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Margins restored in speciality chemical segment…

Aarti Industries’ Q3FY21 revenues grew 9.5% YoY to | 1186.8 crore, mainly due to 31.8% growth in pharma segment to | 232.2 crore. Speciality chemical revenues grew 3.5% YoY to | 1078.8 crore, lower than I-direct estimates of | 1162.7 crore. EBITDA margins improved 55 bps YoY, 233 bps QoQ to 24%. Improvement in gross margins by 303 bps YoY, 339 bps QoQ was partially offset by increase in other expenditure. EBITDA grew 12.1% YoY to | 285 crore. PAT grew 18.2% YoY to | 165.3 crore. Delta vis-à-vis EBITDA was mainly due to lower interest cost.

Strong visibility in speciality chemical segment

The company is a preferred partner for customers from multiple industries for benzene-chain based solutions due to strong chemistry prowess, backward integration, larger products basket that is backed by continuous innovation and leadership position in its key products. It is the only domestic player to have products until the sixth level derivative of benzene chemistry. It also expects to leverage on its existing clientele to promote its toluene and other derivatives. Most contracts are long term cost+ contracts that offer better control on the overall cost structure. Recently, it signed three multiyear CRAMs contracts. Owing to strong order book visibility, Aarti is in an aggressive expansion mode. Focus on value-added products (~75% of FY20 revenues), integrated model and better operating leverage are likely to improve its margin profile. Speciality chemical segment revenues are expected to grow at 19% CAGR in FY20-23E.

Aggressive expansion to support long term growth

Aarti has spent | 3000+ crore in capex in FY17-20, on three multiyear projects. Of this, one was recently cancelled (expects to receive | 900-975 crore as compensation) while the remaining two projects have multiyear peak annual potential of | 590 crore (exhibit 3). Apart from this, it has spent on new R&D unit, expansion of hydrogenation, NCB, de-bottlenecking in various specialty chemicals, and pharma. Going ahead, Aarti is likely to spend at least | 1000-1200 crore per annum in the next four to six years to complete existing pipeline, expansion in value added, pharma segments in the backdrop of strong demand visibility to drive long-term growth.

Valuation & Outlook

Speciality chemical segment margins were restored amid growth revival in domestic market. The company has reiterated flattish net profit guidance for FY21 and double digit growth from FY22. Leveraging on core knowledge of benzene-based derivatives, the company is continuously expanding product basket towards value added products up the value chain. In pharma, strong growth is expected from developed markets backed by integrated model and new launches. Margins are also expected to improve due to incremental addition of high-value products. We like the company’s leadership position and strong visibility on order book. We maintain BUY with a TP of | 1340 (22x of FY23E EPS of | 56.1) vs. earlier target price of | 1235.

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