Maintain BUY on Aarti Industries - Pharma segment outshines - HDFC Securities

Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

We maintain our BUY recommendation on Aarti Industries (AIL) with a target price of INR 1,400/share. We expect AIL's PAT to grow at a 15% CAGR over FY21-23E. AIL's constant focus on R&D will enable the company to remain competitive and expand its customer base. The toluene segment in India is mainly untapped and catered to through imports; AIL will benefit in the long term by entering this segment. 3Q EBITDA/APAT were 15/22% above our estimates, attributable to lower-than-anticipated raw material expenses, a lower-than-expected interest cost, offset by a higher-than-expected tax outgo.

Financial performance: Revenue grew 10/1% YoY/ QoQ to INR 11.9bn, with revenue growth driven mainly by volume expansion and 76% contribution attributable to value-added products. EBITDA was up 12/12% YoY/ QoQ to INR 2.9bn, owing to a significant reduction in raw material expenses. Sequentially, interest cost has fallen by 40/22% YoY/QoQ to INR 173mn. APAT grew 18/18% YoY/ QoQ to INR 1.7bn.

Speciality Chemicals segment: Revenue/EBIT grew 4/4% YoY to INR 10.8/2.2bn. Revenue growth was backed by 90% utilisation across operationalised facilities. EBIT margin for the segment was reported at 20.7%. Return of demand from established markets drove margin improvement.

Pharma segment: Revenue/EBIT grew 32/54% YoY to INR 2.3/0.6bn, with the highest-ever revenue reported in a quarter, owing to more share of value-added products in the product basket. EBIT margins for the segment grew by 338bps YoY to 23.8% on the back of a better operating leverage.

Concall takeaways: (1) Capex spent in 3Q/9MFY21 was INR 4/9bn. (2) Interest cost has fallen significantly due to lower cost of funds and forex- linked revaluation gains on long-term borrowings. (3) AIL is considering demerging its Pharma segment as it is performing well and has a different manufacturing process and market from the rest of the company's.

Change in estimates: We raise our FY21 EPS estimate by 3.5% to INR 27.0 and cut FY22E EPS by 4.0% to INR 27.4 to account for overall performance in 9MFY21.

DCF-based valuation: Our target price is INR 1,400 (WACC 10%, terminal growth 3.5%). The stock is currently trading at 32.4x FY23E EPS.

Shares of AARTI INDUSTRIES LTD. was last trading in BSE at Rs.1160 as compared to the previous close of Rs. 1140.85. The total number of shares traded during the day was 41906 in over 3721 trades.

The stock hit an intraday high of Rs. 1193 and intraday low of 1138. The net turnover during the day was Rs. 48854771.

Source : Equity Bulls

Keywords