet, changing product mix and improving business prospects make Mangalam Organics an interesting story.
The commoditized nature of the business was a big drag on valuations so far. However, as the contribution of value added products increases, profits and margins might go up. Will that result in the re-rating of Mangalam Organics?
Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
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