31 Mar Accumulate Aarti Industries; target of Rs 550: Nirmal Bang
accumulate
Nirmal Bang’s research report on Aarti Industries
Our recent interaction with Aarti Industries’ (ARTO) management along with Jhagadia and Dahej plant visit gave some perspective on the demand environment, update on recently commissioned facilities (including long-term contracts) and most importantly growth trajectory going ahead over the next couple of years. Nearly 52% of the business comes from discretionary segments (i.e. ex-Agrochemicals and Pharma), wherein the management expects a gradual demand recovery during FY24. Despite the near term demand challenges, the management sounded upbeat on future growth outlook, especially Chlorotoluene (which is a new value chain for ARTO). The entire future expansion in new value chains in Jhagadia would be done in Zone IV (95 acres land), wherein the pilot plant is already operational. The management has planned a total capex of Rs25-30bn (by FY26) at this site for exploring new as well as profitable value chains. We believe that there should be reasonable revenue visibility, led by strong customer engagement, import substitution etc. Growth should accelerate from FY25, led by ramp-up of existing capacities and new commissioning during the current year. Total capex incurred during FY19-1HFY23 stood at Rs49bn and over H1FY23 to FY25, ARTO’s capex at Jhagadia should be ~Rs10bn. Maintenance/refurbishment capex going ahead should be lower compared to the last five years. Also, even if new value chains are more profitable, operating profit growth over the medium term should be mainly a function of volume growth. Global and domestic macro environment can have a reasonable impact on demand for ARTO’s portfolio vis-à-vis chemical companies focused largely on Agrochemicals and Pharma innovators. Execution of new projects is the key in terms of driving profitable growth and improving overall return ratios. Post earnings revision, we are building in Revenue/EBITDA/APAT CAGR of 21%/24%/28% over FY23-FY25E.
Outlook
We maintain ACCUMULATE with a revised Target Price (TP) of Rs550 (earlier Rs600) based on 23x PE FY25E earnings.
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