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Upcoming capex bodes well for growth outlook…

About the stock: Established in 1984 by first generation technocrat Rajendra Gogri, Aarti Industries is a leading benzene-based speciality chemical company globally.

* The company primarily operates in two segments – speciality chemicals (84%) and pharma (14%). Pharma is further divided into APIs, intermediates and xanthine derivatives

* Aarti ranks among the top five globally for 75% of its portfolio. Its 200+ products are sold to 700+ domestic and 400+ export customers across the globe in 60 countries with a major presence in the US, Europe and Japan.

Q1FY22 Results: Overall numbers were above our estimates.

* Reported revenue growth was 40.5% YoY to | 1316.8 crore, led by higher growth from speciality chemical segment (up 50% YoY)

* Gross margins rose 140 bps YoY to ~53.7% while EBITDA margin improved 440 bps YoY to 23.8%, due to better gross margins and operating leverage

* EBITDA was up 72% YoY to | 313.8 crore

* PAT increased 101.3% YoY to | 164.9 crore owing to strong operational performance

What should investors do?

The stock appreciated at 41% CAGR in last five years.

* We retain BUY rating on the back of better growth outlook from both speciality chemical and pharma segments

Target Price and Valuation: We value Aarti Industries at 35x P/E FY23E EPS to arrive at a revised target price of | 1085/share (earlier | 960/share).

Key triggers for future price performance:

* Upcoming capex bodes well for speciality chemical revenue growth

* Higher share of value added business portfolio to improve margins profile of the business

* Allocation of incremental FCF towards organic/inorganic growth likely to expand return ratios further

Alternate Stock Idea: Apart from Aarti Industries, in our chemical coverage we also like Neogen Chemical.

* Trigger for Neogen Chemical’s future revenue growth would be increasing custom synthesis opportunity

* BUY with a target price of | 1095

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