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One-offs drag Q4; strong visibility to support growth

Aarti Industries’ Q4FY21 revenues grew 12.4% YoY to | 1209.4 crore amid 14.2% growth in speciality chemicals to | 1123 crore and 8.5% growth in pharma segment to | 223.8 crore. EBITDA margins improved 118 bps YoY to 21.5%. Improvement in gross margins by 548 bps YoY was largely offset by higher other expenditure amid maintenance shutdown and commissioning of new plants. EBITDA grew 18.9% YoY to | 260.3 crore. PAT grew 23.3% YoY to 136.1 crore amid strong operational performance.

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 (one cancelled). Owing to strong order book visibility, Aarti is in an aggressive expansion mode. Focus on value-added products (~75% of FY21 revenues), integrated model and better operating leverage are likely to improve its margin profile. Speciality chemical segment revenues are expected to grow at ~28% CAGR in FY21-23E.

Aggressive expansion to support long term growth

Aarti has spent ~| 4000 crore in capex during FY18-21, on three multiyear projects, new R&D unit, expansion of hydrogenation, NCB, de-bottlenecking in various specialty chemicals, and pharma. Going ahead, with guidance of 1-1.5x of assets turnover, which is embedded in the company’s ambitious target of 1.7-2x sales by FY24 and 2.5-3.5x FY27, the company has to spend | 1000+ crore of capex per annum to complete the existing pipeline, expansion in value added, pharma segments in the backdrop of strong demand visibility to drive long-term growth.

Valuation & Outlook

Q4 numbers were impacted by annual shutdown and commissioning of new plants. Demand for speciality chemical has almost reached to pre-COVID level. Based on visibility, the management has given ambitious revenues, EBIT and PAT guidance of 1.7-2x growth from FY21-24E. Leveraging on core knowledge of benzene-based derivatives, the company is continuously expanding product basket towards value added products covering the entire 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 maintain BUY with a target price of | 1920 (32x FY23E EPS of | 60) vs. | 1340 earlier.

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