Maintain BUY on Aarti Industries - Capex investments to drive growth - HDFC Securities

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

We maintain our BUY recommendation on Aarti Industries (AIL) with a target price of INR 1,940/share. We expect the company's PAT to grow at a 15% CAGR over FY21-23E. AIL's constant focus on Capex and R&D will enable it 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. 4Q EBITDA/APAT were 21/43% above our estimates, attributable to 4% higher revenue, lower-than-expected raw material and operating expenses, and a lower-than-expected interest cost.

Financial performance: Revenue grew 12/2% YoY/ QoQ to INR 12.1bn, with revenue growth driven mainly by volume expansion and 75% contribution attributable to value-added products. Demand for discretionary products has majorly returned to pre-COVID level. EBITDA came in at INR 2.6bn,+19/-9% YoY/ QoQ, with EBITDA margin improving by 118bps YoY to 21.5%.

Speciality Chemicals segment: Revenue/EBIT grew 14/22% YoY to INR 11.2/2.1bn. EBIT margin for the segment was reported at 18.7%, driven by return of demand from established markets. The annual maintenance shutdown at the Acid Division at Vapi and asset revamp linked maintenance shutdown at Jhagadia in 4Q impacted volumes and led to higher costs.

Pharma segment: Revenue/EBIT grew 9/33% YoY to INR 2.2/0.5bn, owing to higher sales of value-added products, continued throughput from regulated markets, and growing pipeline of new intermediates. EBIT margin for the segment grew by 385bps YoY to 21.2%, owing to a better operating leverage.

Concall takeaways:(1) Capex in FY21 was INR 13bn. Total Capex of INR 15bn to be spent in FY22/23. Capex of INR 30-35bn to be spent over FY24-27. (2) The Board has recommended issue of bonus shares in 1:1 ratio for fully paid up equity shares of INR 5 each. (3) Growth guidance of 25-30% YoY given for revenue and APAT in FY22. Revenue target for FY24 is INR 90- 100bn.

Change in estimates: We raise our FY22/23 EPS estimates by 24.2/10.3% to INR 34.0/39.5 to account for change in margin guidance of Speciality Chemicals, robust performance of Pharma segment with better margins, lower interest costs, long term earnings growth guidance, and Capex plans.

DCF-based valuation: Our target price is INR 1,940 (WACC 10%, terminal growth 3.5%). The stock is currently trading at 42.2x FY23E EPS.

Shares of AARTI INDUSTRIES LTD. was last trading in BSE at Rs.1701 as compared to the previous close of Rs. 1665.35. The total number of shares traded during the day was 103944 in over 6556 trades.

The stock hit an intraday high of Rs. 1738.05 and intraday low of 1678.05. The net turnover during the day was Rs. 177305619.

Source : Equity Bulls

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